chapter1

The Georgian National Human Development Report 2001/2002 (NHDR) focuses on poverty. Two factors account for the selection of topic. The first is the ongoing preparation of the Poverty Reduction and Economic Growth Program" (PREGP) for Georgia. When completed, the PREGP will outline the government of Georgia’s plans for how to decrease poverty levels in the country. It will constitute guiding policy not only for the government, but also for institutions such as the World Bank (WB) and the International Monetary Fund (IMF). Additionally, it will serve as guiding framework for assistance from the United Nations system of agencies and bilateral donors. The NHDR 2001/2002 takes poverty not only as a subject worth meriting a report in itself, but also as a window of opportunity to contribute to the public discussion about the objectives and plans of action in the PREGP.

The second factor influencing the decision of topic for this report is the growing importance of poverty in the public’s general perception about their most pressing concerns. Poverty, unemployment and low incomes have risen to the top of people’s agenda. For the first time, they have left behind other traditionally high-profile issues, such as Georgia’s relationship with its neighbors or conflicts with the separatist Georgian regions of Abkhazia and South Ossetia. Recent poverty studies confirm the public mood. The World Bank and the State Department of Statistics have detected an increase in the number of poor according to their latest poverty assessments². The hardships endured by an increasing number of Georgians have brought the issues of unemployment, corruption, and poverty to the top of people’s list of concerns. Together, they account for more than two thirds of the population’s priorities.

We will examine unemployment first. Unemployment hits primarily those 20 to 30 years of age with about half of this age group lacking a stable job. Unemployment is also a serious problem for one third of the population between 30 and 45 years of age. Official Unemployment figures range between 10% and 15%, depending on the method of measurement used. However, as reported by the Georgian Economic Trends (GET), a publication of the European Union’s TACIS program, unemployment figures fail to provide a fair picture unless they are broken down by region and the participation rate of the population in the labor force enters the analysis³. A large and increasing share of people of working age are being discouraged by the lack of opportunities and do not enter the unemployment rate as counted by the International Labor Organization (ILO) "strict" standard of measurement⁴.

Box 1.1: about employment, salaries and poverty

"Widespread unemployment is the very reason for widespread poverty. But if a person gets a salary of 30 GEL and gets this amount once in three months, of course he is not considered unemployed. But it is impossible to live with this sum of money, and completely impossible to maintain the family and children". (Unemployed. Tbilisi)

The urban unemployment rate calculated by the ILO "loose" methodology, and as reported by the SDS, is a significant 25.6% and climbs to 30-40% in Tbilisi. In the capital of Georgia, at least one in three persons of working age are out of the labor force, either because they are unable to locate a job or they have given up hope of finding work and no longer even look. Based on SDS figures, GET also reported that the participation rate in the labor force has been declining steadily since 1998. The increase in "discouraged workers", that is, those that have given up hope of finding employment, is a worrying sign. These individuals run the risk of social isolation and exclusion. For the long-term unemployed, the prospect of finding a job becomes dimmer the more prolonged the period of unemployment.

Though official figures show the rural unemployment rate (loose methodology) is 6 %, this figure is biased because the existing Law on Employment dictates that any farmer owning at least 1 hectare of agricultural land is by definition self-employed. It is not surprising then that the majority of self-employed are employed in agriculture (67.4%). The national unemployment rate is considerably affected by rural figures because these artificially decrease the national unemployment rate while increasing, also artificially, the participation rate.

Employment does not necessarily ensure a Georgian a decisive escape from joining the ranks of the poor. Clearly the presence of an unemployed head of family is most likely to result in a family in poverty. However, a substantive number of families with an employed head of household also fail to escape poverty (see Chapter 3). Most jobs, especially in cities, are created in the informal sector. Many of these jobs are part-time or temporary in unregulated small-scale low-paying activities. Salaries are low across the board and families, more often than not, require additional sources of income. The result is that a significant number of poor people work. The World Bank poverty update of 2001 accurately defined them as the "working poor". For scores of fellow Georgians employment is not enough to pull them above minimum standards of living. Employment is a necessary, though hardly sufficient, condition to escape poverty in Georgia. When asked what they would expect to receive from a poverty reduction program, the answer was access to fairly paid jobs.

