The remainder of this chapter will look at a number of factors, including some strategies and bottlenecks, that affect the capacity of Georgians to ensure a "standard of living adequate for the health and well being of himself and his family". Because, in the short term, income is the variable that will most affect changes in the HDI, we decided to first describe (a) the sources and levels of income for different strata of the population. This is followed by (b) access to living conditions; (c) access to employment; (d) capacity to form labor unions; (e) access to land; (f) access to capital inherited from the Soviet System; and (g) access to social welfare and insurance. Because we believe that the high expectancy of life at birth and the high combined primary, secondary and tertiary education enrolment demand separate treatment, we discuss these topics in chapters 3 and 4 respectively.

UNIVERSAL DECLARATION OF HUMAN RIGHTS, Article 23.3

It is not easy to estimate the average income of a Georgian household. Several reasons account for this problem. Among them, is that approximately 25 percent of employees have an additional informal job, which makes their remuneration difficult to work out. In addition, about 78 percent of self-employed people work in agriculture and do not receive a regular monetary income. A considerable share of the Georgian economically active population is involved in the "informal economy" and does not easily declare its true income. Accordingly, official figures show a disparity between the Georgian population’s total monetary income and expenses for the period 1995-1999.

The figure above shows that in 1995 and 1996, reported expenses match reported income but that from 1997, reported expenses regularly exceed reported income. The difference between the figures tends to increase. In 1997, the difference was 24.71 percent, in 1998 it was 30.88 percent and in 1999 it was 35.62 percent. In addition, one can see that from 1996 on, reported income and reported expenses decreased. This looks incongruent if one considers that in 1997 the economy was expanding fast and continued to expand, albeit much slower, even after the Russian crisis.

Several factors may help to explain the trend in Figure 2.1. The first could be a growing public reticence to report real income, perhaps stemming from the fear of a follow-up visit from the taxman. The second factor could be that the average household came to rely more and more on the expansion of the informal economy as its main source of income. In general, income from the informal economy is substantially more underreported than that from formal sources. The informal economy’s importance as a source of income is anything but surprising if one takes into account formal salaries paid in different economic sectors. Table 2.2 describes employees’ average monthly salaries according to different economic categories. The highest salaries are paid in international organizations or international firms while the lowest are in the health care and education sectors. At the same time, the tendency of real salaries to increase can be noted, though most remain below the poverty line. The difference in male and female wages can reach as much as 50 percent.

Between 1997 and 1999, the State Department of Statistics (SDS) carried out a Household Survey, which included a comprehensive survey of different Georgian families’ income sources and expenditures. Table 2.3 presents the reported average monthly income while Table 2.4 does the same for expenses. Even though the SDS surveys take into account both monetary and non-monetary income, the figures obtained are still less than estimated expenses. In Table 2.4, the data on households’ expenses for the year 2000 comes from the household survey performed by GORBI. (SDS data for 2000 was not ready at the time of writing this report.)

Table 2.4: Structure of Average Monthly Expenses of Population per Household, GEL

If we exclude income derived from the illegal appropriation of goods (e.g. armed robbery), common sense would suggest that people couldn’t consume more than the equivalent of their combined income. So, which is the approximate income of the Georgian population?

Without claiming to have an absolute answer, we have attempted to re-estimate average monthly income for the year 2000 using the data from the household survey performed by GORBI. First, we have obtained an estimate for the contribution from different sources of income to different households groups.

Table 2.5: Structure of Income of the Georgian Households (in %; year 2000)

Source: GORBI

From the data used to construct Table 2.5 we can also estimate the total income per category and total average income. By doing so, it is possible to harmonize the Georgian population’s income and expenses. Table 2.6 presents a revised income figure for the average Georgian household for the first half of 2000. This revised income figure is greater than the one reported for expenditures and allows the data for income and expenses provided by GORBI to pass a first test of consistency.

An interesting aspect of the revised figure for average monthly income is that it is above the minimum consumption basket. In addition, if figures for monthly average incomes for the period 1995-2000 are compared to the minimum consumption basket, one can see a steady improvement in the average Georgian’s capacity to make ends meet.

Fig. 2.2. Income as a Percent of the Minimum Consumption Basket in 1995-2000

Source: Budgetary Office of Parliament; GORBI

To some extent, these numbers are paradoxical. Look at Figure 2.1 again, in particular data for the years 1998-2000. In an environment of economic and budgetary crisis, at a time when salaries and pensions were and are not being paid for months, when the Georgian Parliament adopts a "Law on Budget" sequestering more than 250 million GEL, and when thousands of lari are being misappropriated from social funds, the trend showing the increase in average income appears to continue at almost the same rate as in, for example, 1997, when the economy was growing at breakneck speed. These findings are in line with data derived from polling performed by GORBI. The data show that 54.6 percent of respondents answered that during the last 12 months their income had either increased or remained the same whereas 38.5 percent announced an increase in their expenses within that same period.

