Regional development policy, defined as aid and assistance given to economically less developed regions, is an issue for almost every country that seeks territorial unity. Putting the arguments of equity or efficiency aside, states with high regional disparities are potentially exposed to the political risk of disintegration. This threat can come from both developed and underdeveloped regions. While more advanced regions are capable of independence and might even decide to strive for secession, weaker ones, especially those bordering unpleasant neighbor-states or feeling oppressed, might be easily won over by other parties. That is why almost every country of the world has some type of regional development policy that seeks to eradicate spatial disparities.

The existence of a policy fostering spatial equalization has greater importance in ethnically or religiously diverse states and federations, where integrity is difficult to sustain. Additionally, socialist countries were found to favor regional development policies more than others. Egalitarianism and economic equality as a precondition for all sorts of equality, including political and social, were the explicit goals of the active regional policy conducted by the Soviet Union. However, here the latent goal of keeping all the regions on par in order not to encourage secessionist motives among the strongest regions, which were not willing to share their wealth with the regions lagging behind, was likely the most important reason for such a policy.

THE ECONOMICS OF REGIONAL DISPARITIES

Economically, regional development policy attempts to create conditions for sustainable growth in all regions. That, in turn, is expected to lead to a gradual equalization of living standards. The population-weighted coefficient of variation in regional gross value added (GVA) per capita, known as the Williamson index, is a widely accepted measure of regional inequality. Back in 1965, based on an empirical analysis the US economist Jeffrey G. Williamson concluded that the relationship between the economic development of a nation and regional disparities has an “inverted U-shape”. The empirical regularity works in the following way: at the early stages of development regional disparities tend to widen with the economic development of the state, while more mature growth also promotes convergence in the living standards of territorial units. The pattern is largely similar to what was observed by the Economics Nobel Prize winner Simon Kuznets about income inequality and by Harvard economist Claudi Goldin about gender inequality.

Both Kuznets and Williamson were particularly worried about the strain induced by widening inequality in the early stages of development and the ability of less developed countries to cope with that. However, this argument is less convincing in the light of a 2003 study by economists Raja Shankar and Anwar Shah. They found that a hands-off approach is a better way of eradicating regional disparities than an interventionist policy. Their cross-country analysis suggested that free factor mobility and minimum standards of basic services (that is how the hands-off approach is defined) can serve the goals of regional development better than an interventionist policy. Two other findings of Shankar and Shah are that higher regional disparities are peculiar to developing rather than developed countries and to large unitary states rather than federations.

REGIONAL DISPARITIES IN GEORGIA

Even though Georgian regional inequality in economic activity is largely attributable to the urbanization levels of the regions, not the regions per se, and despite the fact that we now have less inequality than in 2007 or 2008, the dynamics of the Williamson index of regional inequality over the past years produces the impression that we are still on the left side of the “inverted U”. While regional disparities had been widening before the crisis in 2008, there has been a tendency for equalization in the two years following the crisis. After economic recovery in 2010, regional inequality, as measured by the Williamson index, has started to pick up again. What is more interesting is that the distribution of population between the Georgian regions exhibits a similar pattern as the Williamson index. Population distribution, as measured by the Gini Index, became more unequal (i.e. concentrated) in the “good times” of peace, stability, and economic growth and tended to be more equal in the “bad times” of war, crises, and social unrest (see the chart). Of course, the short time series and the marginal nature of the changes does not allow for decisive conclusions, but if this co-movement continues then that is good news, indicating that labor in Georgia is mobile and the concentration of economic activity coincides with the concentration of labor, potentially reaping the benefits of increasing returns to scale.

Taking a closer look at interregional mobility in Georgia today suggests that, in contrast to mobility in Soviet times – when qualified people were made to work in various, mostly rural, regions – nowadays internal migration is voluntary and is clearly centered in the capital. Tbilisi and nearby regions are the most attractive places for interregional migrants to stay. 52% of interregional migrants over the last five years living in Tbilisi (27%) and Kvemo Kartli (25%), two regions with high GVA per capita (see the chart). This once again emphasizes that regional or urban-rural disparities are, to a large extent, self-curing.

DOES GEORGIA NEED AN INTERVENTIONIST REGIONAL POLICY?

Georgia is a developing country and high regional income disparities are more the norm than the exception for nations like ours. Additionally, we are neither an excessively diverse federation nor a socialist state. So, in terms of politics too, regional disparities do not threaten the territorial integrity of Georgia that much.

Considering the global experience, there is little the Georgian government can do to eliminate regional disparities at this stage of development. Whilst labor and capital mobility are unconstrained, all we need is for all regions to be provided with the minimum standard of basic services.