We now turn attention to the topic of good governance, which stands as the second most pressing concern of the population. The idea that good governance and effective institutions matter is not new and it is reflected in a wealth of literature, some of which received a Nobel Prize in Economics. Promoting good governance occupies a central role in UNDP’s strategy to combat poverty. The issue has taken much deserved space in previous NHDRs and continues to be of utmost importance in this report as well. The message is clear. Good governance is a crucial factor in achieving sustainable rates of economic growth and reducing poverty levels.

The forthcoming Poverty Reduction and Economic Growth Program of Georgia places great emphasis on economic growth as the main engine for increased job opportunities and subsequent future decreases in poverty levels. The successful implementation of this strategy is not easy. In a free market economy, economic growth is not something that can be mandated as during the Soviet period. It can only be promoted and fostered by putting in place incentives and policies conducive to greater total output. Institutions are crucial in this respect because they can set incentives and policies that are (or not) conducive to economic growth. Of course, they also matter for other important goals, such as protecting human rights, but we leave this discussion for another time. In terms of income and poverty, any strategy that relies heavily on economic growth as an engine for poverty

reduction can hardly be dissociated from a strategy aimed at improving the effectiveness of institutions. Free markets need clear articulation and enforcement of property rights, the civil and penal code, and contract laws to name a basic few. The scant attention paid to institutions that allow an economy to flourish has played a major role in the disappointing performance in the economic and human development arenas of several republics of the former Soviet Union, including Georgia. For example, the country might have benefited significantly if the attention given to fostering fair competition in the markets for goods and services had been of a similar nature to that given to the privatization of state-owned enterprises, re-payment of foreign debt, and the general equilibrium in the macroeconomy.

The effectiveness of economic growth to reduce the number of poor is dependent on the particular rules of the economic game put in place by institutions. The general perception of the public is that the rules of the game currently in place are not benefiting them. People call the results of weak institutions "corruption" simply because that is what they see as the most visible source of their suffering. But the effect of institutions on economic growth goes beyond corruption to encompass an array of business opportunities that never materialize, simply because the rules of the game make them unfeasible or unprofitable. These lost opportunities are difficult to quantify in monetary terms, but they can nevertheless be important.

Turning back to Figure 1.1 (most pressing issues for the population), one notices, not without concern, that education falls way to the bottom of the list. This does not appear to result from a lack of attention given to the virtues of good education. To the contrary, it is a Georgian tradition to educate ones children well no matter what may come. It is also a long-standing fact of Georgian life that a university education confers social prestige. But education is falling behind other concerns because the population appears to believe that "good education has nothing to do with good job opportunities". Rather these "depend on having good contacts or having enough money to buy a job"⁵.

Putting aside whether contacts may or may not be needed to obtain a good job, there appears to be some truth to the claim that education is losing ground as an important variable for keeping a family above poverty levels. For example, even though individuals with a university degree show a lower risk of being in poverty, the investment in education does not seem to produce all the expected returns. Given a poverty line of around 96 GEL/month, which is not far from the official one, one notices that slightly less than 40% of people with a university degree are in poverty against approximately 50% of those that have completed secondary school. As lower poverty lines are used, the differences between these groups narrow and tend to disappear the further down the poverty line is set. In addition, and as it is discussed in Technical Annex 1, the current contribution of education to family well-being is difficult to discern. In general, education does not appear to be a strong determinant in providing access to the positions individuals may merit. Factors other than knowing ones profession well may have a greater impact on improving family welfare. More on this discussion can be found in Technical Annex 1.

