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Report No. 19348-GE
GeorgiaPoverty and Income Distribution(In Two Volumes) Volume 1: Main Report
May 27, 1999
Poverty Reduction and Economic Management UnitEurope and Central Asia Region
Document of the World Bank
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CURRENCY EQUIVALENTS(as of May 26, 1999)
Currency Unit LariUS$1 - 2.39 Laris
WEIGHTS AND MEASURES
Metric System
ABBREVIATIONS AND ACRONYMS
ECA - Europe and Central AsiaEF - Employment FundEU - European Union
FSU - Former Soviet UnionGDP - Gross Domestic ProductGDP - Gross Domestic ProductGSIF - Georgia Social Investment Fund
IDP - Internally Displaced PersonNGO - Non Government Organization
PAYG - Pay As You GoRARP - Regional Agricultural Reform ProjectOECD - Organization of Economic Cooperation and Development
OXFAM - Oxford Committee for Famine ReliefSDS - State Department of StatisticsSIF - Social Insurance Fund
SOE - State Owned EnterprisesTACIS - Technical Assistance for Commonwealth of Independent States
UNHCR - United Nations Higher Committee on RefugeesUNICEF - United Nations Children's Fund
GEORGIA'S FISCAL YEAR
January 1 - December 31
Vice President: Johannes Linn (ECAVP)Country Director: Judy M. O'Connor (ECC03)
Sector Director: Pradeep Mitra (ECSPE)Program Team Leader: Ana Revenga (ECSPE)
Team Members: Ruslan Yemstov, Jim Lynch(ECSPE); Alexandre Marc, (ECSHD); Nora Dudwick(ECSSD); Ghislaine Delaine (Consultant); Revaz Tsakadze,Eteri Parsadanishvili, Nodar Kapanadze, and Zurab Sajaia(State Dept. of Statistics of Georgia)
Table of Contents
Executive Summary and Policy Recommendations .................................................................. i
1. The Profile of Poverty in Georgia .................................................................. I
1.1 The Extent of Poverty in Georgia .................................................................. 11.2 Who Are the Poor? .................................................................. 4
2. Will Growth Alone Be Sufficient to Reduce Poverty? ................................................................. 11
2.1 Macroeconomic Recovery and Its Impact on Poverty ........................................ 11......................... 12.2 Chronic versus Transient Poverty ................................................................. 132.3 What about the Future? Medium-Term Impact of the Level and Patterns of Growth ............................. 15
3. Inequality and Income Distribution ................................................................. 19
3.1 Measuring Inequality in Incomes and Consumption ................................... .............................. 193.2 Mobility ................................................................. 223.3 Explaining Inequality .............................................. 24
4. The Role of the Labor Market .............................................. 28
4.1 Labor Market Status and Poverty .............................................. 284.2 Output and Employment Trends .............................................. 294.3 What Has Happened to Earnings? ............................................... 324.4 Rural Labor Markets: Low Productivity and Low Incomes .............................................. 34
5. Social Assistance .............................................. 37
5.1 The Importance of the Informal Safety Net .............................................. 375.2 The State Safety Net does not Protect the Poor .............................................. 405.3 IDPs Receive a Disproportionate Share of State and Humanitarian Assistance ............... ..................... 465.4 The Voluntary Sector and Civil Society: Still in its Infancy ............................................................. 485.5 Strengthening and Improving the Safety Net ............................................................. 48
VOL. 1 TABLES
Executive Summary and Policy RecommendationsTable 1: Poverty in GeorgiaTable 2: Incidence of poverty by regionsTable 3: Income, Consumption and Estimated Unreported Monetary Income by Sector of
Employment
Chapter 1Table 1: Poverty in GeorgiaTable 2: Incidence and depth of poverty by locationTable 3: Incidence of poverty by regionsTable 4: Poverty profile - selected characteristics of the poorTable 5: Structure of total consumption by deciles, average 1996-1997
Chapter 2Table 1: Economic and Social IndicatorsTable 2: Average Poverty Shortfall for the PoorTable 3: Characteristics of the Chronically PoorTable 4: Chronic Poverty by Region
Chapter 3Table 1: Distribution of Current Monetary Incomes by Income QuintilesTable 2: Average Income and Consumption by Consumption QuintilesTable 3: Income, Consumption and Estimated Unreported Monetary Income by Sector of
EmploymentTable 4: Distribution of consumption by consumption quintiles and inequalityTable 5: Transitions between consumption quintilesTable 6: Inequality in Consumption by Sector of Employment (4 th quarter 1997)Table 7: Inequality by Education of Household HeadTable 8: Inequality in Consumption by Regions (4 th quarter 1997)Table 9: Structure of Income by Consumption Quintiles
Chapter 4Table 1: Employment and Output Growth by Sector, 1996-97Table 2: Employment by Type, 1996-97Table 3: Urban unemployment rate by regions
Chapter 5Table 1: Georgia: Total Safety Net Expenditures in 1997Table 2: Main (Budgetized) Social Safety Net Programs in Georgia, 1997Table 3: IDP Program 1997 and 1998
VOL. 1 FIGURES
Executive Summary and Policy RecommendationsFigure 1: Georgia: poverty projections with different universal growth ratesFigure 2: Georgia: poverty projections, universal growth of consumption and worsening of
distribution to the level of Brazil's inequalityFigure 3: Poverty in Georgia: future path under different levels of poverty benefit
Chapter 2Figure 1: Poverty Rate by Quarters (new poverty line)Figure 2: Distribution of the Population by Per Capita Consumption: Comparing First and
Last RoundsFigure 3: Georgia: poverty projections with different universal growth ratesFigure 4: Georgia: poverty projections, universal growth of consumption and worsening of
distribution to the level of Brazil's inequalityFigure 5: Poverty in Georgia under with and without external debt restructuringFigure 6: Poverty by regions: sensitivity to growth (poverty incidence in 10 years from now
under different scenarios)Figure 7: Poverty in Georgia: future paths under different levels of poverty benefit (Base
case)
Chapter 3Figure 1: Lorenz Curve for Monetary Income and Concentration Curves for Consumption and
"Unreported" Monetary Incomes
Chapter 4Figure 1: Labor Force Participation, Employment and Unemployment by AgeFigure 2: Trends in Employment and OutputFigure 3: Unemployment Rate (survey-based)Figure 4: Real Monthly Wage, 1996-1997Figure 5: Land Holding and Productivity
Chapter 5Figure 1: Georgia: registered unemployed, 1992-98Figure 2: Poverty in Georgia: future paths under different levels of poverty benefit (New
poverty line)
VOL. 11 TECHNICAL PAPERS
I . The Profile of Poverty in Georgia2. Labor Markets, Inequality and Poverty3. Inequality and Income Distribution4. A Qualitative Study of Impoverishment and Coping Strategies5_ What Will Poverty Look Like In Georgia in 2007?
Executive Summary and Policy Recommendations
A significantfraction of the population in Georgia is poor. Years of crisis and civil warcaused the impoverishment of large section of the Georgian population. In the last five years,greater social and political stability, along with the resumption of economic growth, have broughtabout a significant reduction in poverty. Per capita consumption has increased in real terms foralmost all Georgian households, and increased the most for those in the lowest quintile of thedistribution. However, about 11% of the population remainspoor when measured by a realisticstandard; and nearly 43% of the population can be considered poor if measured by the (muchmore generous) official poverty line.' The most important correlates of poverty in Georgia areemployment status and ownership of productive assets. Those who are unable to work (theinactive, elderly or disabled), or do not have work (the unemployed) are much more likely to bepoor. 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
Average All Areas 42.7 11.1 8.9Urban 45.0 12.1 10.0Rural 40.1 _9.9 7.5
Regional differences in living standards are very wide, with the incidence of poverty inthe poorest regions being several times that in the richer areas. Regardless of the poverty lineused, Adjaria and Samegrelo appear to have the lowest incidence of poverty while Imereti has thehighest. No region is exempt from poverty or from extreme poverty. The region with the lowestincidence of poverty, Samegrelo, still has 4.3 percent of its population that can be consideredextremely poor. The poorest region, Imereti, has three times as many.
