EXECUTIVE  SUMMARY

The National Human Development Report 2001/2002 (NHDR 2001/2002) focuses on poverty. The objective of the report is to contribute to the ongoing debate about the definition and implementation of the Poverty Reduction and Economic Growth Program (PREGP) of Georgia. This contribution has been primarily circumscribed to four major areas of interest. First, the NHDR 2001/2002 explores different definitions and measurements of poverty in Georgia. There is an ongoing debate about poverty lines and their applications in the Georgian context. We add to this debate by exploring poverty lines in terms of options and alternatives open to those that have to live within them. Second, the NHDR 2001/2002 presents an analysis of the characteristics of poor and non-poor when different definitions of poverty are applied. In doing so, the NHDR 2001/2002 also includes readings of the Human Development Index at the regional level. Third, the report explores determinants of poverty as a way of understanding the barriers that families face in securing a decent standard of living, however this may be defined. Fourth, the report outlines a way forward and proposes a list of indicators to monitor success in the implementation of PREGP. The findings of the NHDR 2001/2002 are based on two countrywide household surveys, several focus groups and data provided by local and international organizations¹.

Chapter 1 begins by introducing the most pressing concerns of the Georgian population and their links with poverty reduction policies. Unemployment, corruption, poverty, 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. The Georgian citizens have good reasons for ranking their concerns this way. Unemployment in urban areas is about 26% and in Tbilisi ranges between 30% and 40% depending on the season. Official unemployment figures from rural areas are artificially low (6%) simply because any rural family owning at least one hectare of land is considered to be employed. To have a job, however, is not enough to ensure a decent standard of living. Low income is a concern of the Georgian population because salaries are overwhelmingly below what is needed to cover basic needs.

Good (bad) governance stands as the second most pressing concerns of the population. Its impact on the life of citizens is going beyond the phenomenon of corruption. The distortions brought about by mismanagement, cronyism and other vices are affecting the population’s perception of the value of important long-term investments, like education, which ranks low in the list of public concerns. The answer for this low ranking is as simply as it could be imagined: the public perceives that getting a good job has little to do with having good education but rather depends on ones networks of friends and contacts. Later in Technical Annex 1 and 2, it will be seen that some objectives reasons stand behind these beliefs.

The second section of Chapter 1 introduces the latest figures of the Human Development Index (HDI) for Georgia and regions. The value of the HDI for Georgia shows a net decline, mainly as a result of worsening economic conditions. For the first time, we present a disaggregation of the HDI at the regional level. This allows a comparison of human development indexes across Georgian regions. The readings of the regional HDIs are in general consistent with the public’s perception about which regions are relatively better off than others, but a few surprises arise. Javakheti tops the rank followed closely by Tbilisi while Imereti and Guria are at the bottom of the list. The ranking of regions by HDI highlights one of the distinguishing characteristics of the Human Development Index: it is affected, but not dominated by income figures. Education and life expectancy also matter. If one disaggregates the components of the HDI by urban-rural and winter-summer, two findings can clearly be seen. The first is the significant change in economic activity between winter and summer, a swing that provides insight into the vulnerability of the Georgian economy to such unremarkable events as the change of seasons. The second is that the gains in economic activity from winter to summer are captured by a limited number of urban families. The rest of Georgia sees little of these gains.

Chapter 2 explores the origin and construction of different poverty lines being applied in Georgia. It is important to take some time to describe what poverty lines mean for people whom have to make ends meet within them. There have been several analysis of poverty in Georgia using different poverty line and, therefore, results differ from one another. While the official government’s poverty line states that more than half of Georgians live below poverty, the World Bank declares the number of poor to be less than half that figure. Chapter 2 explores what "type of poor" we refer to when we use one poverty line instead of another. In doing this, the objective is not the selection of a "right" poverty line but to make transparent what it may mean to say, for example, "22% of people in region X are living in poverty".