It would be a mistake of the first order, however, to disregard the importance of the public education sector in a program to combat poverty. An uncertain contribution of education to overall family welfare may reflect an environment in which personal contacts, or downright cronyism, overcome merit. In several rounds of open consultations carried out last summer, the public declared that good jobs, particularly in the public sector, are not always obtained by means of open competition. The low ranking of education in the list of people’s concerns is not saying that Georgians are abandoning their thirst for knowledge but rather it summarizes honest reflections about the visible damage that weak institutions inflict on the daily lives of citizens. Poorly run institutions that fail to provide needed incentives for rapid economic growth restrict the creation of jobs, save those in the informal economy that are

characterized by low productivity and low pay. The lethargic rate of job creation in the formal sector restricts the menu of stable income-generating activities for a substantial share of the population. Jobs that can make a difference between poverty and decent living standards are highly valuable. It may not be surprising that incentives to let them be occupied strictly on the basis of open competition and merit do not always predominate.

After two consecutive years of showing impro-vement, the Human Development Index 2001 for Georgia saw a net decline. In 1998, Georgia ranked 108 out of a total of 174 countries and in 1999 advanced to the 85^th position, which is a difference in rank of 23 positions. In the year 2000, Georgia further advanced to the 70^th position, for a further gain in rank of 15 positions. However, the differences of 23 positions in the Georgian HDI rank between 1998 and 1999 was explained mainly by a refined methodology to discount income while the difference in 15 positions between 1999 and 2000 originated in an updated estimation of Georgian GDP per capita⁶.

Box 1.2: on Human Development, Human Poverty and Income Poverty

The concept of income poverty reflects low individual’s capacity to earn sufficient income. Human poverty goes beyond just lack of income to encompass the degree of access to sufficient earnings, employment, education and health care services among other basics things. In turn, the concept of Human Development goes beyond human poverty and reflects the idea that income, employment and other basics are useful tools for the sake of a greater goal. In this approach, development is not defined as an increase in GDP per capita or in consumption alone but as an increase in our capacities to live a long, healthy, creative life, to enjoy a decent standard of living, freedom, dignity, self-esteem and the respect of others. Human deprivations are serious obstacles in the path to increasing levels of human development. And so are the lack of political freedom and the neglect of particular segment of the population like less privileged ethnic groups, oppressed classes and discriminated women. For further readings on the subject, see the Human Development Report 1997 at www.undp.org.

In the year 2001, the HDI for Georgia fell back to the 76^th position. Several reasons account for this decline. First, while the adult literacy rate increased from 99% to 99.6%, the combined gross primary, secondary and tertiary enrollment ratio fell from 72% to 70%. As a result, the education index fell from 0.90 to 0.89. Second, the GDP index fell from 0.59 to 0.53 reflecting a decrease in per capita income. Third, even though life expectancy at birth increased from 72.9 to 73.0, this difference is too small to affect the Life Expectancy Index, which remained unchanged at 0.80. The combined effect of changes in the indexes for GDP, Life Expectancy, and Education resulted in a fall of the HDI from 0.762 to 0.742⁷.

For this year, the National Human Development Report of Georgia has computed regional values of the HDI so as to allow comparison between different regions of Georgia. Values for life expectancy in different regions were kindly provided by the Demographic Department of the State Department of Statistics. Values for the GDP index, adult literacy and gross primary, secondary and tertiary enrollment ratios originate from survey data from the winter and summer of 2001⁸. Figure 1.3 presents the results.

Figure 1.3 produces two surprises in the form of high rankings for Javakheti and Kvemo Kartli, which appear counterintuitive. Javakheti because it has suffered badly in the last couple of years and Kvemo Kartli because its per capita income is not above that of Adjara, for example. Two factors are at play that should be taken into account when reading the HDI for regions and we proceed to discuss them here before continuing with Figure 1.3. The first is that the HDI is a composite index. That is, it is an average of three different dimensions of human development. Figure 1.3 reflects one of the interesting properties of the Human Development Index in the sense that the ranking is affected, but not dominated, by income figures. Javakheti and Kvemo Kartli are in top positions only because of their high life expectancy at birth, which more than compensates for their relatively low per capita spending. In the case of Javakheti, the index for education does not affect its top position because, as Table 1.3 below shows, the top half of the Education Index does not present great differences among regions. It is therefore not enough to knock down Javakheti from its top rank. In contrast, the education index for Kvemo Kartli is near the bottom of the list and it does pull down the region’s overall HDI index.