Table 2. Incidence of poverty by regions2
A F
Kakheti 34.8 10.0 8.2Tbilisi 43.8 8;6 7.3Shida Kartli/Mtskheta- 41.1 9.8 7.5MtianetiKvemo Kartli 36.8 11.4 8.4Samtskhe Javakheti 38.1 11.5 10.5Adjara 32.6 7.5 7.3Guria 54.8 13.1 10.3Samegrelo 33.6 6.7 4.3Imereti/Racha- 58.9 19.3 14.8Lechkhumi/L.SwanetiTotal 42.7 11.1 8.9
' Poverty rates in Georgia are also very sensitive to assumptions made about economies of scale in the household. Ourestimates for Georgia suggest that to achieve the same welfare as a single person spending I lari, a family of threewould spend only 1.8 lari -i.e. there are very significant economies of scale. But if we simply counted the number ofpeople in a family and used a per capita measure (as is done in neighboring countries), we would get much highermeasures of poverty. On a per capita standard, the poverty rate in Georgia at the end of 1997, under the new povertyline, would have been 32 percent.2 Fourth quarter, 1997. Two sparsely populated administrative regions were included in larger regions duringstratification. Racha-Lechkhumi and Lower Swaneti are included in the Imereti region, and Mtskheta-Mtianeti issampled with the Shida Kartli region. Abkhazia and South Ossetia (Tskhinvali region) were not part of the samplingframe.
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Most poverty is transient. At the new realistic poverty line, only about 2 percent of thepopulation remains poor for a full year. Nearly 80 percent of the poor escape poverty over thecourse of a year. Employment status of the household is the strongest correlate of long-termpoverty. Households where the head is inactive or unemployed face the highest chances of beingchronically poor. The majority of the chronic or long-term poor are urban (73%). Nearly onehalf live in Imereti (48%), and another one-fifth (21%) in Tbilisi.
Growth can have a big impact on poverty. Simple projections of poverty rates underdifferent 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 consumptionis 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 injust 5 years. Sustained economic growth and stable macroeconomic performance are hencecrucial components of any poverty alleviation strategy.
Figure 1.
Georgia: poverty projections with different universalgrowth rates4 5 % -- -- A < , ............................ ____.. .................. ------- sv,"_,,,_, ,_ _ ,
450%.- 405% 5 -- t-t 3 5 %c2 530%
cX25% -~ ---=----~:a20%
00e 10O% -_ _
5%
0%
aa2
Growth rate for percapita consum ption
-official poverty line -new poverty line 1
The downside of this high growth elasticity is that poverty is very sensitive to a slowdownin per capita consumption growth. A slowdown in GDP growth (because of the Russia crisis, forexample) or GDP growth that does not translate into growth in per capita consumption, wouldhave an immediate negative effect on poverty rates.
The impact of growth can be swamped by rising inequality. Income inequality in Georgiais very high. In 1996, the Gini coefficient for money income was 0.59-a level comparable to themost unequal economies in Latin America. In this context, any worsening of the incomedistribution would undermine the positive impact of growth. If the distribution were to worsen tothe 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 10years to restore the incidence of poverty to present levels! The Government's capacity to tax andredistribute income will hence play a very significant role in determining poverty, outcomes in thefuture. Without a significant improvement in this capacity, thefuture prognosis for poverty inGeorgia looks bleak.
Figure 2.
Georgia: poverty projections, universal growth of consumptionand worsening of distribution to the level of Brazil's inequality
3 o 0 3
20%
*~15 %
5 %
0% ___
Now 03% 5% 7% 9% 1I.!growth growth growth growth growth growth
for5 for5 for5 for5 for5years years years years years
-|- Worsening inequality, new poverty line-I- Stable inequality, new poverty line
Regional differences in poverty will not disappear with growth. The above scenarios allassume that growth is uniform across the whole economy. In reality, growth rates are likely todiffer across sectors and consequently across regions, and poor regions may well lag the averagein growth. Carrying out the projections while allowing growth to vary across regions in responseto sectoral composition shows exactly that: poor regions such as Imereti or Guria grow moreslowly than the average. As a result, existing regional differences in poverty do not disappearquickly 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 largediscrepancy between household cash consumption and monetary incomes, equivalent on averageto about 40 percent of total consumption. The gap between consumption and income is lowest atboth 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 isbetween reported total cash expenditures and reported total cash income, and representsunderreporting of money incomes The magnitude of underreporting is positively associated withthe degree of informalization of household employment, and with the prevalence of "gray"economic transactions. Underreported cash incomes are largest among those employed inrestaurants and hotels, for whom unreported tips are an important fraction of income, and amonghealth care workers, who rely on out-of-pocket payments by patients. But underreporting is alsolarge for those employed in the public administration and in public utilities (perhaps reflectingwidespread 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 surveyof public sector wages and pensions are close to budget numbers), we assume that the gapbetween 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 about28 percent of GDP, or almost 1.9 bln. Iari in 1997.
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Table 3. Income, Consumption and Estimated Unreported Monetary Income by Sector of Employment(average per household for survey period)
monetmy inotnes,
AgricultuTe 274 181 65Manufacturing 279 160 88Electricity, gas and water 240 105 102Construction 316 299 84Trade 239 159 70Hotels and restaurants 411 173 271Financial services and real estate 343 314 16Public administration, defense 286 153 107Education 245 146 101Health and social services 261 130 113
Poverty in Georgia is intrinsically linked to labor market status. The collapse ofproductivity and real incomes following independence was the main cause of impoverishment ofthe Georgian population. And inactivity, unemployment and lack of sufficiently remuneratedemployment remain the root cause of why families get stuck in poverty. Labor market adjustmentfollowing the collapse of output was achieved mainly through the growth of self-employment,and through the reallocation of labor towards small-scale agriculture. The resultinginformalization of employment has dampened the impact of the crisis and served to protect thepoor. But it remains a short-term response. Today, a large and growing fraction of the Georgianlabor 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-employmentremains constrained to low-productivity agricultural or trading activities, with little earningsstability and little potential for long term earnings growth. Prospects for future growth in livingstandards hinge critically on the economy's ability to generate new private employment, and toreallocate labor away from these low-productivity activities into higher value added sectors. Thebiggest 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 hasbeen able to absorb a huge inflow of labor released from other sectors. As a result, overallunemployment in Georgia has remained low. The down side, however, has been a sharp declinein labor productivity and consequently weak growth in rural incomes. In contrast to what hashappened in urban areas, real rural incomes have remained practically stagnant during the recenthigh growth period, despite a record grain harvest and favorable weather conditions. This poorperformance can be attributed to unequal access to inputs complementary to labor (fertilizers,tractors, capital equipment); barriers to land transactions and consolidation of holdings; lack ofmarket access and information; scarcity of rural credit; and limited off-farm earningsopportunities.
A small, but well targeted safety net, can play an important role in reducing poverty. Thecollapse of fiscal revenues in Georgia reduced the formal safety net to a bare minimum. Anextensive informal safety net emerged in its place. However, the coverage of this informal safetynet is limited, and many families slip through the cracks. The main challenge for the formalsafety net for the near future will continue to be a lack of fiscal resources. Despite theseconstraints, 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 acrucial 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 besufficient to reduce the incidence of poverty by several percentage points. And if the socialassistance budget were to be increased more rapidly (to 1% of GDP by 2007), the impact onpoverty would be much larger.
Figure 3.
Poverty in Georgia: future paths under different levels of poverty benefit(Base case)
12%....... L''':'''-'-'': -=.............. - - ------ -----=----------- - -..... ...... ............ .. ............ ........12%
.3 9%
0.0
.= 6% -.. -- - --- ~ i
e 3%-_.
0% - -____ ___ __ .......
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Percent poor - initial levelPoverty incidence- base case (no targeting of actual (1997) poverty benefit)
L -- Poverty incidence - base case, increase in poverty benefit to the planned 1998 levels and targetingPoverty incidence - base case, targeted poverty benefit gradually increasing to 1% of GDP by 2007
IDPs receive a disproportionate share of State and humanitarian assistance. The IDPprogram is one of Georgia's largest safety net programs, ranking second only to old age andinvalidity pensions. However, IDPs do not appear to be more vulnerable than other populationgroups. In fact, IDPs that have resettled on their own or have integrated themselves into localcommunities face a lower risk of poverty than the average Georgian household (4 percent of themare poor as opposed to 1O percent of the total population). And they face the lowest risk ofextreme poverty of almost any population group. The contrast between benefits received by IDPsand those received by other, often more needy, families highlights the need to improve thetargeting of assistance to IDPs. In addition, in-kind benefits should be phased out, or at aminimum, their costs should be fully budgetized.
How can the safety net be improved in the short and medium term? In the very shortterm (1999), actions can focus only on improving targeting and redirecting resources to the trulyneedy, mainly by:
* Protecting the family allowance system. Ensure that the allocation in the 1999 budget is atleast 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. Replacewith a direct payment (through a modest increase in the family allowance system) for thosegroups 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 ingeographically, starting with Tbilisi, as electricity distribution companies are privatized.
