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A blog about economics in the South Caucasus.

Georgian Nepotism

In Georgia, employment is often found not through prevailing in fair, orderly selection processes, but through personal connections. This is a well-known fact almost nobody denies. It is evident in almost every Georgian firm and institution. In a hospital you encounter a “nurse” not capable of the most basic medical accomplishments, in one of Tbilisi’s universities you meet a “cleaning woman” who is mentally ill, known for scaring everybody through aggressive and inappropriate behavior, and in the railway station you buy a ticket from a clerk who knows nothing about regulations, timetables, and trains. In one of the “vajkatsi” sketches, you can see what a vajkatsi does to find a job: hanging out in the park, waiting for friends to provide work opportunities.

In the Georgian language, people who are not employed because of their suitability for a job but due to other reasons are euphemistically called “coffee makers”. Two months ago I visited several companies in Shida Qartli and found out that there are plenty of coffee makers even in private organizations. “I cannot fire her because she is my business partner’s mother in law, but in reality she does nothing”, I was told by a desperate owner of a hotel, going on to complain that he would need only half of his employees for a proper functioning of the hotel.

Also in the public sector, the problem is ubiquitous. Once a person has achieved the political level, the media exercise some control, preventing the worst excesses. At deputy minister level and higher, one will face criticism if buddies and relatives are employed. Yet on lower levels, media are much less attentive.

When two months ago Irakli Gharibashvili met students at Tbilisi State University, economist Irakli Mirtskhulava asked the Prime Minister how he could accomplish his goals to develop the country with nonqualified staff. Mirtskhulava stressed that that government institutions were full of insufficiently qualified “coffee makers”, doing practically nothing but receiving salaries. The Prime Minister did not disagree and answered that he is “looking high and low” for qualified and skillful personnel. The answer is just partly satisfactory, as it is less a problem of availability of qualified people. Rather, it is about flawed selection processes that allow those who select applicants to overrule objective criteria and shove jobs to their buddies or, even more problematic, to simply create new jobs for them.


BUT GEORGIA HAS A SLIM GOVERNMENT…

But how does this story fit to Georgia’s undisputed achievements in streamlining the government?

It is very difficult to find numbers showing the extent of this problem. Nobody admits to be a coffee maker, and nobody speaks about having provided a job for a buddy. For the public sector, one may take the share of public employees as a (very) rough measure of how much “air” is in the system.

The graph shows the composition of the Georgian population according to employment. 5% of Georgians are employed in the public sector, about 12% of the Georgian labor force. This does not seem excessively high, and may at first sight even be taken as evidence for the efficiency of the public sector. Yet 12% is higher than in many developed countries which, according to OECD data, are way below 10%, like Germany, Poland, Chile, Japan, and Korea. Moreover, there is a famous observation already made in the 19th century, called Wagner’s Law, saying that the share of the public sector in the economy grows with economic development. The main reason is that many functions that are taken over by the government in developed countries are neglected by the governments of developing countries. For example, in developing countries governments often do not feel responsible for correcting inequality and providing poverty relief, so that there is typically no social welfare state.

If one assumes that the number of public employees is positively related to the budget administered by the government, then Wagner’s Law would suggest that the public employment in a developing country will be lower in relative terms than public employment in developed countries. This argument, however, only holds under the assumption that the size of government employment reflects the amount of functions taken over by the government. If government employment is misused for other purposes, for example for providing jobs for buddies, political patronage, and for beautifying the unemployment statistics, then economic development and the size of the government sector may diverge. So, in low-income countries a large public sector is more likely to indicate a problem than in a developed country. In Azerbaijan, public employment arguably accounts for more than 55% of the labor force (ILO data from the end of the 1990’s, newer data not available), which does not mean that Azerbaijan is a particularly developed country. Rather, the Azerbaijani public sector is ballooned and much bigger than what would be justified by the state of economic development.

So, while 12% do not trigger off the alarm bells, one cannot use this data to reassure the critics that there is no problem with nepotism in the public sector.


WHAT TO DO ABOUT IT?

Georgia is the undisputed world champion in killing off corruption, at least when it comes to the highly visible petty corruption, widespread before 2003. This includes measures like making the admission exams for universities an example for the world how to organize exams in a fair, clean, and objective way. Yet if a country can organize its admissions exams in a perfect way, it can also rid its personnel management from nepotism. Organizing an admission process and an application process is not very different in the end. Is there a lack of political determination, perhaps because public employment is a convenient way to cater political clienteles?