The second factor at play is that some of the data needed for the HDI of Georgian regions is no longer current, particularly life expectancy at birth. In order to estimate life expectancy, the State Department of Statistics partly relies on death certificates issued by government offices. The cost of formally declaring a person dead is 5 GEL and this payment acts as a deterrent for some. One could assume that poor people face this constraint more than non-poor and that in poor regions the problem is more severe. The experts at the SDS do their best to correct for underreporting, but the baseline data is old and subject to distortion. Until the data from the new census become available, the rankings of Javakheti and Kvemo Kartli must be considered in light of the fact that they depends solely on their life expectancy at birth figures, which in turn come from data with uncertain reliability.

Even when taking these caveats into account, it is still remarkable that in spite of the drought that affected the Javakheti region in the year 2000 the region managed to come up on top of the regional rank. Tbilisi follows closely, which may not be that surprising. Kvemo Kartli is slightly above the national average while Adjara is slightly below. Mtskheta-Mtianeti, Racha, Kakheti Samegrelo, Shida Kartli and Imereti continue in decreasing order but the differences from one to the other are not great. Guria is at the end of the distribution.

In terms of HDI’s GDP index the rankings change. The economic weight of the capital, Tbilisi, and the revenue generated by the main port of entry for trade with Turkey, Batumi, manage to grab the top positions in the GDP index rank. At first glance, the readings of the GDP index for Tbilisi and Adjara may not look excessively above the rest of the pack, but they do reflect differences in average per capita spending. The national average GDP index is 92% of Tbilisi’s. Kakheti and Shida Kartli are in the middle of the distribution and reach approximately 89% of Tbilisi’s index. Guria consistently ranks far at the bottom of the list. Its GDP index is 78% of Tbilisi’s.

The GDP index rank varies not only between regions, but also between winter and summer⁹. Figure 1.5 below shows these variations for Tbilisi, Kakheti, and the national average.

Figure 1.5 reflects the swing in disposable income, and therefore material living standards, from winter to summer in Tbilisi, Kakheti and Georgia as a whole. The swing in the GDP index in Tbilisi suggests that more than a few Georgians suffer changes in living standards following the change in seasons. Tbilisi accounts for approximately 25% of the total population (45% of total urban) and could be responsible for approximately one third of the total national output. The seasonal change in the GDP index for Georgia, and in particular for Tbilisi, says a lot about the structure of economic activities in Georgia. Mainly, their vulnerability to mundane factors, like seasons, that usually play a less important role in industrial and semi-industrial economies. The seasonal variation for Georgia is not just the result of the severe electricity shortages of winter 2000/2001. The GDP index is reflecting

countrywide seasonal variations in consumption that have become a routine feature of Georgian life. The drastic swing in living standards between summer and winter is also reflected in the poverty headcount, which can almost double in Tbilisi, Adjara and Kakheti. We will elaborate more on this point in Chapter 3.

If the swing for Tbilisi is noticeable, the one for Kakheti is impressive. Kakhetians, to a great extent, live like "income camels", that is, accumulating in summer as the harvest allows, and consuming their stock and savings throughout the long dark winter. The supply of electricity in Kakheti can fall by two thirds between the summer and winter. This is not that unusual in Georgia, but in Kakheti takes place from an already low base. Thus, in addition to their major income source being on standby during winter, they have major impediments to the establishment of alternative sources of subsistence as the supply of energy is available on average two hours a day. Inhabitants of Guria, however, are worse off. The region ranks consistently at the bottom of the GDP index rank no matter how the GDP index is constructed or at what point in time the index is computed. Guria even lacks the means to adopt the "income camel" strategy applied by citizens in Kakheti. Winter is darker in Guria than anywhere else. During the winter of 2000/2001, on average, people in Guria had only one hour of electricity a day.

Georgia not only presents differences in living standards across regions and seasons, but also between rural and urban populations. Differences exist in terms of adult literacy ratio, gross enrollment ratio, and spending per capita. Because reliable life expectancy figures between urban and rural regions are not available the analysis is based on the HDI indexes for education and GDP.

