The main purpose of the consultancy was to contribute to the elaboration of the Population Situation Analysis (PSA) section on Socio-Economic Context in Georgia. The Government of Georgia (GOG) and the Prime Minister have announced addressing demographic challenges as a top priority of the country. UNFPA was asked to support undertaking the Population Situation Analysis (PSA) in Georgia, in order to generate evidence regarding demographic situation that would be further used for elaboration of the Demographic Strategic Plan for Georgia.

In the first part of this article, I described some of the adverse incentives resulting from a social welfare system. Then I argued that according to Simon Kuznets' famous paradigm, increasing inequality is hardly evitable when a country enters a growth trajectory (as Georgia did in 2003), and I reasoned that it is at least an ambivalent (not to say questionable) policy for Georgia, at its current state of development, to fight inequality by social welfare measures. In this vein, the article seemed to advocate that Georgia might better follow the “Asian” approach of “develop first, redistribute later”.

Last week I discussed the economic consequences of inequality. Contrary to a traditional tenet of economics, empirical research has shown that inequality may have adverse economic consequences. Inequality increases the risk of political instability in a country, posing a threat to investments due to the fact that political unrest is highly detrimental to the profits made from any economic activity.

Why should we care about income inequality? According to Nobel Prize laureate Joseph Stiglitz and Harvard economist Jason Furman, “greater inequality leads to more political instability, and greater political instability leads to lower growth” (“Economic Consequences of Income Inequality”, Federal Reserve Bank of Kansas: Journal Proceedings, 1998, pp. 221-232).

Is inequality bad for economic development? There has been a lively debate on this issue. Some economists argue that inequality is necessary for economic growth, while others are against it.