It is more difficult to address the problem in the private sector. Here it has to do with mentality. As long as entrepreneurs and managers consider family ties and friendships more important than the success of their firms, the problem will persist.

Perhaps, one can raise public awareness through open discussion. While there is nepotism everywhere when it comes to entrepreneurs and owners of companies, in North-Western Europe and the USA it would be considered a severe abuse of office if an employed manager would hire family members. If detected, such a manager would have to face dire consequences. Having a public debate on the issue might help to raise standards in Georgia as well.

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Guest - Eteri on Monday, 30 June 2014 15:08

Nepotism – one of the forms of corruption – is a use of public office for a private gain that is distributing favors to family members instead of the public. Using the term Nepotism in regard to the private sector is somewhat misleading, unless private sector is a giver or a recipient of gains from the public office. Article is more about entitlement culture in combination with informal social support schemes. See also interesting literature on Social Business pioneered by Nobel Prize Winner Mohammad Yunus, who thinks that using private enterprise for redistribution of social gains is a normal way to operate where formal public social protection schemes fail to provide.

http://www.muhammadyunus.org/index.php/social-business/social-business

Nepotism – one of the forms of corruption – is a use of public office for a private gain that is distributing favors to family members instead of the public. Using the term Nepotism in regard to the private sector is somewhat misleading, unless private sector is a giver or a recipient of gains from the public office. Article is more about entitlement culture in combination with informal social support schemes. See also interesting literature on Social Business pioneered by Nobel Prize Winner Mohammad Yunus, who thinks that using private enterprise for redistribution of social gains is a normal way to operate where formal public social protection schemes fail to provide. http://www.muhammadyunus.org/index.php/social-business/social-business
Guest - Helene Ryding on Monday, 30 June 2014 21:55

It seems to me several issues are rolled into "nepotism" as described here, and they need to be unpacked.

First of all, everyone uses connections to get jobs, at least to get references to be considered for jobs. Try to get a job in the UN for example, without being recommended or "known". This does not necessarily mean they are any good at the job, or will work hard.

Secondly, there are always obligations to help family members to support themselves. However, low wages and large extended families mean many people need to be employed to get the income needed to live on. We could go back to a single highly paid breadwinner, who supports everyone, but this was largely mythical in an agricultural society, and anyway wages are not high enough.

People "cannot be sacked" because there are not enough jobs to go round and not enough unemployment support, like retraining.

One solution to get better people is to pay higher wages, but then how do you make sure the best qualified person gets the job, when supposedly neutral people are stacked in the selection committee, having already pre-selected the person or written the job description to suit a particular candidate.

So is "nepotism" as described really just a Georgian problem?

It seems to me several issues are rolled into "nepotism" as described here, and they need to be unpacked. First of all, everyone uses connections to get jobs, at least to get references to be considered for jobs. Try to get a job in the UN for example, without being recommended or "known". This does not necessarily mean they are any good at the job, or will work hard. Secondly, there are always obligations to help family members to support themselves. However, low wages and large extended families mean many people need to be employed to get the income needed to live on. We could go back to a single highly paid breadwinner, who supports everyone, but this was largely mythical in an agricultural society, and anyway wages are not high enough. People "cannot be sacked" because there are not enough jobs to go round and not enough unemployment support, like retraining. One solution to get better people is to pay higher wages, but then how do you make sure the best qualified person gets the job, when supposedly neutral people are stacked in the selection committee, having already pre-selected the person or written the job description to suit a particular candidate. So is "nepotism" as described really just a Georgian problem?
Guest - Eric Livny on Monday, 30 June 2014 22:24

Roba’s general observation is spot on!!! Coffee makers and coffee drinkers of Georgia unite!!!

I am truly puzzled by nepotism as a source of inefficiency in Georgia’s supposedly market-driven PRIVATE sector.

I can understand why labor was not used efficiently under USSR's (artificial) full employment regime. Since back then coffee was a rare commodity, working hours were used for smoking, domino playing and queuing for consumer goods (such as stockings). As Soviet workers would have it: “they pretend to be paying us, we pretend to be working”.

Likewise, I would not be surprised to find out that nepotism and favoritism are practiced at some levels in the public sector where “coffee makers” can be hired using other people’s money.

But private sector nepotism? Why would it exist???

Two thoughts.

First, nepotism is a form of intra-family charity. I often encounter “coffee makers” hired by business owners and managers as a way of keeping young relatives off the street (or drugs and alcohol). Hiring such “lost souls” is an act of charity with an extra pedagogical effect.