Of course, the situation is not the same for all strata of the population. We are presenting average figures and these may say little about the capacity of each particular household to attain the minimum consumption basket. Table 2.7 presents a breakdown with percentage of households for each category of income.

Table 2.7 shows that approximately 6.5 percent of the Georgian population has almost no income. These are individuals who beg in the streets of Tbilisi, Batumi, etc and are highly marginalized. Equally disturbing is the fact that about 40 percent of the population is technically below the poverty line. Thus the average incomes reported in Figure 2.2 should be regarded with extreme caution when drawing conclusions. An average figure masks the fact that a significant proportion of the population has incomes below subsistence levels.

Surprisingly enough, despite the economic crisis of the last two years, despite the glut of unpaid salaries and pensions, and despite the low salary levels, there is an apparent tendency for average income equality to improve. Figure 2.3 describes a Lorenz curve for the Georgian population. Some progress in real terms appears to take place from 1996. This means that in addition to average incomes rising, equality of income also tends to get better. But not for everybody. The lowest 6.5 percent is not gaining ground and, in fact, is apparently locked in a poverty trap.

Fig. 2.3. Lorenz Curve of Income Distribution

Source: NHDR 1996; GORBI: Budgetary Office of Parliament

All these tables and figures appear to convey a sense of inconsistency between reported income and expenses that decrease in an environment of economic boom, or between salaries below the poverty line and an apparent improvement in average living conditions. We believe the answer to these questions, however, lies in the informal economy’s increasing importance as an income source for the average household. If so, then this could explain decreasing levels of reported expenses and income (because informal income is usually underreported) as well as the average household’s apparent capacity to make ends meet, despite formal salary and pension arrears, or despite formal salaries falling below the poverty line. In addition, the informal economy appears to have grown significantly since 1997.

An expanding informal economy would also be in line with the long entrepreneurship tradition of Georgians in general, and their equally long tradition of distrusting the governing authorities in particular. Those with a profound skepticism about the benefits of government intervention may see these figures as proof that in Georgia the smaller the government the better since, in any case, it has little effect on the individual’s capacity to pursue his/her own income. Though we sympathize with the idea of an efficient Georgian government, which ensures existing laws are respected, as well as with that of a government, which only intervenes in areas of the economy where the private sector will not supply an efficient level of goods or services, we are worried that the apparent rise of the Georgian informal economy harbingers the government’s increased inability to provide public goods such as an efficient police force, an agile court system, a decent care health system and well-maintained schools. For all these things the government needs to collect taxes and exercise its authority. On this score, the growth of the informal economy will not do much to help. In fact, we note with concern that in many parts of Georgia the government’s presence is almost a formality. We refer to places that seldom receive electricity in summer and no supply whatsoever in winter, places in which misappropriation of resources means salaries and pensions have not been paid for months (even years in some cases), and places in which neither the Ombudsman nor the justice system has much influence over how local conflicts are resolved.

In summary, in addition to reporting that the average situation of the Georgian household appears to be improving, the figures presented in this section also seem to suggest that the Georgian population, despite its government’s poor managerial performance, manages to improve its living conditions. The informal, almost vibrant, economy is the lifeline providing relief to the average Georgian household. There is little to celebrate and cheer in this. The growth of the informal economy is a response to the costs of going formal. The Georgian citizen sees government structures, such as the police force or the courts, as hurdles threatening the viability of economic activities rather than as crucial structures to enforce contracts and minimize transaction costs. Similarly, the population sees requisites for undertaking formal economic activities, such as paying taxes, as vehicles for a chosen few to enrich themselves at the expense of the many, rather than as a source of income to enable the state to provide a range of crucial public goods. In the long run, a growing informal economy threatens the government’s capacity to implement public policy. Neither the informal economy, nor the numerous clans that govern the informal sector, is anxious to provide such services as a decent health care system and public education, to ensure the rule of law works throughout Georgia, or to guarantee the provision of basic human rights.

Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing ...

UNIVERSAL DECLARATION OF HUMAN RIGHTS, Article 25.

The Georgian population’s living conditions are, on average, better than those in other CIS countries. Figure 2.4 indicates that over 60 percent of households own their homes. Housing is almost universal in Georgia.

Fig. 2.4. Living Conditions of the Georgian Population

Source: SDS

It is true that living conditions inside a significant number of these apartments or houses fall a long way short of standards taken for granted in western countries. Only about 50 percent of households have a telephone line and less than 50 percent have centralized or individual heating systems and are thus depend on kerosene and electric heaters (Table 2.8). Nevertheless, despite these shortcomings, it should be recognized that Georgia has managed to avoid the expansion of those "shantytowns" that have sprung up in almost all other post-communist countries of the CIS.

Source: SDS

Table 2.9 shows the average living space per household. More than 41 percent of householders have houses or flats bigger than 100 m², more than 50 percent of flats are over 80 m², and more than 65 percent are over 60 m². According to data collected by GORBI, 57.18 percent of householders live in their own flat whereas 42.82 percent share the flat with parents or live in a communal flat. A significant number of households owns a flat (90.8 percent), while 1.0 percent rent from the state and 0.9 percent from a private person. In addition, a remarkable number of households (25.7 percent) own a house other than the one in which they live (for summer or winter holidays).