* Improving the targeting of assistance to IDPs. Trhrough self-targeted public works, proxymeans testing or frequent registration requirements. Redirect released resources to the familyallowance program or towards establishing public works programs as discussed below.
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* Continue to support the integration of IDPs housed in institutions into local communities.The evidence from the household survey suggests that once this happen, IDPs are able ontheir own to dramatically improve their living conditions..
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 byfamilies with members able to work-i.e. mainly pensioners living alone and thedisabled.
* The poor able to work should be supported through self targeted employment schemesorganized to provide a minimum level of subsistence. Such programs would combine thebest features of an Employment Guarantee Scheme with those of Social Funds aimed atpromoting labor intensive projects in poor areas. To ensure that the money goes only tothose who need it, without undermining the incentives to seek a normal job, the wage offeredhas to be low (at the level of local wage rate for unskilled manual labor in "normal" times).
1The Profile of Poverty in Georgia
Years of crisis and civil war caused the impoverishment of large section of the Georgian population.In the last five years, greater social and political stability, along with the resumption of economicgrowth, have brought about a significant reduction in poverty. However, not all groups have benefitedequally: about 11 %of the population remains poor, and nearly 9% is extremely poor. The mostimportant correlates ofpoverty in Georgia are employment status and ownership ofproductive assets.Those who are unable to work (the inactive, elderly or disabled), or do not have work (theunemployed) are much more likely to be poor. In general, urban poverty is more widespread, deeperand more severe than rural poverty, although recent trends suggest that this may change in the future.Regional differences in living standards are very large, with poverty rates in the poorest regions twicethose in better-off areas.
1.1 The Extent of Poverty in Georgia
1. Just over half a million Georgians-I 1 percent of the population-are poor. By this wemean that they live in households where total consumption falls below a minimum subsistencelevel or poverty line.2 Almost 9 percent of the population is extremely poor: their monthlyconsumption is below the cost of a "survival" food basket, which achieves only a minimumcaloric intake. The majority of the poor (56%), live in urban areas. And, on average, urbanpoverty is higher, deeper and more severe than rural poverty, although there are signs that thisranking may reverse over time.
2. Any poverty rate depends critically on the poverty line chosen, and on the choice ofmethodology used to compute it. For this reason, it is often hard to compare poverty rates acrossdifferent countries: these comparisons can be meaningless if the respective country poverty linesare widely different. In this profile for Georgia, we use three lines: an official line based on the(unrealistically) high nutrition norms inherited from the pre-independence period (equal to 102lari per month per equivalent adult); a new poverty line based on a revised minimum food basketand derived from the actual consumption patterns of the population (equal to 52 lari per monthper equivalent adult); and an extreme poverty line, drawn at 40 percent of median consumption,and equivalent to the cost of a "minimum survival" food basket (of 40 lari per month perequivalent adult). Table I summarizes the incidence, depth and severity of poverty for all threelines.
3. Not surprisingly, there are very large differences in the incidence of poverty depending onwhether we use the official or the new poverty line. The official line is almost exactly double thenew line, so we would expect to obtain a higher poverty rate. But the poverty headcount isalmostfour times higher when we use the official line. This indicates that households are"bunched" between these two lines; e.g. almost a third of the population could be regarded aspoor by a generous standard (official), but not poor from a more realistic point of view (new line).This comparison also reveals that about 30 percent of the population that is currently non-poor isvulnerable to poverty.3
This chapter is a summary of the more detailed analysis presented in The Profile of Poverty in Georgia, TechnicalPaper 1, Volume 11 of this study. Data, methodology and findings are discussed there at length.2 These figures correspond to end- 1997, and are drawn from the quarterly Survey of Georgian Households which wasconducted by the State Department of Statistics of the Republic of Georgia (SDS) during June, 1996 throughDecember, 1997.3 Their consumption is above the poverty line, but less than double of the poverty level; e.g. these people are closeenough to poverty to feel themselves insecure.
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Table 1. Poverty in Georgia4
YeT7-Ph - ---e. O#ia lPoeitline r New -e~r~ lineS, ~i~
Poverty incidence (% of 42.7 1118.9population that is poor)Poverty Depth 14.9 3.3 2.7Average shortfall of the poor 35.0 29.9 30.5Severity of poverty 7.4 1.5 1.2
4. As illustrated by Table 1, the incidence of poverty depends critically on the choice of apoverty line. But poverty rates are also very sensitive to assumptions made about equivalencescales and economies of scale in the household: whether we simply count the number of peoplein a household, or try to adjust in some way for the composition and size of families can have ahuge impact on the measurement of poverty. In the case of Georgia, for example, there are solidreasons for believing in sizeable economies of scale.5 But if we simply counted the number ofpeople in a family and used a per capita measure (as is done in neighboring countries), we wouldget much higher measures of poverty. On a per capita standard, the poverty rate in Georgia at theend of 1997, under the new poverty line, would have been 32 percent-almost three times as highas the actual estimate obtained using economies of scale! Poverty in Georgia would still be lowerthan in neighboring countries, but less dramatically different. So, what measure is one to rely on?One that is comparable with those of other countries or one that is country-specific, but realistic?It depends on the purpose for which poverty is being measured; if the goal is setting policy, thenwhat matters most is to construct a measure of poverty that is the most accurate for that particularcountry, and best reflects its specific characteristics.
Table 2. Incidence and depth of poverty by location(>fflvinl >ver line , , r .i, vtr povrWty
... . , _0 -;1k -wv po
UJrban Areas:Poverty incidence 45.0 12.1 10.0Average shortfall of the poor 35.4 32.1 32.3Poverty depth 16.0 3.9 2.4Severity of poverty 8.1 1.9 1.2
Rural areas:Poverty incidence 40.1 9.9 7.5Average shortfall of the poor 34.4 26.8 27.9Poverty depth 13.9 2.8 1.5Severity of poverty 6.7 1.2 0.6
5. Rural versus Urban. Regardless of which poverty line one chooses, a higher proportion ofthe urban population lives in poverty. Urban poverty is also deeper and more severe. From thisperspective, Georgia looks similar to many other FSU countries. Rural areas have lowerincidence of poverty because the rural population has much better access to at least one
4 These figures are for the fourth quarter of 1997. An individual is classified as poor if he/she lives in a householdwith consumption below the poverty line. Poverty incidence is percentage of the population that is poor; the shortfall ofpoverty is the distance between the average consumption of the poor and the poverty line (as percent of the povertyline); the index of poverty depth distinguishes among the poor according to how far below the line their consumptionfalls; it is the poverty shortfall averaged for the whole population (zero for non-poor); severity ofpoverty givesrelatively greater weight to poverty shortfalls that are way below the line (e.g. it captures the degree of inequalityamong the poor). Data are from State Department of Statistics, Survey of Georgian Households. Estimates usesampling population weights.5 Our estimate of theta is 0.6, meaning that to achieve the same welfare as a single person spending I lari, a family ofthree would spend only 1.8 lari. These methodological issues and the sensitivity of our results to economies of scale arediscussed in detail in Technical Paper I and Annex I, Volume ll of this study.
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productive asset, namely land.6 However, rural poverty is also highly sensitive to seasonality; inother words, the incidence of poverty in rural areas varies with the agricultural cycle. During theslack agricultural season, rural poverty increases; after the harvest, the situation improves. As weuse consumption, not income, to measure poverty, this time pattern suggests that rural householdsare unable to spread their consumption evenly throughout the year.
Comparing Absolute PovertyPeople living at less than one dollar a day at purchasing power parity (in 1985 prices)
(percent of population)
Country Poverty incidence YearGEORGIA 11.1 1997Armenia 16.6 1996Bulgaria 2.6 1992Estonia 6.0 1993Kyrgyz Republic 18.9 1993Poland 6.8 1993Turkey 2.5 1994
Source: all countries, except Turkey, Armenia and Georgia from Worldi Bank, WDI(1998); Turkey, Armenia, Georgia own calculationsestimates using household survey data; PPP - CPenn World tables.
6. Regionalpoverto. Regional differences in liviing standards are very wide, with theincidence of poverty in the poorest regions being twice that in the richer areas (see Table 3).Regardless of the poverty line used, Adjaria and Samegrelo have the lowest incidence of poverty;Imereti the highest. Tbilisi has a poverty incidence that is slightly below the national average forlower lines and slightly above for the official line. No region is exempt from poverty, even fromits extreme form. The region with the lowest measured poverty, Samegrelo, still has 4.3 percentof its population in extreme poverty. The poorest region, Imereti, has three times as many.Imereti is also the most populated region, hosting almost 25 percent of the surveyed population of
6 Note, however, that we base our comparisons on total consumption. Once incomes or monetary expenditures areused, rural areas rank much poorer than urban areas. This impliets that in rural areas most of the products are not sold atthe market, but consumed in-kind.