Not only are people creating jobs for their uncles and cousins, they create WHOLE BUSINESSES (e.g. bakeries, shops and restaurants) for their parents, sisters, brothers and children. These businesses fail left and right, because those put in charge have no clue about management. Instead of managing, they hire their friends, play backgammon and drink coffee. In terms of incentives it is not very different from the Soviet full-employment model.

Second, there is the issue of trust. A very common feature of the Georgian business landscape is the "waikatsi manager" – a trusted relative who would not steal money and ideas from the business (but would piss on its clients). I meet these waikatsi "coffee drinkers" everywhere I go. Most recently, a manager of the fashionable Senate restaurant in Vake Park taught my family and friends that the client is always wrong. And guess what, he was not particularly worried by the prospect of us talking to the owners (ha-ha!)

Roba’s general observation is spot on!!! Coffee makers and coffee drinkers of Georgia unite!!! I am truly puzzled by nepotism as a source of inefficiency in Georgia’s supposedly market-driven PRIVATE sector. I can understand why labor was not used efficiently under USSR's (artificial) full employment regime. Since back then coffee was a rare commodity, working hours were used for smoking, domino playing and queuing for consumer goods (such as stockings). As Soviet workers would have it: “they pretend to be paying us, we pretend to be working”. Likewise, I would not be surprised to find out that nepotism and favoritism are practiced at some levels in the public sector where “coffee makers” can be hired using other people’s money. But private sector nepotism? Why would it exist??? Two thoughts. First, nepotism is a form of intra-family charity. I often encounter “coffee makers” hired by business owners and managers as a way of keeping young relatives off the street (or drugs and alcohol). Hiring such “lost souls” is an act of charity with an extra pedagogical effect. Not only are people creating jobs for their uncles and cousins, they create WHOLE BUSINESSES (e.g. bakeries, shops and restaurants) for their parents, sisters, brothers and children. These businesses fail left and right, because those put in charge have no clue about management. Instead of managing, they hire their friends, play backgammon and drink coffee. In terms of incentives it is not very different from the Soviet full-employment model. Second, there is the issue of trust. A very common feature of the Georgian business landscape is the "waikatsi manager" – a trusted relative who would not steal money and ideas from the business (but would piss on its clients). I meet these waikatsi "coffee drinkers" everywhere I go. Most recently, a manager of the fashionable Senate restaurant in Vake Park taught my family and friends that the client is always wrong. And guess what, he was not particularly worried by the prospect of us talking to the owners (ha-ha!)
Guest - Eric Livny on Tuesday, 01 July 2014 16:03

Just came from a presentation of the long awaited concept of Civil Service Reforms. This reform will definitely bring Georgia closer to the European civil service model. In the process, however, it will create a lot of new jobs for bureaucrats in charge of developing remuneration standards, rules for hiring and promoting professional civil servants; ensuring their stable employment in the face of political storms; developing training and re-training standards, certifying training programs, running certification tests and whatnot. The Civil Service Bureau will be given a zillion new functions.

Came to think that this may be a rather high price to pay for eradicating (a bit of) nepotism and inefficiency in public sector hiring. One might argue that this is an ok price given that this reform will be financed by other people’s money (Western donors). But money is not the main issue. Rather, I would be concerned about a sub-optimal allocation of extremely limited human resources between value creation and redistribution functions.

Georgia already has one of the cleanest and most efficient public administration systems in the entire post-communist world and tinkering with it will not address a binding constraint. Given limited resources it might make more sense to deploy the country’s best people to productive occupations or government services that can induce foreign and domestic investment.

Just came from a presentation of the long awaited concept of Civil Service Reforms. This reform will definitely bring Georgia closer to the European civil service model. In the process, however, it will create a lot of new jobs for bureaucrats in charge of developing remuneration standards, rules for hiring and promoting professional civil servants; ensuring their stable employment in the face of political storms; developing training and re-training standards, certifying training programs, running certification tests and whatnot. The Civil Service Bureau will be given a zillion new functions. Came to think that this may be a rather high price to pay for eradicating (a bit of) nepotism and inefficiency in public sector hiring. One might argue that this is an ok price given that this reform will be financed by other people’s money (Western donors). But money is not the main issue. Rather, I would be concerned about a sub-optimal allocation of extremely limited human resources between value creation and redistribution functions. Georgia already has one of the cleanest and most efficient public administration systems in the entire post-communist world and tinkering with it will not address a binding constraint. Given limited resources it might make more sense to deploy the country’s best people to productive occupations or government services that can induce foreign and domestic investment.
Guest - Florian on Wednesday, 02 July 2014 10:30

The question is how big the nepotism problem is. According to this article, it is substantial. And the same impression you get when you speak with Georgians. Therefore, improving the selection process may address a binding constraint in the end, and it may be worthwhile even if it comes with some additional bureaucracy.