There is not a significant difference between urban and rural populations with respect to the adult literacy rate. This may reflect past standards of education and levels attained plus Georgian tradition that places a high value on education. Not surprisingly, the rural-urban divide for gross primary, secondary, and tertiary enrollment ratio is greater than for adult literacy. This could indicate differences in accessibility to secondary and tertiary educational establishments. When compared to other countries, the education index is good for both rural and urban populations. However, when attention turns to the GDP index, the situation changes.

The GDP indexes in Figure 1.9 have been computed based on per capita spending adjusted for PPP. The values of Figure 1.9 are valid as a description of changes in the HDI’s GDP index between winter and summer of 2001 but they may not be taken as indicators of regular changes in the index between rural-urban and summer-winter in general. For that, further data analysis will be needed.

The GDP index for urban areas is higher than for rural ones and the order of ranking does not vary between winter and summer. One notes that while the GDP index of urban areas goes up from winter to summer, the one for rural areas remains at almost the same level. In fact, the index for rural areas decreases slightly, but this fall is not significant enough and could reflect sampling error. The increase in urban areas, however, is significant and does reflect changes in standard of living between seasons. It is interesting to see Figure 1.9 together with Figure 1.5, which shows variation in the GDP index for the whole of Georgia between winter and summer. Together, these figures suggest that seasonal income gains are captured mostly by urban dwellers while the rural populous fails to grab their share of it. pThis reflects the ills brought about by low productivity in the rural sector, which is an important cause of rural poverty.

In spite of the limited capacity of rural Georgia to capture a significant share of this seasonal windfall, the effect of a change in seasons on urban areas is still remarkable. This continues to reflect the degree of vulnerability of the Georgian economy, which is not only uncomfortably exposed to things like foreign financial crisis, but also to quite unremarkable events like the change of seasons. The seasonal tide, however, fails to lift all urban boats. Approximately, only 57% of the urban population benefits from the arrival of summer. Urban districts in Guria, Mtskheta-Mtianeti, Racha, Shida Kartli and Kvemo Kartli do not present major differences in their GDP index between seasons, and some of these may have actually observed a slight decline since winter 2001.

The issue of poverty has risen to the top of people’s concern leaving behind other traditionally high-profile issues like conflicts with the separatist Georgian regions of Abkhazia and South Ossetia. It is also remarkable that the issue of good governance (corruption) stands as the second most pressing concern of the population. The public mood is reflecting an accepted line of reasoning in the development literature: good governance is a crucial factor in achieving sustainable rates of economic growth and in reducing poverty levels. The public opinion is that good (bad) governance expands (restricts) overall business opportunities in the country and therefore expands (restricts) people’s capacity to access fairly paid jobs.

It is worrying to see that the apparently low level of transparency at decision-making levels is noticeably distorting the efficacy of some traditionally effective anti-poverty strategies. Specifically, education is falling well behind other concerns of the population because people appear to believe that "good education has nothing to do with good job opportunities". Rather, the public explained, these appear to depend more on having good contacts. This general perception of what matter most in a getting a good job is extremely damaging in the medium and long term run. No developed country in the world has come to be such by having a system of incentives and rewards that discourage investments in education.

The perennial struggle of the Georgian economy has begun to show on the Human Development Index. After two consecutive years of improvement, the Human Development Index 2001 for Georgia saw a net decline. At the regional level, Javakheti presents the highest HDI index followed closely by Tbilisi. Kvemo Kartli is slightly above the national average while Adjara is slightly below. Mtskheta-Mtianeti, Racha, Kakheti Samegrelo, Shida Kartli and Imereti continue in decreasing order but the differences from one to the other are not great. Guria sits comfortably at the end of the distribution. In terms of the urban-rural divide, the GDP index of the HDI shows that seasonal income gains are captured mostly by urban dwellers while the rural population fails to grab its share of it. This partly reflects the ills brought about by low productivity in the rural sector, which is an important cause of rural poverty. There is an unequal distribution of income gains in the urban population with only 57% of the urban families benefiting from the arrival of summer. Inequality, as it will be seen in Chapter 3, characterizes current patterns of income distribution and seriously erodes the legitimacy of economic reforms.