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Georgia; as a result, is home to a large share of the poor (32 percent of the total poor populationof Georgia lives in Imereti). Imereti is also the region where the poverty is the deepest: most ofthe poor are extremely poor.
Table 3. Incidence of poverty by regions7
Kakheti 34.8 10.0 8.2Tbilisi 43.8 8.6 7.3Shida Kartli/Mtskheta 41.1 9.8 7.5Kvemo Kartli 36.8 11.4 8.4Samtskhe Javakheti 38.1 11.5 10.5Adjara 32.6 7.5 7.3Guria 54.8 13.1 10.3Samegrelo 33.6 6.7 4.3Imereti/Racha/Swaneti 58.9 19.3 14.8Total 42.7 11.1 8.9
7. In large part, these regional disparities reflect differences in initial conditions orendowments, aggravated in some cases by the vastly differing opportunities generated by growthand transition. The inherited structure and specialization of production is one explanatory factor.Regions with high poverty rates were predominantly former industrial centers. Today, most oftheir factories and mines are obsolete, inefficient and largely inactive. Regions with low andmedium poverty rates are more dynamic and diversified, agro-industrial areas or trading centers(the capital and main ports). On the other hand, geographical factors also play a role. Among allsurvey regions, Imereti has the highest proportion of the population living at high altitudes. Dueto neglect of road maintenance, many of these sites are now isolated for many months of the year.
1.2 Who Are the Poor?
8. Table 4 summarizes poverty rates by demographic and economic characteristics ofhousehold and individuals. While demographic composition of the household is somewhatcorrelated with poverty, the biggest determinants of poverty risk in Georgia are clearly theeconomic variables of the household: factors such as the employment status and earnings of thehousehold head, and ownership of productive assets (primarily land).
9. Poverty and Employment Status. Households with an inactive or unemployed head facethe greatest risk of being poor. Almost a third (3 0%) of all households in which the head ofhousehold is not employed (unemployed or inactive due to old age, disability or having droppedout of the labor force) are poor, and 26 percent are extremely poor. These families, moreover,constitute a large share of all the poor (28%), and nearly one third (32%) of the total extremelypoor population. This inactive population is disproportionately located in urban areas: 86percent of households with an inactive or unemployed head are urban. However, ruralhouseholds with an inactive head of household are at a particular high risk of poverty. These areprimarily households which either have no land or are not able to work it because of old age ordisability.
7 Fourth quarter, 1997. Two sparsely populated administrative regions were included in larger regions duringstratification. Racha-Lechkhumi and Lower Swaneti are included in the Imereti region, and Mtskheta-Mtianeti issampled with the Shida Kartli region. Abkhazia and South Ossetia (Tskhinvali region) were not part of the samplingframe.
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10. In both urban and rural areas, inactivity is the strongest predictor of poverty. However, inrural areas we find many people working in agriculture who are also poor. About 15 percent ofhouseholds in which the head is self-employed in agriculture are poor (as compared to a nationalaverage of 1 1.1 percent), while 9 percent are extremely poor. This is linked to low levels ofproductivity in agriculture and low level of earnings for farmers (see below and Chapter 4).Surprisingly, there are no clear differences in poverty incidence between those employed forwages in the state versus the private sector, or relative to those who are self-employed outside ofagriculture (mainly trade). There are, however, signs that these sectoral patterns may bechanging: by end- 1997 (our last observation point), those employed in private firms clearly hadthe lowest risk of poverty at any line, suggesting that they are benefiting the most from economicgrowth.
11. Poverty and Ownership of Assets. After the economic collapse of industry, agricultureemerged as the most important economic activity in the country, and remains so to this day. Atpresent, incomes from land (agricultural self-employment and subsistence gardening) constitutejust about half of all incomes of the population (including the urban population), and over 70percent of the incomes in rural areas. In Georgia today, agriculture is the rural economy; it is alsoa substantial part of the urban economy!
12. The most important asset in termns of affecting the risk of poverty in rural areas isownership of land. Landless households have a higher poverty risk and depth of poverty thanhouseholds with land; and three times the poverty risk and depth of poverty than households thatown more than 1 hectare. However, only a relatively small proportion of the rural population islandless: about 8 percent of rural households do nol: own land, or do not use any land. Half ofthese rural landless poor do not have any employed members at all, and are predominantly singleelderly.
13. The bulk of the rural poor do own land, but own less than the non-poor and use it lesseffectively. On average, the rural poor own about 0.5 of a hectare, compared to 0.7 owned by thenon-poor. More importantly, the poor spend only 2 lari every month on farming expenditures,whereas the non-poor spend 8.5 lari. This translates into lower yields and less diversified cropsfor the poor. On average, the non-poor are cropping three different cultures; the poor one or oneand a half. Cultivation of technical plants (sunflower, tobacco etc.) is almost exclusively done bynon-poor households. This apparent link between cropping patterns and poverty suggests thatagricultural specialization is an important factor behind inter-regional differences in poverty risks.For example, corn and wheat are now relatively pro-fitable crops; as a result, cereal growingregions have a much lower number of poor households than citrus and grape growing areas.
14. When a rural household has other assets (such as draft animals or cattle), its poverty risksare greatly reduced. These assets substantially increase the productivity of agriculturalemployment, they also allow for the diversification of sources of income, and hence reduce therisk of poverty.
15. For urban households, the link between poverty and ownership of assets is less clear.Owning some financial assets (such as a bank deposit) is correlated with a very low (or zero) riskof poverty, but only a miniscule fraction of the population reports owning these assets. Owning ahouse versus renting also appears to slightly reduce the risk of poverty, but on the other hand, themajority of the population (and hence of the poor) own their house. Ownership of durables(refrigerators, TVs) is no different between the pooI and non-poor, or between urban and ruralareas. However, owning a car, one of the few durables that can be put to productive use, clearlyreduces the risk of poverty.
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Table 4. Poverty profile - selected characteristics of the poor
Sigl Wokn Ag Adul............ .t 3 ' '.9% 2 .1%Ae
I. HBousehold demwgraphic profileCouple with Children 6.2% 1.2%/ 0.5% 7%Extended with no Children 8.1% 2.1% 0.9% 12%Extended with Children 18.8% 3.6% 1.5% 66%Pensioners with Children 17.1% 13.1% 10.0% 0%Single Working Age Adult 10.0% 3.9% 2. 1% 1%Single Adult+ Pensioner 9.3% 3.9% 2.6% 5%Single Mothers 12.0% 1.6% 0.4% 1%Single Pensioner(s) 12.3% 3.8% 2.0% 7%
2. Household head enployment:Inactive or unemployed 30.1% 8.9% 4.8% 28%Self-employed in agriculture 15.2% 2.5% 0.9% 30%Employed in budget sphere 10.1% 2.5% 1.4% 13%Employed in SOE 11.1% 2.3% 0.9% 10%Employed in private firm 11.0% 3.1% 1.2% 10%Self-employed outside agriculture 7.7% 0.8% 0.3% 14%
3. Education (for persons over 15years old):Elementary 22.9% 3.4% 1.4% . 9%Secondary incomplete 14.3% 3.0% 1.4% 10%Secondary 13.9% 3.0% 1.3% 30%Post secondary 10.9% 2.8% 1.2% 12%University 7.8% 1.5% 0.7% 9%
Total 13.4% 2.9% 1.3% 1 100%
16. Dependency and Poverty. The demographic structure of households in Georgia has beensharply altered by the fall in living standards over the crisis years. In response to the collapse ofwages and incomes, nuclear households have expanded to form larger, extended householdswhich provide a better safety net. Today, extended multigenerational households represent overone half of all households in both urban and rural areas. Few single households or single parenthouseholds remain-although those who do are at a very high risk of poverty, since they tend tobe the ones without relatives to rely on or to take them in. Nuclear families-couples withoutchildren, or with children but no other dependents-now represent only 40 percent of allhouseholds (down from nearly 70 percent), and have a low risk of being poor. The fact that theycan choose to live as a nuclear family is in itself a sign that they are better off than those whonust group into extended family homes.
17. The majority of the Georgian poor live in extended, multigenerational families withchildren. Almost 19 percent of such families are poor; and since there are many of them, theyalso constitute the bulk of the poor population (66%). A key factor of poverty appears to be thedependency ratio-i.e., how many persons have to live on each breadwinner's income. Thepoorest households are those in which no one has gainful employment, or those in which morethan three dependents are supported by each employed member.