Source: SDS

The data show that while living conditions have a long way to go before they match those in advanced societies, the overall situation is much better than that seen in most third world countries. A house is an important asset to own and contributes heavily to human development. Homeless people and inhabitants of shantytowns are not social groups known by their high probability to survive the age of 40.

The remarkable level of housing in Georgia is an inheritance from the previous system. Such inheritance can be detected not only in observing the distinctively boring and ugly architecture of Soviet apartments, but also because little additional housing has been added since the Soviet Union’s collapse. Most private investment in housing has gone on repairs inside houses and apartments, not on building new ones. Figure 2.5 describes construction data of flats and houses occupied by the Georgian population.

Fig. 2.5. Percentage of Housing Construction (1921-1999)

Source: SDS

Figure 2.5 shows that housing construction peaked in 1960-1980. This had nothing to do with an official preoccupation about needing to meet any goal of universal housing. Instead, in the early sixties, the First Secretary of the Georgian Communist Party, Mr. Vassiliy Mzhavanadze, and his obedient Central Committee decided to increase Tbilisi’s population to over one million. The aim of this decision was to profit from the increase in material supply from Moscow to Soviet cities with over one million inhabitants (Among other things, Moscow provided funding for the construction of subway systems in cities above a million inhabitants). A program of massive apartment construction was started, which coincided with the campaign "to overtake and surpass the United States" led by Mr. Nikita Khrushchev, First Secretary of the USSR Communist Party. The massive construction of Georgian cities and towns sharply changed the ratio between urban and rural populations.

A visit to these satellite cities and towns will show the dreadful state of maintenance of most buildings. In the last decade, little, if anything has been spent on basic maintenance and many of these building are literally falling apart. As expected, families have chosen to invest their scarce savings on maintaining the interior of their apartments at the expense of maintaining the exterior. Judged on housing, Georgia does well mainly because of what it inherited from a previous system. But unless more work is done to maintain these building, sooner or later they will start to fall apart.

Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment

The social and economic changes that Georgian society has experienced in the last decade has entirely altered the employment structure (Fig. 2.6). Before the collapse of the USSR, the economically active segment of Georgian society represented an inseparable part of the Soviet state and, as such, comprised employees (remarkably, though ironically, this category included the Nomeklatura, which, according to Lenin's definition, was officially considered to be the "people's servants") and peasants working in kolkhozs, not working housewives, retired persons and students. The number of self-employed and unemployed people was low. Over the course of economic reforms, this has changed.

Fig. 2.6. Structure of Employment

The percentage of employed males exceeds that of females by about 10 percent whereas the unemployment level is approximately the same (Fig. 2.7). This is because of the number of economically active females that choose to be housewives rather than to join the labor force. The official unemployment rate is high at 16.8 percent. According to GORBI, however, if only employment with a monetary remuneration is considered, the unemployment rate rises to as much as 25.6 percent. The more palatable official unemployment figure comes from considering employment with both monetary and non-monetary remuneration.

Fig. 2.7. Macroeconomic Structure of Employment According to Gender

Source: SDS

The fall in formal employment opportunities that followed the collapse of the economy in early 1990 was brutal, particularly in the economy’s main industrial branches. Figure 2.8 shows the changes in employment taking 1990 as a base year.

Fig. 2.8. Number of Employees in Main Industrial Branches

Source: Budgetary Office of Parliament

The sharp plunge of employment possibilities in the main industrial branches of the economy was accompanied by a similar trend in the non-industrial sectors. Figure 2.9 shows the changes over time in employment in the non-industrial sectors of the economy, taking 1990 as the base year. It is worth noting that the government managed to survive the slash better than any other non-industrial branch, even despite pressure from international financial organizations for the government to streamline itself, a condition of many international loans. Education, in turn, managed to retain the services of almost ¾ of its former employees.

Fig. 2.9. Number of Employees in Non-Industrial Branches

Source: Budgetary Office of Parliament

The squeeze in employment possibilities forced scores of Georgians to seek alternative ways of survival and many joined the ranks of the so-called self-employed. Table 2.10 shows both the distribution of the number of self-employed people between different economic sectors of business activity and the distribution according to gender. It is striking that over 78 percent of self-employed persons are engaged in agricultural activities. In addition, there appears to have been a shift from other sectors of employment to agriculture because this category is the only one to have grown since 1997.

Source: SDS

To a large extent, the agricultural sector acts as a buffer against the negative consequences of reduced employment possibilities in other sectors of the economy. People tend to return to the family plot when employment in other sectors, particularly those with monetary remuneration, becomes unavailable. It shows the Georgian population’s notable degree of flexibility and its ability to move and change jobs as favorable/unfavorable economic conditions emerge.

