Georgia: Poverty and Income Distribution

Years of crisis and civil war caused the impoverishment of a large section of the Georgian population. In the last five years, greater social and political stability, along with the resumption of economic growth, have brought about a significant reduction in poverty. Per capita consumption has increased in real terms for almost all Georgian households, and increased the most for those in the lowest quintile of the distribution. However, about 11 percent of the population remains poor when measured by a realistic standard; and nearly 43 percent of the population can be considered poor if measured by the (much more generous) official poverty line.¹ The most important correlates of poverty in Georgia are employment status and ownership of productive assets. Those who are unable to work (the inactive, elderly or disabled) or do not have work (the unemployed) are much more likely to be poor. In general, urban poverty is more widespread, deeper and more severe than rural poverty, although recent trends suggest that this may change in the future.

Table 1. Poverty in Georgia

Regional differences in standards are very wide, with the incidence of poverty in the poorest regions being several times that in the richer areas. Regardless of the poverty line used, Adjaria and Samegrelo appear to have the lowest incidence of poverty while Imereti has the highest. No region is exempt from poverty or from extreme poverty. The region with the lowest incidence of poverty, Samegrelo, still has 4.3 percent of its population that can be considered extremely poor. The poorest region, Imereti, has three times as many.

Table 2. Incidence of poverty by regions²

Most poverty is transient

At the new realistic poverty line, only about 2 percent of the population remains poor for a full year. Nearly 80 percent of the poor escape poverty over the course of a year. Employment status of the household is the strongest correlate of long-term poverty. Households where the head is inactive or unemployed face the highest chances of being chronically poor. The majority of the chronic or long-term poor are urban (73 percent). Nearly one-half live in Imereti (48 percent), and another one-fifth (21percent) in Tbilisi.

Growth can have a big impact on poverty

Simple projections of poverty rates under different growth scenarios reveal that economic growth can have a very big impact on poverty. The elasticity of the poverty headcount with respect to growth in average per capita consumption is very high, and fast growth leads to a more than proportional reduction of poverty rates. Growth of 5-6 percent per year, for example, would lower poverty to one-half its current level in just 5 years. Sustained economic growth and stable macroeconomic performance are, hence, crucial components of any poverty alleviation strategy.

The downside of this high growth elasticity is that poverty is very sensitive to a slowdown in per capita consumption growth. A slowdown in GDP growth (because of the Russia crisis, for example) or GDP growth that does not translate into growth in per capita consumption, would have an immediate negative effect on poverty rates.

The impact of growth can be offset by rising inequality

Income inequality in Georgia is very high. In 1996, the Gini coefficient for money income was 0.59 — a level comparable to the most unequal economies in Latin America. In this context, any worsening of the income distribution would undermine the positive impact of growth. If the distribution were to worsen to the same level as in Brazil (the most unequal country in the world, with an income Gini of 0.61), the economy could grow at an impressive 11 percent each year, and it would still take almost 10 years to restore the incidence of poverty to present levels! The government's capacity to tax and redistribute income will, hence, play a very significant role in determining poverty outcomes in the future. Without a significant improvement in this capacity the future prognosis for poverty in Georgia looks bleak.

Regional differences in poverty will not disappear with growth

The above scenarios all assume that growth is uniform across the whole economy. In reality, growth rates are likely to differ across sectors and consequently across regions, and poor regions may well lag the average in growth. Carrying out the projections while allowing growth to vary across regions in response to sectoral composition shows exactly that: poor regions such as Imereti or Guria grow more slowly than the average. As a result, existing regional differences in poverty do not disappear quickly with growth. Addressing these differences may require special "regional" interventions, particularly aimed at Imereti, which is home to the bulk of the poor.

Reported incomes do not accurately measure real consumption

There is a very large discrepancy between household cash consumption and monetary incomes, equivalent on average to about 40 percent of total consumption. The gap between consumption and income is lowest at both ends of the distribution (for the poorest and richest quintiles), and highest in the middle, where it represents about 45 percent of total consumption. Almost all of the observed gap is between reported total cash expenditures and reported total cash income, and represents underreporting of money incomes. The magnitude of underreporting is positively associated with the degree of informalization of household employment, and with the prevalence of "gray" economic transactions. Underreported cash incomes are largest among those employed in restaurants and hotels, for whom unreported tips are an important fraction of income, and among health care workers, who rely on out-of-pocket payments by patients. But underreporting is also large for those employed in the public administration and in public utilities (perhaps reflecting widespread bribes or other petty corruption practices), as well as for those employed in education.

As "formal" incomes tend to be reported accurately (estimates from the household survey of public sector wages and pensions are close to budget numbers), we assume that the gap between total monetary spending and incomes of households represent informal sector incomes. Using this methodology we arrive at an estimate of the share of informal economy equal to about 28 percent of GDP, or almost 1.9 bln. lari in 1997.