For purposes of capturing different understandings of "how poor is poor", Chapter 2 develops three poverty lines called "NHDR", NHDR Intermediate" and "NHDR Extreme". The NHDR Poverty Line, set at approximately 100GEL/month, captures that segment of the population that earns enough to achieve a minimum diet but suffers non-trivial constraints in the provision of items like health care, education, electricity and gas. These are vulnerable individuals with little capacity to further restrict their budgets for whom unexpected expenses can easily mean reductions in quality and quantity of food. The NHDR Intermediate Poverty Line, set at approximately 75GEL/month, captures the group of individuals with problems in achieving an adequate diet in addition to having serious constraints in the provision of health and education services, electricity and heating. The NHDR Extreme Poverty Line, set at approximately 45 GEL/month, captures the group of Georgians at the margin of society, a group of desperate people that are far from achieving an adequate diet and have almost no budget for health care, education, electricity and heating.

The analysis in Chapter 2 calls for serious doubts about whether an individual is able to meet even basic needs (e.g. food) having to live with the allowance provided by the Alternative Minimum Poverty Line, the main poverty threshold used in the Poverty Reduction and Economic Growth Program for Georgia. The public also appears to share these same doubts. As reported in several roundtables, the public declared unanimously that it would be "impossible" to make ends meet with 55 GEL/month even though it may be technically feasible. With 75 GEL/month, the answer was "hardly possible" while 110 GEL/month would provide a "more bearable existence". The use of poverty lines that people consider to be unrealistically low hardly helps an anti-poverty program to gain acceptance from the public. Neither do they seem to help in improving the targeting of poor, as Chapter 3 will show.

Chapter 3 presents the results of a poverty assessment using three different poverty lines for winter, summer and their average. Poverty hits Georgian regions differently according to different seasons and for some regions these swings are remarkable, like in Adjara and Kakheti where poverty headcounts can almost double from summer to winter. People living under the NHDR poverty line account for 50% of the population in winter and 40% in summer. For the NHDR Intermediate, the values are 30% and 24% respectively. For the NHDR Extreme, the percentages are 13% and 8%. Adjara, Mtskheta-Mtianeti and Kakheti, show a disparity in the percentage of males and females affected by poverty. Adjara has a greater number of males in extreme poverty than females while Mtskheta-Mtianeti and Kakheti show the opposite trend. Disparities are great in Mtskheta-Mtianeti with females being four times more likely to be in extreme poverty than males.

People with elementary and uncompleted secondary education are two groups that show the highest poverty rates using any poverty line. Those with tertiary education always show the lowest. As the poverty line is lowered, the differences in poverty risks between educational groups appear to narrow. Higher education is not an insurance against unemployment. Two third of people without jobs have post-secondary studies either in the form of vocational, incomplete tertiary or tertiary degrees.

The analysis of family expenditures shows that the poor depend much on the functioning of the system of public education and health care. Private expenditures on education take on average a 0.5-0.6% of total spending of poor families, a value so low that it could have passed unnoticed as just measurement error in the calculation of total consumption. In terms of health care, the analysis show that access to proper medical treatment is a commodity far from the reach of most Georgians. Poor people tend to postpone a visit to the doctor until it is really needed, often with dire effects on the health of the individual and the budget of the family in question. Overwhelmingly, the reason to skip a visit to the hospital or a doctor is lack of money. Only 24% of Georgians below the NHDR poverty line can afford a complete treatment (visit to the doctor and the purchase of medicines). For those falling below the NHDR Extreme poverty line the figure is 15.6%.

Chapter 3 shows measurements of inequality on the three pillars of the Human Development Index. The high level of inequality in Georgia presents an important obstacle to the Poverty Reduction and Economic Growth Program. Without an improvement in income distribution, economic growth will have to be high and sustained in order to reach the poorest strata of the population. Inequality in expenditures on education and health care are particularly high with Gini indexes of 0.93 and 0.77 respectively. The values of indexes of inequality are in line with the perception of the general population in that the benefits from economic reforms have failed to reach many.