While agriculture has provided a lifeline to many that would otherwise have gone hungry, it is also a difficult and often unrewarding activity. Self-employment in agriculture covers people who predominantly work their own land plots and, as a rule, who receive only a small monetary income (from selling produce in open markets). For many, agricultural activities in Georgia traditionally had an auxiliary character, because most of the urban population owned small land plots that provided a non-monetary income. Agriculture’s overwhelming contribution to the number of self-employed merely reflects the crisis in other sectors of the economy and the inherent difficulties of finding employment. Finally, the absence of monetary income for a large group of self-employed people contributes to the perpetuation of non-monetary economic relations in rural areas, areas in which a significant volume of goods and services are paid for with agricultural products. This feature prevents the capitalization of individuals’ businesses and limits the range of goods and services available to farmers.

The importance of agriculture as a relief valve is also observed in the differences in unemployment levels between Tbilisi and the regions (Table 2.10). Unemployment has hit the most educated sectors of Georgian society particularly hard, as scores of physicists, engineers, biologists, doctors, and artists have painfully experienced.

Fig. 2.10. Regional Structure of Unemployment

Source: SDS; United State Employment Fund

Figure 2.10 shows that unemployment levels are significantly higher in Tbilisi (about 30 percent of the economically active population) than in any other region. This is partly because a significant number of the former intelligentsia lives in the capital, as do hundreds of thousands of IDPs from Abkhazia. The latter can be found forming crowds at Tbilisi open markets, reselling simple goods like cigarettes, cheap clothes from wholesalers or food from peasants. They have created an informal "stock exchange" of unqualified labor on a per hour payment doing work like loading/unloading trucks or even just the simplest of housework.

Figure 2.11. Categories of Self-Employed People According to Their Social Status

Source: SDS

The employment structure also reflects the size of the informal economy and is consistent with findings from the previous section (income). The number of those who call themselves self-employed has overtaken the number in fixed employment by a large margin. The self-employed represent a group dominated by people mostly engaged in informal activities who often also "work" in formal jobs that pay no salaries (Fig. 2.11). When asked why they keep going to jobs that do not provide remuneration, the answer is invariably the need to maintain the network of relations associated to their jobs, "just in case opportunities arise in the future".

Everyone has the right to form and to join trade unions for the protection of his interests

Historians will not remember the last decade in terms of the power and influence of Georgian trade unions, which are a shadow of their former selves. Several factors account for their lack of presence in the country’s daily political and economic life. The first one, of course, is that strong unions demand active sectors of the economy; few people will notice a strike in an idle or bankrupt firm. The second factor is that the growth of the informal sector has been fuelled by people formerly employed in unionized sectors of the economy, which in the Soviet Union constituted all sectors of the economy. The third factor is that the labor unions have been unable to depart or distinguish themselves from their Soviet counterparts. The average Georgian citizen finds it difficult to notice a real difference between Soviet trade unions and those of independent Georgia. The fourth and final factor has been an insatiable desire for property, which may seem surprising if we consider that the labor unions legally inherited all real estate and other tangible property that Soviet labor unions used to own in Georgian territory. The inheritance from the former Soviet labor unions came in the form of capital assets that initiated a savage fight for its control, resulting in scores of crossed legal claims that almost paralyzed the unions.

The recent history of trade unions in independent Georgia dates to June 29, 1990, when the Congress of the Georgian Trade Unions cancelled the Georgian Republican Council of Trade Unions and founded the Confederation of Independent Trade Unions (I. Tugushi, Notes on Union of the Georgian trade unions, Tbilisi, July 2000 (in Georgia). This document has been kindly provided by the Chairmen of the Union). This Confederation declared itself the legal successor and owner of all property that belonged to the (Soviet) Georgian Republican Council of Trade Unions. It also automatically "inherited" all of its members. Almost overnight, the Confederation became an important organization uniting the overall (or almost the overall) economically active population of Georgia as 28 unions joined up. While the Confederation may have managed to acquire the existing trade unions' property, it failed to gain the souls of its members, who remained indifferent to the maneuvers of their leaders. The Confederation soon sailed into troubled waters and on August 24, 1991, the Extraordinary Foundational Congress of the Georgian Trade Unions liquidated the Confederation, founded the newly Independent Georgian Trade Unions and declared itself the successor of all existing property (This internal coup was engineered by Mr. Gamsakhurdia's government, who did not trust the Confederation leaders). This time, however, not all the leaders dutifully lined up as expected and ten unions refused to join the new structure. With the fall of the Gamsakhurdia Presidency, the days of the Georgian Trade Union were numbered and 11 days later, on January 28, 1992, a new "unifying" Congress of Georgian Trade Unions was called. The congress resulted in the Union of Georgian Trade Unions.