18. Age, Education and Gender. There are no large differences in terms of poverty riskbetween age groups, with the exception of single pensioners, who face a high risk of being poor.About 17 percent of urban single pensioners are poor; and over 80 percent of these poor singlepensioners are also extremely poor. In comparison, 8.5 percent of urban working age males and 8percent of urban working age females are poor. Children do not appear to be at especially highrisk: 9.8 percent of all children of school age are poor (the same proportion in urban and ruralareas). Young children, who often are at higher risk because childcare demands prevent thewomen in the household from working, also do not face a poverty risk that is higher than
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average-at least in urban areas, where just under 9 percent of children under 7 are poor. Butthey do face a somewhat higher risk of poverty in rural areas, where 11.5 percent of childrenunder 7 are poor. This could reflect the lower availability of childcare options in rural areas.
19. As we may expect, education is inversely correlated with poverty. Having only anelementary education significantly increases the risk of being poor, while a higher educationclearly reduces it. However, we do find poor individuals at all levels of education (andindividuals with a higher education represent an equally large share of the poor as do those withonly an elementary education).8
20. Female-headed households are more likely to be poor than male-headed households. Andwhen we consider jointly marital status, gender and poverty of individuals, the underprivilegedposition of women become more evident. Single women and women in unregistered wedlockhave much higher risks of poverty than men in similar situation; and especially, single femalepensioners (widows) are particularly vulnerable to poverty.
21. "Vulnerable Groups". A number of population groups were perceived under the formerSoviet system to be particularly vulnerable, and were granted special privileges, some of whichpersist in Georgia today (such as discounts on electricity tariffs, transport etc). Some of thesegroups were identified in the survey instrument. Comparing their risk of poverty with the averageincidence for the population as a whole reveals some interesting findings. The disabled(especially the seriously disabled, groups I and II) at are a high risk of poverty; a large share ofthem are also extremely poor. Special pensioner categories (veterans, defense employees andothers entitled to special pension supplements) have a lower risk of poverty than non-specialpensioners and than the population as a whole. IDPs covered by the survey (those that haveresettled into households as opposed to remaining institutionalized) also fare much better than thepopulation on average (only 4 percent of such IDPs are poor).9
Basic Needs
22. Consumption patterns. As revealed by the share of food in total consumption (almost 70percent), the population on average is rather poor. In this context, the poorest decile of thepopulation, which devotes three-quarters of its total monthly consumption to food, is notdramatically different from the richest, who still have a food share of 60 percent. What is ratherunusual is the very high share observed, evenfor rich households, of food in the form of ownagricultural produce consumed in-kind. This reveals that even the relatively affluent depend ontheir garden plots to guarantee food security.
23. Outlays for housing, health care, transport, clothes, electricity and fuel are the major non-food budget items for the poor and non-poor alike (Table 5). But jointly they claim only about 25percent of all consumption expenditures. Education has a substantially lower weight in thebudget, but unlike for other non-food items, the non-poor spend substantially more than the poor.
s A more detailed discussion of the links between education, incomes and poverty can be found in Chapter 4, and inTechnical Papers I and 2 in Volume 11.9 By definition the sampling frame in the survey does not cover institutionalized population, so IDPs living indormitories, hostels etc were not sampled.
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Table 5. Structure of total consumption by deciles, average 1996-1997(percent of total consumption)
I(poorest) 74 1 3 6 3 5 3 1 0 3 100 11 59.82 75 1 3 6 3 5 3 1 0 4 100 12 105.53 75 1 3 6 2 5 4 1 0 4 100 12 136.94 73 1 4 6 2 4 4 1 0 4 100 12 168.05 73 1 4 6 2 5 4 2 0 4 100 12 205.26 72 1 4 6 2 5 4 2 1 4 100 12 240.37 71 1 4 6 2 5 5 2 0 4 100 14 282.68 70 1 4 6 2 5 5 2 1 4 100 16 329.49 68 1 4 7 2 5 5 2 1 4 100 17 404.5
10 (richest) 62 1 4 8 4 4 7 3 2 4 100 21 631.7Total 69 1 4 7 3 5 5 2 1 3 100 16 259.7Note: deciles are drawn based on consumption per equivalent adult
24. Nutritionalstatus. Georgian households do not face a problem of dire caloric deficiencies,but do face problems of adequate composition of food. The SDS survey found that the averagefood consumption per equivalent adult in the lowest quintile was 1700 Kcal per day (as comparedto the recommended minimum of 2000 calories). This level is low, but not so low as to lead toserious nutritional problems. However, it does have to be put in context as traditionally Georgiahad high consumption standards, both in terms of quantity and quality of food consumed. It isnot surprising then to find that a sizeable proportion of households assess their nutritional statusas deficient: according to a Vulnerability Assessment conducted in March 1996, 23 percent ofurban households and 17 percent of rural households evaluated their nutritional status as bad orunbearable.' The assessment also found that about 1 percent of all households can afford toconsume only two food items on a regular day (most often bread and potatoes or beans). Thereare clear differences in the diversity of food basket between different groups: 5 percent of singlepensioners and 2.3 percent of single parents can afford to eat no more than two food productsregularly.
25. Basic services. The link between access to basic services and poverty in Georgia is veryweak. During the years of crisis, the breakdown of municipal services pushed the standards ofliving for all households to very low levels. Today, the simple fact of possessing a certain facilitydoes not necessarily mean that it is used by the household. For example, while almost allGeorgian households (97%) have an electricity connection, supply has been unreliable and mosthouseholds have received no more than 2 or 3 hours per day. Gas supplies have been reduced tovery low levels, or stopped altogether. Lack of electricity and gas supplies have made it difficultto heat dwellings or prepare hot meals, and have forced the majority of Georgian households torely on kerosene and wood as their main heating fuels.
26. According to the SDS household survey, the link between poverty and basic services is notuniform, but depends on area, region, and the type of service. There are, for example, strongdifferences in access to water and sewerage between urban and rural areas: about 80 percent ofurban families have hot water (either centrally or individually supplied), whereas in rural areasless than 10 percent of households have this utility. Only every fifth rural household has atelephone; in urban areas this service is provided to near half of all households. Similarly, pipedwater reaches almost 100 percent of urban dwellers, but only two-thirds of the rural population.Taking into consideration these urban-rural differences, we find that the poor are clearly worseoff than the non-poor in using gas (individual or central connection). Households that do not use
"' L. Dershem, D. Gzinshuili, A. de Roos, and D. Venekamp. "Food, Nutrition, Health and Nonfood Vulnerability inGeorgia, 1996: A Household Assessment", ECHO, 1997. Henceforth referred to as "Vulnerability Assessment".
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gas at home are more likely to be severely poor than others. Other services, however, do notrender themselves useful to distinguishing the living conditions of the poor from the non-poor.
27. Access to health care. Access and use of health care in Georgia are closely correlated withpoverty status, and there are growing signs that the poorest groups of the population are beingexcluded from the health care system. Moreover, in the absence of effective health insurance,health risks are emerging as one of the important factors of vulnerability.
28. Morbidity in Georgia is quite high. According to a recent SDS survey, a majority of allhouseholds (close to 80 percent) reported having at least one ill member over the 3-month surveyperiod; 14 percent of households reported having a member with serious physical limitationimpairing her or his daily life." Despite this, actual use of the health care system is neither highnor universal. According to the SDS survey, only 46 percent of individuals who were sick soughtprofessional treatment; the rest treated themselves or sought non-traditional forms of help. Out ofthose who were sick, but treated themselves, about 20 percent did so because they were not ableto afford professional treatment."2 Among those in the poorest quintile, the share of those withhealth conditions who said they could not afford professional help, was twice as high as in therichest quintile.
29. As the trade-off between health care and food for poor families is so extreme, this groupfaces difficult choices in trying to mobilize funds necessary for treatment. When they do turn todoctors for help, medical spending becomes a very big item for the poor, and the total amountsare almost comparable to what the non-poor spend. Poor households seeking curative care spendon average 7.8 lari per month on medicines (compared to 11.5 lari for non-poor), 5 lari on visitsto the doctors (as opposed to 18 lari for non-poor), 36 lari for hospital care (as opposed to 50 larifor non-poor), 70 lari for child birth (140 for non-poor). Thus, a single case of hospitalization caneat up the full monthly earnings of a poor family.