Poverty in Georgia is intrinsically linked to labor market status

The collapse of productivity and real incomes following independence was the main cause of impoverishment of the Georgian population. And inactivity, unemployment and lack of sufficiently remunerated employment remain the root cause of why families get stuck in poverty. Labor market adjustment following the collapse of output was achieved mainly through the growth of self-employment, and through the reallocation of labor towards small-scale agriculture. The resulting informalization of employment has dampened the impact of the crisis and served to protect the poor. But it remains a short-term response. Today, a large and growing fraction of the Georgian labor force still relies on self-employment as the primary means to earn an income. For some, this is an avenue for earnings mobility and growth; for the majority, however, self-employment remains constrained to low-productivity agricultural or trading activities, with little earnings stability and little potential for long-term earnings growth. Prospects for future growth in living standards hinge critically on the economy's ability to generate new private employment, and to reallocate labor away from these low-productivity activities into higher value-added sectors. The biggest constraints are the lack of investment and financing sources.

The rural economy has played a crucial role as a safety net during the crisis years

Building on the almost universal access of the rural population to land, the rural economy has been able to absorb a huge inflow of labor released from other sectors. As a result, overall unemployment in Georgia has remained low. The downside, however, has been a sharp decline in labor productivity and consequently weak growth in rural incomes. In contrast to what has happened in urban areas, real rural incomes have remained practically stagnant during the recent high growth period, despite a record grain harvest and favorable weather conditions. This poor performance can be attributed to unequal access to inputs complementary to labor (fertilizers, tractors, capital equipment); barriers to land transactions and consolidation of holdings; lack of market access and information; scarcity of rural credit; and limited off-farm earnings opportunities.

A small but well targeted safety net can play an important role in reducing poverty

The collapse of fiscal revenues in Georgia reduced the formal safety net to a bare minimum. An extensive informal safety net emerged in its place. However, the coverage of this informal safety net is limited, and many families slip through the cracks. The main challenge for the formal safety net for the near future will continue to be a lack of fiscal resources. Despite these constraints, however, the formal safety net has an important role to play in poverty alleviation. Given the small overall poverty gap, a well targeted poverty benefit, even if small, can play a crucial role in dampening poverty. If the family allowance were to be kept at the very low level observed in the 1997 budget (relative to GDP), but were accurately targeted, it would still be sufficient to reduce the incidence of poverty by several percentage points. And if the social assistance budget were to be increased more rapidly (to 1 percent of GDP by 2007), the impact on poverty would be much larger.

Internally Displaced Persons (IDPs) receive a disproportionate share of State and humanitarian assistance

The IDP program is one of Georgia's largest safety net programs, ranking second only to old age and invalidity pensions. However, IDPs do not appear to be more vulnerable than other population groups. In fact, IDPs that have resettled on their own or have integrated themselves into local communities face a lower risk of poverty than the average Georgian household (4 percent of them are poor as opposed to 10 percent of the total population). And they face the lowest risk of extreme poverty of almost any population group. The contrast between benefits received by IDPs and those received by other, often more needy, families highlights the need to improve the targeting of assistance to IDPS. In addition, in-kind benefits should be phased out, or at a minimum, their costs should be fully budgeted.

How can the safety net be improved in the short and medium term?

In the very short term (1999), actions can focus only on improving targeting and redirecting resources to the truly needy, mainly by:

• Protecting the family allowance system. Ensure that the allocation in the 1999 budget is at least the same level as in the 1998 budget and that, unlike in 1998, it is fully paid out.
• Eliminating tariff discounts to special population groups and other in-kind benefits. Replace with a direct payment (through a modest increase in the family allowance system) for those groups of recipients who are truly needy, mainly the disabled (categories I and II).
• Eliminating direct payments from the budget for electricity. This can be phased in geographically, starting with Tbilisi, as electricity distribution companies are privatized.
• Improving the targeting of assistance to IDPS. Through self-targeted public works, proxy means testing or frequent registration requirements. Redirect released resources to the family allowance program or towards establishing public works programs as discussed below.
• Continue to support the integration of IDPs housed in institutions into local communities. The evidence from the household survey suggests that once this happens, IDPs are able to dramatically improve their living conditions on their own.

Over the medium term (1999-2001), a more comprehensive strategy can be put in place, based on the following two principles:

• Cash benefits should remain limited to individuals not able to work and not supported by families with members able to work (i.e., mainly pensioners living alone and the disabled).
• The poor who are able to work should be supported through self-targeted employment schemes that are organized to provide a minimum level of subsistence. Such programs would combine the best features of an Employment Guarantee Scheme with those of Social Funds aimed at promoting labor-intensive projects in poor areas. To ensure that the money goes only to those who need it, without undermining the incentives to seek a normal job, the wage offered has to be low (at the level of local wage rate for unskilled manual labor in "normal" times).

Notes:

1. Poverty rates in Georgia are also very sensitive to assumptions made about economies of scale in the household. Our estimates for Georgia suggest that to achieve the same welfare as a single person spending 1 lari, a family of three would spend only 1.8 lari — i.e., there are very significant economies of scale. But if we simply counted the number of people in a family and used a per capita measure (as is done in neighboring countries), we would get much higher measures of poverty. On a per capita standard, the poverty rate in Georgia at the end of 1997, under the new poverty line, would have been 32 percent.
2. Fourth quarter, 1997. Two sparsely populated administrative regions were included in larger regions during stratification. Racha-Lechkhumi and Lower Swaneti are included in the Imereti region, and Mtskheta-Mtianeti is sampled with the Shida Kartli region. Abkhazia and South Ossetia (Tskhinvali region) were not part of the sampling frame.