Research Reports

Inclusive Growth Public Discussion Platform
Friday, 29 January, 2016

Once the wealthiest Soviet republic, Georgia has since fallen far behind other post-Soviet states (except for, perhaps, Tajikistan, Kyrgyzstan, and Moldova) in almost any parameter of wellbeing. Adjusted for purchasing power parity, Georgia’s annual income per capita in 2012 was close to $5,900 (a little higher than in resource-poor Armenia). Moreover, the “median” Georgian, as opposed to the “average” Georgian, is much poorer than is suggested by the per capita income estimate. Like any average measure, the income per capita figure masks significant inequality in the distribution of income, and Georgia is much less equal as compared to all of its other post-Soviet peers (with the possible exception of Russia).

Following the collapse of the Soviet Union, the Georgian nation went through a process of rapid disinvestment and de-industrialization. It was forced to shut down industrial plants, sending scrap metal abroad and pushing workers into subsistence farming or early retirement. Thanks to the country’s moderate climate and good soil conditions, hunger never became an issue, yet inequality and associated political pressures rapidly reached catastrophic dimensions, unleashing cycles of violence, undermining the political order and inhibiting prospects of economic growth.

The Rose Revolution of 2003 restarted the process of economic growth, averaging 6.6% per annum and peaking at 12% in 2007. Yet behind the glistening façade of these growth statistics lay political and social uncertainty resulting from widespread poverty and inequality. Between 2007 and 2011, the share of people living under the poverty threshold grew by 43%1, as reported by the National Statistics Office of Georgia. Equally alarming are the official unemployment statistics, particularly for new entrants into the labor market (people in the 20-24 age bracket). However, official unemployment data does not tell the whole story. In 2014, only 15% of the Georgian population were employed in the official economy. Another 23% of the employed were categorized as self-employed, but a very large share of these were actually subsistence farmers who should have been labeled as under-employed at best.

As shown in Figure 1, thus far Georgia has failed to engage the majority of its working-age population in the formal sector of the economy. This has important implications for aggregate productivity, poverty, and inequality.

Arguments have been advanced by some economists that it is perfectly reasonable to expect inequality levels to increase when a country starts to develop from very low levels of productivity, as is presumably the case in Georgia. These arguments find support in a theory that was popularized by Simon Kuznets in the 1950s. According to this theory, market forces tend to bring about higher levels of income inequality in the early stages of development; but, after a certain threshold of average incomes is achieved, this inequality would decrease.