30. Out-of-pocket payments have long become a condition of receiving treatment even inpublic health facilities. And without effective health insurance, the illness of a family memberemerges as one of the most serious risks of slipping into poverty. There is a sizable number ofhouseholds in the survey who report spending all their cash on medical care: almost 5 percent ofpoor households and 1 percent of non-poor households surveyed had no more than 5 lari left afterhealth payments, to meet all other monthly needs. As a result, health care emergencies are animportant cause of indebtedness for households. Nearly half of the households in the poorestquintile borrow or sell property to finance health expenditures.13
31. Real public expenditures of the Ministry of Health declined over the years of transition(1990-95) by more than ten times. At present, only 22 percent of total finance for health care iscoming from the State central and municipal budgets, or from medical insurance. The overallconstraint on resources has meant diminishing funds, low salarieg4 and no maintenance ofequipment or facilities. It has forced health facilities to rely increasingly on out-of-pocketpayments, which have effectively priced the poor out from hospital care. According to the SDS
1 SDS, Survey of the Demand for Health Care Services, Summer 1997.' The Vulnerability Assessment findings are very similar: 21.7% of all individuals with health problems did notcontact a health care provider because of the inability to pay.'3 SDS Health Demand Survey. Confirmed by the SDS household survey, which shows that 40% of the poor withmedical expenses borrow and/or sell their property.14 Health care has one of the lowest monthly salaries (about 1/2 of the national mean) in the Georgian economy bothaccording to official data and to SDS household survey. However, as an indicator of importance of informal payments,the poverty risks for those employed in health care are not higher, and are even slightly lower, than for other employeesin state and private firms.
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health survey, only 10 percent of hospital care users are from the poorest quintile of thepopulation. This usage pattern highlights an anti-poor bias in the allocation of healthexpenditures: over 50 percent of the total expenditures of the Ministry of Health and StateMedical Insurance Company go towards financing inpatient curative health care yet, as the SDSsurvey reveals, this type of care is rarely used by the poor.
32. Access to education. Education is inversely correlated with the level of poverty, but thelink is strong only for higher education. Secondary education in particular, seems to provide poorshelter against the risk of poverty. This, combined with less affordable access to highereducation, have weakened the incentives to obtaining an education among the poor. The fall indemand has been accompanied by the collapse of public financing of education (which declinedby a factor of 11 times between 1991 and 1996), and by a sharp deterioration in quality.
33. Total gross enrollments have fallen by about 18 percent during transition years (by 30percent in urban areas and by 10 percent in rural areas). This is partly due to demographicfactors, and partly to the reduction of the population covered by the existing systemr5, but there isalso a clear deterioration in the effective use of the education system by the population. Primaryeducation is, in theory, free and universal. However, net enrollment rates have dropped sharply,from 91 percent in 1990 to 74 percent in 1994; gross enrollments have fallen from 95 percent toabout 80 percent. Secondary school is still compulsory and free up to the 9th grade. However,enrollment rates there have also fallen: from 95 in 1990 to 76 percent in 1994. For 10th and I Ithgrades there are formal enrollment fees that families have to pay. Formal fees are modest (10 lariper month in 1997), but for a poor family it can be unaffordable (average consumption per capitain poor families is only 20 lari per month). Apart from these formal fees, there are ad-hocinformal payments collected from parents of pupils at every grade, usually to pay for schoolheating, urgent repairs etc. And there are other significant costs at all grades for books, writingmaterials, clothes, pocket money for school breakfasts and transport.
34. Education expenditures are the most unequally distributed item in the structure ofconsumption in Georgia (Table 5). On average a poor family sending a child to school spendsannually about 15 lari, or just over 2 percent of their cash budget. The non-poor spend about 140lari or over 5 percent of their total cash expenditures."6 Two factors seem to be driving theinequality in private educational spending: one is textbooks (which represent about a quarter oftotal private spending on education); a second are private lessons (which represent about 10percent of all private spending). Almost no poor household in the survey reported taking privatelessons. Given the poor quality of secondary instruction in Georgia, no private lessons and lackof textbooks effectively act as barriers preventing children from poor families from accessinghigher education. It also translates into unfair differences in quality of education even for thesame level and same school, and thus creates very discouraging expectations among poorstudents, who believe that they will never be accepted at higher education establishments"7
35. The resulting unequal access to post-compulsory education is reflected in the SDS survey:only 20 percent of individuals aged 16-17 in poor families are students, as compared to 78percent in non-poor families; and out of all families that have a child enrolled in higher education,only 6 percent were poor. Public expenditures on higher education clearly benefit the rich morethan the poor."
5 Due to the breakaway of some regions.16 Data from SDS household survey.17 See N. Dudwick, Georgia: A Qualitative Study of Impoverishment and Coping Strategies, Technical Paper 4,Volume II of this study.18 In 1997, the share of higher education in the Ministry of Education's budget was almost 50%, suggesting thatspending is biased against the poor.
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Will Growth Alone Be Sufficient to Reduce Poverty?
The rise of widespread poverty in Georgia is a direct consequence of the economic collapse and civilstrife following the breakup of the Former Soviet Union. The recovery of growth has done much toreduce the number of the poor; but not all population groups have benefited equally from growth.Hyperinflation, macroeconomic crisis and weak governance have combined to cause a sharp rise ininequality among households. While sustained growth is an absolute priority for continued povertyalleviation in Georgia, it is not clear if growth alone will suffice. The existence of large inequitiesbetween households, groups and regions suggests that pockets of more structural poverty will persisteven in afast-growing economy. The quality and patterns of growth-and in particular, whethergrowth translates into widespread increases in productivity and labor incomes, or whether it results inincreased incomes for only afew-will be the key determinants of the evolution ofpoverty during thenext fewyears.
2.1 Macroeconomic Recovery and Its Impact on Poverty
36. In early 1994, Georgia emerged from two years of armed conflict with a collapsedeconomy. Officially estimated GDP had dropped to 30 percent of its 1990 level; governmentrevenues were barely 2 percent of GDP; and the economy was ravaged by hyperinflation and theensuing depreciation of the domestic currency. These developments had a severe impact on thepopulation: real wages fell by 90 percent, and social indicators worsened dramatically. As aresult of the collapse in real incomes, household expenditures became severely compressed, witha large part of the population relying on subsistence gardening and barter trade to provide fortheir most basic needs. At the same time, the fiscal collapse made it impossible for theGovernment to finance its basic functions, let alone an effective social safety net to protect themost vulnerable. Family networks, private support mechanisms and Georgians' traditionalentrepreneurship became the only reliable mechanisms to guarantee survival.
Table 1. Economic and Social Indicators
Real GDP (% change) -44.8 -25.4 -11.4 2.4 10.5 11.0CPI inflation (year end) 7,488 6,474 57 14 7Employment ('OOOs)
State sector 1,375.6 1,160.0 1,095.7 985.3 580.0 568.6Private sector 411.5 488.2 560.0 634.0 1,400.7 1,617.6
Unemployment ('000s)Registered 136.4 225.9 75.7 65.4 53.4 142.8
o/w receiving benefits 22.2 12.3 .80 1.1 7.98 5.4
Avg. monthly wage (laris) 0.028 6.2 13.8 29 54.9Source: IMF
37. Since 1994, the economic situation has improved dramatically. The economy has beengrowing steadily since 1995, at an average of 8 percent per annum. Inflation has come down tomoderate levels and the fiscal situation, while it remains extremely fragile, has been broughtunder control, allowing for a modest improvement in the financing of social expenditures. Thesetrends have underpinned an improvement in living standards, which nevertheless remainsignificantly below their pre-transition levels.
38. What has been the impact of growth on poverty? It is hard to carry out a rigorousassessment since the SDS survey data starts only in 1996. However, some useful insights can be
1 This Chapter draws extensively from Technical Papers I and 2 in Volume II.
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gained from looking at some earlier surveys and poverty work. For example, a UNICEF studyfound that in 1994 an overwhelming 85 percent of the population was poor. A survey conductedin early 1996, on a sample of 1200 households, found that 71 percent of urban and 43 percent ofrural households were below the (official) poverty line? Applying similar methods and povertyline to the SDS household survey, we would obtain a poverty incidence of about 55 percent of thepopulation by end-1996/early 1997. Thus, there has been some progress in reducing the numberof poor in the years after the stabilization of economy (1995-97).