Chapter 4 provides a description of the origins of the Poverty Reduction and Economic Growth Program for Georgia, its main objectives and a set of proposed basic indictors for its monitoring. The objective of this chapter is to contribute to the discussion about how poverty should be fought in Georgia. The list of indicators is, of course, not exclusive and others may be added, as the public feels appropriate. The chapter closes with two main messages. The first is that the resources that are financing the bulk of the PREGP are neither a gift from international agencies nor a grant from donor countries. To the contrary, they are loans and the money will have to be paid back in full. There is a shared responsibility between those taking and those giving the loans for ensuring that the resources allocated to the PREGP are wisely spent and deliver their expected returns. The second point we would like to emphasize is that the objectives of the PREGP are not feasible unless our representatives in the government undertake renewed efforts to root out mismanagement as well as to improve the business environment in Georgia. Good governance is one of the most crucial aspects in a fight against poverty, comparable in importance to prudent monetary and fiscal policy. It is also a pre-condition for financing hospitals, schools and paying pensions

The NHDR contains 8 technical annexes intended to complement and support the findings of the report. Technical Annex 1 presents the result of a set of regression analyses aimed at

exploring determinants of poverty. The results of these regressions are interesting in terms of the variables that consistently fail to provide guidance about family welfare. In general, variables that reflect personal skills, like education, have little weight in explaining why a person is poor or not. Attempts at identifying determinants of poverty, or the causes that are likely to send a family below the poverty line, leave a large percentage of variation unexplained. Approximately 130 variables were explored in winter and summer and the best combination of them leaves 40% of the variation in family welfare unexplained. This rate did not improve when the dataset was broken down by urban-rural and East and West Georgia. Further exploration of the variables selected reveals that reported income is the variable that carries the bulk of the explanation. Take income out of the models and the Rs Squared collapse. In turn, the best selection of variables can explain only half of variations in income among families. Combining both models, one can explain less than a third of the variation in the welfare of families.

This apparent failure to find a set of characteristics that helps to understand why a family is more likely than another to fall below the poverty line resembles that image of a "black box" in Georgian society. This black box appears to reflect the many informal barriers to access to well paid jobs. Overcoming these barriers require a good network of contacts, and possibly money, and therefore incumbents, well connected, and the already well off have an advantage over the rest. These distortions appear to be entrenched in several sectors of society, particularly at national and regional decision-making levels. It suggests that actions aimed at stimulating the Georgian economy need to come together with actions aimed at correcting the "rules of the game". The results of the models may be reflecting not only a limited number of tools available for escaping poverty, but also the presence of a set of incentives that promote redistributive rather than productive activities, that create monopolies rather than competitive conditions, and that restrict opportunities in general rather than expand them.

Technical Annex 2 introduces the results of a cluster analysis and complements the poverty profile presented in Chapter 3. By using clusters, some characteristics that distinguish poor from non-poor can be more clearly seen. For instance, the presence of high ranked officials and directors exerts a positive influence on family welfare. These categories are over represented in the cluster that contains the richest strata of society. The clusters also show that only high government office or managerial position distinguishes very rich from the rest. While the presence of middle ranked managers is under represented in the poorest group, the middle and upper classes have a roughly equal representation. The clusters also confirm that skills are a necessary though hardly sufficient condition to go up the social ladder. In terms of skilled workers, their relative absence affects poor families but their presence fails to convey much ammunition to go up the social ladder. In general, cluster analysis seems to better serve the purpose of identifying groups in most need than the lowering of poverty lines.

The remaining technical annexes provide a set of tables and support data. Technical Annex 3 presents a summary of the strategy, policy instruments and tools in the Poverty Reduction and Economic Growth Program. Technical Annex 4 presents information about the composition of the NHDR food basket, its nutrient intake, and other supporting data for Chapter 2. Technical Annex 5 provides a description of the calculation of the Human Development Index for Georgia and its regions. Technical Annex 6 presents a summary of the household survey structure upon which the bulk of analysis in this report is based. All Tables and Figures whose source is cited as "UNDP" indicate that the data originates in the winter and summer household surveys. Technical Annex 7 presents current readings of indicators proposed in Chapter 4 for the monitoring of the PREGP. Finally, Technical Annex 8 presents a map of Georgia.