Disputes surrounding tangible property continue today. From 1992-1994 the Georgian Government "appropriated" the Palace of Culture, the Methodological & Training Center and the Sanatorium "Nabeglavi", transferring ownership to several governmental agencies. Touched where it hurt most, leaders of the Union fought back and on July 15, 1998, obtained a Constitutional Court ruling canceling the government decision and restoring the previous status quo. The Ministry of Defense, which by that time controlled the Palace of Culture, refused to leave highlighting, as mentioned in Chapter One, the easygoing attitude of some government employees to the justice system’s rulings. The situation was further complicated by a court claim from Mr. Katsitadze, the former leader of the Independent Trade Unions, who is trying to get the 1992 congress cancelled and, of course, the restitution of all its tangible property with him as the plenipotentiary manager.

Meanwhile, the management of the Unions’ property is in the hands of several entities founded by the Union of Georgian Trade Unions. For instance, "Kurortinvest", a Joint Stock Investment Company, manages the Resorts of the Georgian Trade Unions (foundation capital 11.4 million GEL plus 1.461 million GEL of auxiliary real estates). Unfortunately, Kurortinvest has been unable to attract investment for improving and running up the capital assets listed in Table 2.11.

Source: I. Tugushi, Notes on Union of the Georgian trade unions, Tbilisi, July 2000 (in Georgian).

Two other entities also manage labor union property. The first is the Sport Society "Shevardeni" (Falcon), which is in charge of 40 different units (worth 2.17 million GEL), including six stadiums, 14 sports complexes, nine wresting halls, two swimming pools, two sports halls, two chess clubs, a shooting-range, an athletics hall, and a number of tennis courts. The second is "Kurortmsheni, Ltd.", a construction firm of trade unions with a foundation capital of 382,185 GEL. In addition, the Union itself manages five limited liability companies (an autoservice station, the restaurant "Phasis", 'Polygraphist' and the tourist base in Tskhneti, "Kurortproekti"), three joint stock companies (the hotels "Bakhtrioni", "Amirani", "Karishkhala") and other firms with a total foundation capital of 2.623 million GEL. Thus, as of July 1, 2000, the Union of Georgian Trade Unions directly or indirectly owned and managed tangible property and real estates worth 16.575 million GEL, the current value of the property inherited from the Soviet trade union system.

On paper, the might of the Union of Georgian Trade Unions knows few boundaries and includes the following organizations: (i) Adjara Republic Council of Adjara trade unions; (ii) Abkhazia Coordination Council of Abkhazia trade unions; trade unions of (iii) Aviation workers; (iv) Local industry & housing workers; (v) Architecture, construction & building material industry workers; (vi) Bank, financial and insurance companies’ employees; (vii) Education employees; (viii) Geology, geodesy & cartography employees; (ix) Energy & electro-technical workers; (x) Trade and consumption cooperation workers; (xi) Defense & radio-electronic industry workers; (xii) Communication workers; (xiii) Resort & tourism workers; (xiv) Subway workers; (xv) Engineering industry workers; (xvi) Medical workers; (xvii) Light industry workers; (xviii) Metallurgy & mining industry workers; (xix) Academy of Sciences employees; (xx) Employees of small enterprises (xxi) Oil and gas industry workers; (xxii) Coal industry workers; (xxiii) Footballers; (xxiv) Journalist & mass media employees; (xxv) Railway workers; (xxvi) Sportsmen & sport employees; (xxvii) Autotransport & road workers; (xxviii) Mechanical engineering & agroindustry workers; (xxix) sailors; (xxx) Paper & wood processing workers; (xxxi) Army service & public associations employees; (xxxii) State aviation workers; (xxxiii) Agriculture & food industry workers; and (xxxiv) Chemical, medical industry & heating system workers.

In practice, however, the situation is different. The Union’s structure is little more than a relic of ancient times because it unites trade unions of workers and employees of industries that either do not exist any more, or whose participation in the economy has sharply reduced, like in the state aviation and mechanical and engineering industries. In addition, Georgian trade unions have no power in Abkhazia.

The number of trade union members curiously coincides with number of employees registered by both the Tax Department and the Social Welfare system. Such a coincidence fuels the suspicions of those who claim that trade union membership is a formality, aimed at extracting payments through membership dues. In some cases, the allegations may have a point. No trade union meetings have been called in scientific institutions, universities, and other entities for the last ten years. Most of the population does not even know whether or not they belong to a trade union.

The Unions have also been unable to extend their reach to the scores of employed people in the new branches of business activity who often remain unprotected. Workers in cafés, restaurants or stores can be fired at any time without reimbursement, as he/she has no labor or employment contract. Another area in which unionization could make a difference is in international organizations, which usually pay local staff salaries five to ten times less than those of foreigners working in the same job. Our conclusion is that the current situation of the labor unions is cause for concern. While there are some labor union leaders who sincerely try and improve working conditions and terms, the Union of Georgian Trade Unions appears to be more submerged in disputes about property distribution and more dedicated to managing its assets than in commenting on Georgia’s current process of socio-economic transformation. As a result, only 27.6 percent of the Georgian population trust trade unions, 61.3 percent do not trust them at all and 11.1 percent has no idea about their existence (Georgian Lifestyle, GORBI, TBILISI, 2000). Georgian trade unions exist in a virtual space isolated from current problems affecting the country, an inauspicious long-term strategy for organizations whose main goal ought to be the well-being of their members. In the new economy, Unions have a role that, if played with conviction and honesty, will earn them back the recognition of their member workers (Like in the cases of Zestaphoni Ferroalloy Plant, Chaturmanganese Mines and Madneuli Metal Enrichment Plant. Trade unions participated in these conflicts and today the Trade Union of Metallurgy & Mining Industry is active and trusted by its members).