39. The data from the SDS survey also allow us to estimate trends in poverty over the recenthigh growth period (1996-97).4 In urban areas, there has been a clear reduction in poverty rates(Figure 1). In rural areas, the improvement is much more muted (and it is difficult to separatetrend from seasonal variations).5
Figure 1. Poverty Rate by Quarters (new poverty line)
25% -. _
20%
-0° Urban
!0o/o -U~~~~~~~~~~~~~~~~~~~~~~~~~~~Ruiral
Percent poe r
I 5%
I 0%- I ISummer 96 Fall 96 Winter 97 Spring 97 Summer 97 Fall 97
Quarters
40. The differential performance of rural and urban areas reflects primarily very differentpatterns of growth across sectors: value added in transport, trade and services, all of which areprimarily urban, grew by 13-30 percent in real terms during 1996-1997; in contrast, value addedin agriculture, which represents the bulk of the rural economy, grew by only 2 percent. At thesame time, agriculture absorbed much of the employment released in other sectors of theeconomy; the result was much lower growth in productivity per worker, and consequently lowergrowth in real incomes (and consumption) for those employed in the sector' At end- 1997, valueadded per worker in agriculture was only about 100 lari per month; four times lower than valueadded per worker in trade, and five times lower than in industry or construction.
2 Based on the official family budget surveys data, referred to in "Demand for health care services and expenditures"UNICEF, 1997.3 ECHO, 1997. Food, Nutrition, Health and Nonfood Vulnerability in Georgia 1996: A Household Assessment (alsoreferred to as "Vulnerability Assessment"). The poverty line used was a predecessor of the official poverty lineestablished by Law in 1997; at the time of the survey is was 86 lari per equivalent adult.4 There is a methodological break in the series that makes measures of poverty incomparable between the initial fourrounds and the last two. But one can make comparisons within the first four and within the last two, and infer a trend.5 An extreme example of these urban-rural differences is found in Adjaria: households that were interviewed for fourconsecutive quarters in urban areas reported their consumption had doubled; in rural areas, average per capitaconsumption in households that participated in the survey for four consecutive quarters actually dropped. Thistranslates into an astonishingly large discrepancy between urban and rural poverty in this region: while less than 1% ofthe urban population in Adjaria is below the poverty line, as much as 30% of rural population is poor.6 Value added in agriculture grew by 2% in real terms between 1996 and 1997. During the same period, agriculturalemployment grew by 16%.
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41. On the whole, real GDP growth during 1996-97 has resulted in increases in per capitaconsumption for almost all households. This is reflected in Figure 2 as a rightward shift of theconsumption distribution. Comparing the situation i.n Fall, 1997 to that in Fall, 1996, we find thatper capita consumption increased in real terms for all quintiles of the consumption distribution,and in fact, increased the most for the lowest quintile. Per capita consumption for the lowest 20%of the distribution increased by nearly 17 percent in real terms, while real per capita consumptionfor the top quintile increased by only 2 percent. However, for those households that stayed poorthroughout the full year, real per capita consumption did not increase at all. And in fact, theaverage poverty shortfallfor the poor actually increased over time! (Table 2). Thus, there is asmall fraction of the population who appears to be stuck in poverty and getting poorer. These arethe chronic or long-term poor.
Figure 2. Distribution of the Population by Per Capita Consumption: Comparing First and Last Rounds
45%
40% . .35%/
30%0jo
25% 120%
15% I10%
5%
Lari pr c4sits
-3rd quarter 1996 -- ___ 4th quarter_f 1997 |
Source: SDS household data; log scale; kernel procedure to obtain density estimates.
2.2 Chronic versus Transient Poverty
42. Much of the early poverty analysis for the transition economies was based on theassumption that poverty in these countries was both shallow and transitional in nature. Itfollowed naturally that rapid and sustained growth would resolve the poverty problem. However,increasingly the evidence throughout the region points to the emergence of a class of long-termpoor, who are not reached by growth. Recent estimates suggest that in Russia, for example, 17percent of the population is chronically or long-termn poor! Even in successful transitioneconomies such as Poland, there is evidence of chronic poverty: households that are poor andstay poor, or even get poorer over time. The risk is that these chronically poor become anunderclass, with distinct characteristics that set them apart form the non-poor, and that doomthem and their children to live in poverty.
43. As seen above, there is a fraction of the population in Georgia which is persistently poor,and who are not benefiting from growth. But how large is this fraction? What are theircharacteristics? Are they different from other poor households who are able to escape povertyover time? To analyze this, we explore the panel dimension of the SDS household survey andexamine cohorts of households during a full year.
7 Poverty Transitions in Russia: Moving Up or Bottoming Out in 1994-1996, The World Bank, November, 1998.
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44. This exercise reveals that the majority of the poor are poor for only part of the year. At thenew poverty line, only about 2% of the population remains poor for the full year of observation.Nearly 80 percent of the poor escape poverty during the year. If we apply the official povertyline rather than the new one, then 18 percent of the population is chronically poor' Alternatively,
we may consider the long-termTable 2. Average Poverty Shortfall for the Poor poor to be those households whose
-- ;M M.. average consumption throughoutSummer, 1996 27.9 the year was below the poverty line.Fall, 1996 29.7 About 6%, or close to half of all theWinter, 1997 27.4 poor, are poor on average.Spring, 1997 28.9 However, even in this case, theSummer, 1997 25.4 majority of the poor are transientFall, 1997 30.1 rather than chronic poor.9
Source: SDS Household Survey
45. The fact that a largeproportion of poverty is transient indicates that most of the poor are able to lift themselves out ofpoverty in a relatively short period of time. This is good news: it means that the bulk of the poorare not likely to fall into more structural, and more permanent, forms of poverty. And it suggeststhat growth can potentially have a very large impact on poverty. On the other hand, it also meansthat many households which are not poor today face the risk of falling into poverty at some point,which makes targeting assistance much more difficult. It also means that most of the populationhas had an experience of poverty at some point in time, and that many households findthemselves vulnerable to poverty. In the winter months, for example, about 20% of thepopulation that is normally not poor falls into poverty. On average, for all panel waves, we findthat one-third of the population has had a spell of poverty over the period of observation (4quarters). The risk of slipping into poverty is very high for the average Georgian household.
Table 3. Characteristics of the Chronically Poor
@fi~ia fli~e (ne~rline) ot~kW) (new line)1. LocationUrban 17.7% 2.1% 50% 73%Rural 19.3% 0.9% 50% 27%2. Household head employment:Inactive or unemployed 29.0% 6.6% 18% 52%Self-employed in agriculture 19.7% 1.6% 26% 25%3. Household labor profileOne or more unemployed 23.5% 3.3% 21% 36%No one employed for full year 35.7% 8.3% 10% 28%All adults employed for full year 13.8% 0.5% 10% 4%Some members lost their job 19.7% 1.6% 56% 57%Total 18.4% 1.5% 100% 100%
We call chronically poor households which have been below the poverty line during the whole year of observation.It may not be comparable to the definition of chronic poverty used in other countries where longitudinal data areavailable.9 However, some of these households may then fall back into poverty. Since we observe households for only a year,we cannot accurately track these transitions. As such, our results probably overstate the escape rate form poverty - andunderestimate the true magnitude of chronic poverty.
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46. Can we identify some of the root "causes" of chronic or long-term poverty? As is the casefor overall poverty risk, employment status of the household emerges as the strongest correlate of(chronic) poverty. Households where the head is inactive or unemployed face the highest chancesof being chronically poor. The number of employed persons in the household and the stability oftheir employment also matter. The presence of unemployed members, even in households with aworking household head, considerably increases the chances of the household being chronicallypoor. The risk is also high for households with temporary or fluctuating employment (mainlyhouseholds where employed members suffer spells of non-employment in between jobs).Although average budgetary wages are low, employment in the Government significantly reducesthe risk of being chronically poor. This suggests that budgetary employment (and the additionalsources of income it may generate) acts as an implicit safety net that prevents families fromfalling into permanent poverty. Reflecting the importance of inactivity and unemployment as themajor correlate of long-term poverty, the majority of the chronic or long-term poor are urban(73%). Nearly one half of the long-term poor live in Imereti (48%); and another one-fifth (21%)in Tbilisi.'°
Table 4. Chroniic Poverty by Region
Kakheti _ 1__ .0, 0.6% 0.1% 11% 5°/ 1°/Tbilisi 14.3% 1.4% 0.6% 18% 21% 20%Shida kartli/Mtskheta 12.9% 0.7% 0.0% 7% 5% 1%Qvemo kartli 25.7% 1.5% 0.5% 13% 10% 7%Samtskhe-javakheti 16.2% 0.0% 0.0% 3% 0% 0%Adjara 11.6% 1.0% 0.1% 6% 6% 1%Guria 36.6% 1.0% 0.1% 8% 3% 1%Samegrelo 8.5% 0.5% 0.5% 5% 3% 7%Imereti/racha/Swaneti 28.8% 3.8% 2.5% 29% 48% 63%
Total 18.4% 1.5% 0.7% 100% 100% 100%
2.3 What about the Future? Medium-Term Impact of the Level and Patterns of Growth
47. Some simple projections of poverty rates under different growth scenarios reveal that,assuming inequality stays constant, economic growth can have very big impact on poverty (Figure3). The elasticity of the poverty headcount with respect to growth in average per capitaconsumption is very high, and fast growth leads to an even faster reduction of poverty rates.Sustained economic growth and stable macroeconomic performance are hence crucialcomponents of any poverty alleviation strategy.
