ISET Economist Blog

Georgia on the Development Frontier: From Subsistence Agriculture to Exchange
Monday, 21 October, 2013

While written in 1991, “The Development Frontier” by Peter Bauer has lost none of its relevance for Georgia and other predominantly agrarian economies of the 21st century. Economic development, suggests Bauer, “begins with the replacement of subsistence activities by production for sale. Producers will move out of subsistence production only if they see the advantages of doing so and if it is made possible for them to do so. They need the incentive, the opportunity, and the resources.”

And this, according to Bauer, is where the traders come in. Traders make consumption goods available for villagers, tempting them to enrich their consumption patterns. This temptation creates incentives for commercial production and exchange. Armed with the knowledge of local, regional, and export markets, traders also create new opportunities by providing outlets for farm products. Furthermore, traders also acquaint farmers with new products that are in demand and provide necessary skills and resources – tools, seeds, fertilizer, etc.

No one has yet told Georgian traders that they may be the agents of progress and civilization. In fact, they are the guys we all so love to hate. On our travels through the Georgian countryside, we often see them going from village to village in their Ladas and Volgas, small trucks, and marshrutkas. Then we meet them again in the open-air wholesale markets in each and every Georgian city.

Unlike their ancient colleagues, traders of today don’t risk their lives, yet trading activities as such are still associated with very high transaction costs and considerable commercial risks. Driving old marshrutkas on Georgia’s mountain roads is certainly no fun. But of particular concern are damages and losses to agricultural products resulting from poor packaging compounded by vibration and shaking on bad roads. Another source of risk is overheating since agricultural products are often carried in vehicles that are not protected from the sun, let alone having proper ventilation and refrigeration systems. Finally, the breakdown of old vehicles can also be a significant cause of losses, as perishable products may be left exposed to the heat while repairs are carried out.

It is only natural that given these risks, traders are more likely to frequent some regions and villages and not others. Difficult-to-reach regions will see lesser numbers of traders, lesser competition among them, and consequently lower prices. For example, villages in proximity to Tbilisi are likely to fetch better prices for their products compared to further away places. Following this logic, it would be reasonable to assume (or hypothesize) that transition from subsistence farming to exchange is likely to be inversely related to distance (travel time) from the farm gate to the market and the size of that market (faster around Tbilisi and slower in other regions).

In recent years Georgia has seen a very significant improvement in regional and rural road infrastructure, reducing trade-retarding transport and transaction costs. If our reasoning is correct, we should expect commercial agriculture to gradually pick up across the entire nation. In some parts of Georgia, this is already the case. Given the quantum leap in the quality of road infrastructure experienced by Samtskhe Javakheti (SJ) in 2009-10 (travel time to Tbilisi was reduced from 8 to less than 2.5 hours), SJ households have seen their income increase by more than 60% in just 2 years (from 2009 to 2011).

Even more importantly for our analysis, however, a very large portion of this increase can be attributed to commercial farming. A simple comparison with Imereti (see chart) is quite telling in this regard. In 2009, Imereti and SJ had roughly the same level of income per household (slightly above 500GEL/month). By 2011, SJ households were earning about 250GEL more; approximately 170GEL of this gap is explained by SJ’s growing advantage in commercial farming and exchange.

Monthly Income (GEL) of Rural Households in Samtskhe-Javakheti and Imereti Regions, 2009-2012


Looking at 2012, not only are SJ farmers producing more agricultural products, but they also sell a much larger share of it. Agricultural production-related income constitutes a rather similar share of total income in SJ and Imereti (46% and 41%, respectively), however, SJ farmers sell more than half of what they produce. Imeretian farmers demonstrate a much lesser degree of commercialization: they sell only one-quarter of their agricultural products and consume the rest.

Shares of Different Sources in Total Household Income, Samtskhe Javakheti vs Imereti in 2012


The main point here is that while investment in regional and rural road infrastructure is no silver bullet, it may still be one of the most effective ways to promote the much-needed transition from subsistence farming to exchange. If Georgia builds good roads, its small traders should be able to do the rest!

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.