No one shall be arbitrarily deprived of his property

UNIVERSAL DECLARATION OF HUMAN RIGHTS, Article 17.2

Access to property in general and land in particular has always been a touchy issue. The first decree signed by the government of the First Georgian Republic in 1918 was the "Decree on Private Property of Land" while the first decree signed by the Council of Red Commissars in 1921 was the "Decree on the Nationalization of Land". Land use rights constitute important criteria that distinguish a liberal economic system from a totalitarian one. Different property regimes also appear to influence productivity. In 1988, the state owned 87 percent of agricultural land, and it provided 16 percent of crop production, while the 13 percent of land that belonged to rural householders produced 84 percent of agricultural domestic produce.

The process of re-distributing collective 'kolkhoz' lands to rural and urban householders was implemented between 1990-1995. Georgia’s recent laws on "Property of Agricultural Lands" and on "Land Property" accelerated the process of land privatization and transferred a significant portion of former state land to private individuals for nothing. Over 790,000 ha (or 26 percent of overall agricultural lands) have been privatized including 54 percent of high-quality arable land. Table 2.12 shows the structure of Georgia’s Land Fund. The whole land fund accounts for 6.95 million ha but only 43.1 percent or 2,991,100 ha of this is agricultural.

The average size of a given household’s land plot, in either villages or towns, is not large. Figure 2.12 shows that there is a tendency for the average area of cultivated land to increase. Yet the tendency is weak. The explanation lies in the country’s underdeveloped land markets.

Fig. 2.12. Average Area of Cultivated Land Plots per Household

Source: SDS

Fig 2.13. Distribution of Main Land Plots According to Property Rights

Source: SDS

Georgian agriculture’s capacity to organize itself with minimal input from the government and to operate in an almost cashless environment helped the country to overcome the most tragic and difficult stages of the civil war without experiencing massive famine. Even at its most stretched, Georgian agriculture was able to supply markets with a basket of basic produce. According to USAID, however, the current private land plots are too small for profitable production (Recent Development of Georgia's Agriculture, Report of the Strategic & International Studies, Washington D.C., 2000). Consolidation may be needed. But a cashless environment and underdeveloped land markets are not helping the capitalization of farms, the consolidation of the sector, or investments in agriculture. In addition, cultural factors hinder the alternative option: setting up cooperatives which would benefit from economies of scale. In Georgia, the word "cooperative" still spells Soviet kolkhoz to a peasant. His/her bad experience from this type of production unit means that farmers prefer to enjoy any possible benefit to working alone than to join his/her property to any joint venture.

We will now briefly turn our attention to the privatization process of Georgian State assets. This is one of the last decade’s most important pieces of public policy, because access to capital is an important tool in breaking the poverty trap and climbing the social ladder. Indeed, the World Bank, in its Poverty and Income Distribution study for Georgia, confirms that different capacities to access capital assets correlates to differences in poverty levels, a finding in line with what common sense would suggest.

To privatize state assets in a post-communist country is to seriously redistribute wealth, because previously everything belonged to the State and, at least in theory, the State belonged to the people. With the collapse of the Soviet Union, people should have been given back their corresponding share of State assets, yet results have been disappointing. Even more disappointing is the fact that international organizations have been unable to halt or to rectify what appears to have been a biased and unfair distribution of wealth generously peppered by outright misappropriation of state assets. And yet international organizations actively designed the privatization process, often making their financial assistance dependent on its implementation.

Thousands of pages have been written about the Georgian privatization process. The National Human Development Reports of 1995-1999 discuss the issue at length, as do nearly all the quarterly issues of the magazine Georgian Economic Trends. We are not interested in repeating here all that bulk of data. We will briefly describe the opportunities opened to help common citizens get back his/her portion of State assets, wealth that, in one way or another, he/she helped to create while working under the Soviet System.

Mr. Zviad Gamsakhurdia’s government took the first important step in the privatization process. According to a Special Decree of the President, it declared Georgian householders who had forwarded the corresponding notification to be the owners of their flats in municipal buildings. From 1992 onwards, the privatization process in Georgia gathered steam by means of the "Law on Privatization of State-Owned Enterprises", a piece of legislation later saddled with more than 60 amendments issued to coincide with different economic swings. On May 30, 1997, the Parliament of Georgia adopted a new Civil Code and a new "Law on Privatization of State Property". The latter was legislation largely concerned with regulating the privatization of large enterprises.