The question is how big the nepotism problem is. According to this article, it is substantial. And the same impression you get when you speak with Georgians. Therefore, improving the selection process may address a binding constraint in the end, and it may be worthwhile even if it comes with some additional bureaucracy.
Guest - Nikita on Friday, 18 July 2014 02:01

I would like to contribute three points.

First, your perceptions of the frequency of nepotism in hiring may exceed the actual extent of the problem. See Ben Olken’s related work on perceptions of corruption and corruption reality in Indonesia. (http://economics.mit.edu/files/3931).

Second, even if nepotism in hiring occurs less frequently than is perceived in public it may have a big negative effect on organizational performance. Besides not working themselves, coffee makers can produce negative externalities on their productive co-workers in at least two ways.
Coffee makers in leading and middle management positions may fail to coordinate the work of their subordinates. In consequence, subordinates’ individual efforts may remain unproductive.
Moreover, coffee makers may undermine the work morale of their peers and subordinates. A productive worker may start lazing around because she thinks that the preferential treatment of her peer coffee maker is unjust. Alternatively, the worker may reduce her effort because, by observing her coffee maker superior, she infers that lazing around is socially accepted. In the controlled environment of experimental public goods games and weakest link games it has been repeatedly shown that subjects who do not exert any effort are responsible for the (fast) decrease in overall cooperation and coordination, respectively.

Third, in one comment Eric suggests that business owners may hire coffee makers out of altruism. The business owner forgoes some of her profits in order to save the coffee maker from unemployment. Given my negative externality arguments above, the business owner could decrease her loss in profits by paying the coffee maker the same wage, but keeping her away from the firm. The wage could be renamed into ‘private unemployment benefits’. In the example about the hotel owner in Robizon’s post, the hotel owner could half his staff, provide private unemployment benefits to all the fired coffee makers, and make more profit.
Building on this line of thought, I can imagine that social obligations may constrain the entrepreneurs’ ability to do business. In the extreme case, entrepreneurs may even refrain from expanding their business or from starting a new business, concerned that they will have to accommodate more unproductive but dear people.

I fully agree that it is difficult to identify coffee makers in public and in private organizations. Hence, it is difficult to estimate their effect on organizational performance. If I come up with a viable identification strategy, I will share it here.

I would like to contribute three points. First, your perceptions of the frequency of nepotism in hiring may exceed the actual extent of the problem. See Ben Olken’s related work on perceptions of corruption and corruption reality in Indonesia. (http://economics.mit.edu/files/3931). Second, even if nepotism in hiring occurs less frequently than is perceived in public it may have a big negative effect on organizational performance. Besides not working themselves, coffee makers can produce negative externalities on their productive co-workers in at least two ways. Coffee makers in leading and middle management positions may fail to coordinate the work of their subordinates. In consequence, subordinates’ individual efforts may remain unproductive. Moreover, coffee makers may undermine the work morale of their peers and subordinates. A productive worker may start lazing around because she thinks that the preferential treatment of her peer coffee maker is unjust. Alternatively, the worker may reduce her effort because, by observing her coffee maker superior, she infers that lazing around is socially accepted. In the controlled environment of experimental public goods games and weakest link games it has been repeatedly shown that subjects who do not exert any effort are responsible for the (fast) decrease in overall cooperation and coordination, respectively. Third, in one comment Eric suggests that business owners may hire coffee makers out of altruism. The business owner forgoes some of her profits in order to save the coffee maker from unemployment. Given my negative externality arguments above, the business owner could decrease her loss in profits by paying the coffee maker the same wage, but keeping her away from the firm. The wage could be renamed into ‘private unemployment benefits’. In the example about the hotel owner in Robizon’s post, the hotel owner could half his staff, provide private unemployment benefits to all the fired coffee makers, and make more profit. Building on this line of thought, I can imagine that social obligations may constrain the entrepreneurs’ ability to do business. In the extreme case, entrepreneurs may even refrain from expanding their business or from starting a new business, concerned that they will have to accommodate more unproductive but dear people. I fully agree that it is difficult to identify coffee makers in public and in private organizations. Hence, it is difficult to estimate their effect on organizational performance. If I come up with a viable identification strategy, I will share it here.
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