Originally, the idea was that the population at large would participate in the privatization of medium- and large-sized enterprises via special voucher auctions. By 1997, about 87 percent out of a total of 5,310,414 vouchers had been distributed to the Georgian population. The voucher model of privatization called for vouchers to be exchanged for securities of state-owned enterprises that were being transformed into joint stock companies. By this process, vast segments of the population were supposed to end up owning shares in the enterprises.

These vouchers and securities were accumulated in special investment funds, intended as vehicles that would later foster the creation of a secondary security market. Yet these funds bought (or exchanged via vouchers) just 0.3 percent of shares in former state enterprises and, surprisingly enough, a significant portion of their investments went on unpromising enterprises that were waiting for the "Law on Bankruptcy" to be implemented. Many of these investment funds went the way of that described in Box 2.3.

The Georgian population at large has seen little of these former state assets. By the end of the first stage of privatization (the second stage comprised selling state enterprises directly to actual investors), the Georgian population owned the same amount of tangible property as it had at the start of the process. When the second stage of privatization is taken into account, which among other things is characterized by scores of tenders with only one participant, the privatization process appears to have resulted in an unfair re-distribution of wealth of a magnitude not seen since the nationalization of property by the Red Commissars in 1921.

Everyone, as a member of society, has the right to social security...

UNIVERSAL DECLARATION OF HUMAN RIGHTS, Article 22.

The population’s access to social welfare and insurance depends overwhelmingly on the State’s capacity to attain proper levels of tax collection and to ensure that resources collected are properly managed. Neither a strong informal economy nor crippling levels of mismanagement are factors that favor the local population’s access to social welfare and insurance. A strong informal economy robs the State of crucial resources needed to properly endow the social welfare and employment funds, while mismanagement, of course, decreases the efficiency of how scarce government resources are spent.

The previous issue of the NHDR 1999 noted that budgetary revenues fell short of targets set for the period 1995-1998. This performance was repeated in 1999, as Figure 2.14 shows.

Fig. 2.14. Approved and Executed Revenues to the State Budget (in USD)

Source: NHDR-1999; The Law of Georgia on 2000 State Budget of Georgia; Report on Execution of the 1999 State Budget of Georgia, by Government of Georgia, 2000.

In real terms, the revenue goal for 1999 was set at almost the same level of revenues obtained in 1998. Yet even this exhibition of targeting prudence was insufficient and revenues in 1999 were again below the planned targets. The State Budget received 124.3 million USD less than in 1998. As with almost every other category of national budget spending, the Special State Funds suffered from the shortages in resources. They received approximately the same amount of Georgian laris as in 1998. If the devaluation of the Lari in late 1998 is taken into account, the figure received for 1999 is 30.84 million USD less than in 1998 (Fig. 2.15).

Fig. 2.15. Revenue to the Special State Funds

Source: NHDR-1999; The Law of Georgia on 2000 State Budget of Georgia; Report on Execution of the 1999 State Budget of Georgia, by Government of Georgia, 2000.

The overall execution of the Special State Funds was equal to 89.74 percent in 1999. The United Social Welfare Fund achieved an execution of 87.93 percent, the United Employment Fund of 95.05 percent and the State Road Fund of 96.03 percent. Table 2.13 shows the revenues expected and the revenues actually obtained in 1999, as well as those planned for the year 2000 for the three funds previously mentioned.

Since one of our interests in this section is the population’s capacity to access unemployment benefits, we will direct our attention to the performance of the United Employment Fund (Table 2.14). A brief look at the official numbers provided shows that the fund received 3.6 million GEL in revenues. If this amount were to be distributed among the 344,600 unemployed (based on the WTO’s "loose criterion"), the United Employment Fund would have been able to provide each unemployed person 10.48 GEL per year. Not a lot. But since the fund only has 10,900 people or 3.16 percent of those unemployed registered, the available resources could have allowed for each unemployed person to receive as much as 331.28 GEL per year or 27.61 GEL per month.

Source: The Law of Georgia on 2000 State Budget of Georgia; Report on Execution of the
1999 State Budget of Georgia, by Government of Georgia, 2000

However, only 948,900 GEL was spent on payments to unemployed people, an equivalent of 87.06 GEL per year or 7.25 GEL per month per registered individual. Organizational and administrative expenses were nearly as high as payments to unemployed people (948,900 versus 929,300 GEL). Considering the amount of people in each respective payroll, the United Employment Fund appears to provide incomparably greater benefits and working conditions to its managers (and possibly employees) than to the unemployed people on its books. This situation has been a subject of concern for the present authorities and the managerial expenses for 2000 have been cut to 300,000 GEL. We sincerely applaud any measure that can increase the efficiency of spending and thus increase the capacity of the United Employment Fund to reach the scores of unemployed Georgians who are in real need of a monetary supplement.

We will now turn our attention to the performance of the United Social Welfare Fund. Here, the situation is far from acceptable and measures aimed at increasing efficiency of spending, and therefore the population’s access to welfare benefits, may require more than just keeping managerial expenses in check.

Finally, Table 2.15 shows that the executed subsidies to temporarily disabled employees was 5.9 million GEL or 99 percent of the planned target, an excellent performance that was even improved in terms of organizational expenditures, which amounted to 4 million GEL and were 100 percent executed. If "Communication expenses" are also taken into account, operational expenses amount to 4.4 percent of total expenditures, a relatively acceptable percentage, though above the 2.4 percent allowed by law (Indeed, 4-4 percent in optional costs is a target that most projects of international organizations fail to meet. The Georgian law, however, is even tougher and demands costs be kept to 2.4).

Table 2.16 describes the officially registered arrears in so-called "protected articles" of the State Budget. A protected article is a prioritized budget item. Expenses in "non-protected" budget lines are dependent on first securing enough resources to cover the expenses in all protected articles. In short, the government is supposed to refrain from spending in, for example, management expenses or buying new vehicles, until all protected articles have been paid in full. Reality, however, indicates otherwise.

Arrears in pensions continue to grow unchecked. Total official arrears in pensions were 53 million GEL by the end of 1998, and with the addition of a further 24.6 million GEL in 1999, amounted to 77.6 million GEL by January 1, 2000. The total arrears for all protected articles reached 246.3 million GEL. During the 1999 fiscal year, arrears increased by a staggering 105.8 percent.

The situation regarding the management of the employment and welfare funds has been chaotic. Those worst affected have been the poorest and most vulnerable members of society, for whom even the meager supplements provided by these funds can make the difference between having something to eat and not. We are happy to see that the newly reformed Ministry of Health Care and Social Welfare is apparently trying to improve the current situation. As a first step it has changed all managers of the United Employment Fund and United Social Welfare Fund. Second, the Ministry appointed a special Council of Trustees and Group of Experts to find alternatives to improve how resources are managed. Third, the Ministry appears genuinely interested in cooperating with different international organizations like Counterpart International, USAID, and the World Bank to reform the social welfare funds. Fourth, some measures have been introduced to increase the population’s confidence in how these funds are managed. Among them we notice a project to appoint controllers elected by the population to all social welfare departments. The newly hired managers have already introduced a new computer system to register pensioners, which has increased transparency. The system quickly revealed several tens of thousands of Gogol’s "dead souls". Finally, officials in the Ministry are considering the possibility of replacing the existing social welfare system with one of state insurance. Corresponding draft laws have been forwarded to the Parliament.

These measures are precautionary, measures intended to minimize the occurrence of mismanagement and corruption. No doubt they are very much needed. But the existence of low corruption levels relies on that of a judicial system capable of acting efficiently and relatively fast in the event of illegal activities. A fully functioning and independent court system would discourage most of those in managerial positions in the welfare and social funds to misappropriate public money because efficient, clean and agile courts would introduce the novel idea that corrupt activities can and will be swiftly punished.

This chapter has looked at what appears at first sight to be conflicting data. We have observed that if monetary and non-monetary income is taken into account, the average Georgian household’s total income has been improving over time. To our surprise, we have also observed that equality in income distribution not only improves when non-monetary income is accounted for but that it appears to have improved since 1996. These tendencies are being observed in an environment of salaries below the poverty line, increasing arrears in pensions and salaries, and in the presence of welfare and pension funds that provide little more than a meager monetary supplement to a fraction of those in need.

Looking at the structure of employment, we find that the number of so-called self-employed members of society has overtaken the number of employed people, which is anything but surprising in view of the debacle in those sectors that used to employ the most people. The self-employed, however, are a long way from the notion of the vibrant entrepreneur profiting from new opportunities a market economy affords. An overwhelming percentage of these people have ended up working in agriculture, a cash-starved sector with limited opportunity to grow. Most of those who are self-employed turn to the informal sector for a much-needed lifeline to make ends meet.

The chapter also provided official data about reported income and expenditures and highlighted that in real terms, official figures for both income and expenses decreased, even at a time when the economy was growing at a breakneck speed. Either people have become more suspicious over time about reporting income and expenses, or the origins of their source of income have changed. We are inclined to believe that the second explanation is the more plausible and that the informal economy may be gaining ground.

From the private individual’s narrow perspective, a dollar obtained in the informal economy does not differ from a dollar obtained in the formal sector. The costs of doing business in the formal economy appear to be high and originate in the many hurdles a dubiously competent tax department, a crippling bureaucracy prone to corrupt practices, and the relative capacity of the court system to enforce contract law all pose. All these factors are invitations to remain in the informal sector, invitations that find strong synergies in the population’s low levels of trust in formal structures of governance. We note with concern that 56.8 percent of population do not trust courts of justice, 64.0 percent do not trust the Parliament, 79.4 percent mistrust the tax administration, 80.2 percent distrust customs offices, 62.1 percent the Presidency, 65.6 percent the chairmanship of Parliament, and so on and so forth (Georgian Lifestyle, GORBI, TBILISI, 2000).