48. The simulations also show, however, that a worsening of the income distribution wouldundermine any positive impact of growth (Figure 4). If the distribution were to worsen toBrazilian levels, the economy could grow at an impressive 11 percent each year and it would stilltake almost 10 years to restore the incidence of poverty to present levels! Hence, theGovernment's ability to tax and redistribute income through expenditure and taxation policiesrould play a very significant role in determining poverty outcomes in the future. In this regard,Georgia's currently weak tax enforcement capacity poses a serious concern for the future, notonly because of its implications for macroeconomic stability and growth, but also because of itspotential impact on the distribution of income.
10 See Technical Paper 1, Volume 11, for details.
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Figure 3.
Georgia: poverty projections with different universalgrowth rates
45% r{v- {
c4 5% r _.. _.. .. .................... . .._ ...... .......... .......... .. ...- ----------------ca c35% _ _
30%
20% _
15%
I0 0/ t
0%~~~~~~~~~~~~~
andwoe in of distrit tio the l of linequ aI
Figure 4.
Georgia: poverty projections, universal growth of consumptionand worsening of distribution to the level of Brazil's inequality
40% ----
35%
&30%
E 25%
5 20%
15%
5% t ~~
0%Now 0 3% 5% 7% 9% 11%
growth growth growth growth growth growth
for 5 for 5 for 5 for 5 fo r 5years years years years years
r -~ -u-Worsening inequality, new poverty lineI Stable inequality, new poverty line
49. The need for debt relief/restructuring. The above simulations show a strong link betweenper capita consumption growth and poverty incidence. However, the link between overalleconomic growth and consumption growth in a highly indebted country like Georgia, is notsimple. With a heavy debt burden, and tight external financing constraints, positive outputgrowth can easily co-exist with relatively modest, or even negative, consumption growth. Figure
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5 illustrates what happens to poverty rates with and without restructuring of Georgia's debtservice payments.
Figure 5: Poverty in Georgia with and without external debt restructuringPercent poor
12%
91%
6%
3%
1997 998 1999 2000 2001 2002 2003 2004 2005 2006 200
Percent poor - initial level
| Poverty incidence- base case
U Poverty incidence- base case and external debt restructuring
50. Unfortunately, both scenarios offer very limited improvement in poverty rates for the shortterm. This is because, despite moderate but stable GDP growth rates, projected per capitaconsumption growth for 1999-2001 under both plausible scenarios is very low. The pictureimproves considerably over the medium-term, particularly under the debt restructuring scenario.A restructuring of Georgia's considerable burden of debt payments (including its repayments toTurkmenistan) allows for a substantial increase in the rate of growth of private consumption vis-a-vis the base case, with an immediate impact on poverty. Moreover, if the resources releasedthrough restructuring were to be targeted in any way (via, for example, a Government transfer tothe poor) the impact on poverty would be even larger.
51. Regional Differences. The above scenarios all assume that growth is uniform across thewhole economy. In reality, growth rates are likely to differ across sectors and consequentlyacross regions, and poor regions may well lag the average in growth. Carrying out the projectionswhile allowing growth to vary across regions in response to sectoral composition shows exactlythat: poor regions such as Imereti or Guria grow more slowly than the average. As a result,existing regional differences in poverty do not disappear with growth (Figure 6). In a country asregionally and ethnically fragmented as Georgia, this could undermine overall social and civilstability. It suggests that dealing with regional poverty may require special "regional"interventions.
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Figure 6.
Poverty by regions: sensitivity to growth(poverty incidence in 10 years from now under different scenarios)
20.0% -
r9 3 i +~~~~~~~~~~~~~~~~Kakheti. 16 0%
'= 140% . . ^ .. ~~~~~~~~~-.- \,Tbilisi
~° 12 0% . ... . .. . . \ ........ t. A Shida kartli
o 10.0% Qx Qvemo kartli
8.0% -- Samckhe javakheti
E!D 6 0- - ---- +---Adjara
0Guria
2.----Samegrelo
Now Zero growth Base case - Medium case- High case- -' ImeretiRMSM model extrapolation extrapolation
forecast of 1995-1995 of 1997trend s urvey
Figure 7.
Poverty in Georgia: future paths under different levels of poverty benefit(Base case)
Percen 12%
Poo
r inthe 9% . __
ulation
6% .... -.. ... …
0% 11997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
F---- P-e-Perfcent poor - initial level
-0--- Poverty incidence- base case (no targeting of actual (1997) poverty benefit)a Poverty incidence - base case, increase in poverty benefit to the planned 1998 levels and targeting
Poverty incidence - base case, targeted poverty benefit gradually increasing to 1% of GDP by 2007
52. The Impact of State Transfers. How could state transfers or other targeted interventionsaffect this picture? Because of its limited resources, currently the state can play only a small rolein poverty alleviation. However, the size of poverty gap is not large (about 2 percent of GDP)a,nd is likely to fall further if growth continues. In this context, even a small, but well-targetedpoverty benefit, could play a crucial role in dampening poverty. This is illustrated in Figure 7,and further elaborated in Chapter 5. Further improvements in the state's ability to tax, and hencetransfer resources to the most needy through appropriately targeted expenditures, wouldstrengthen the reduction in poverty rates.
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3Inequality and Income Distribution'
Income inequality in Georgia is very high. The Gini coefficientfor money income in 1996 was0. 59-a level comparable to the most unequal econornies in Latin America. However, measuring onlymoney incomes in Georgia can be misleading, as there is evidence of a very large discrepancy betweenreported incomes and actual consumption. Inequality in consumption is less severe than for incomes,with a Gini coefficient of 0.36. Growth has notyet had a strong impact on consumption inequality perse, but we find evidence that during 1996-97 consumption increased at almost all levels of thedistribution. During the same period, there was significant income mobility, exceptfor those at thevery bottom or the very top of the income distribution. For the latter, economic success appears to beclosely associated with labor market status, ownership ofproductive assets and resulting earningsopportunities.
3.1 Measuring Inequality in Incomes and Consumption
53. Georgia is, in many ways, a highly unequal society. If we examine the distribution ofmonetary incomes we find evidence of extreme inequities, with the lowest 20 percent ofpopulation commanding only about I percent of total income, while the richest 20 percent ofindividuals account for nearly 60 percent. The Gini coefficient estimated for end-1996 was 0.59,just short of that observed in Brazil, which in 1995 had a Gini for per capita income of 0.61.
Table 1. Distribution of Current Monetary Incomes by Income Quintiles
IndividualsFirst quintile (poorest) I 1 2 2 2 2Second quintile 6 6 7 6 7 8Third Quintile 11 12 13 12 13 13Fourth quintile 21 22 23 22 23 22Fifth Quintile (richest) 61 59 56 58 55 55
Coefficientofvariation 1.61 1.51 1.31 1.60 1.25 1.22Gini coefficient 0.59 0.57 0.54 0.56 0.52 0.51Theil entropy measure 0.67 0.63 0.52 0.60 0.49 0.48Theil mean log deviation 0.46 0.49 0.42 0.50 0.42 0.43measure
54. With growth there has been some improvement in the distribution of income: during 1997the lowest quintiles experienced an unambiguous increase in their share of total income, while thetop quintile lost around 10 percent. Indeed, inequality indices sensitive to different parts of thedistribution show that the improvement affected the entire spectrum of incomes, and not just thetop and bottom. Nevertheless, inequality in money incomes remains extremely high.
55. Given the degree of informalization and demonetization of the Georgian economy,measuring only reported money incomes may give a misleading picture. Income is traditionallyunderreported in household surveys, even in established market economies, and Georgia is noexception. If we compare income and consumption data using the SDS survey, we find a verylarge discrepancy, equivalent to about 40 percent of consumption on average. The gap betweenconsumption and income is lowest at both ends of the distribution (for the poorest and richest
This Chapter draws extensively from Inequality and lncome Distribution, Technical Paper 3, Volume II. See the fullpaper for more detailed exposition and analysis.
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quintiles), and highest in the middle, where it represents about 45 percent of total consumption(Table 2).
Table 2. Average Income and Consumption by Consumption Quintiles
Mean income per capita, lari/month 44.93 41.84 34.64 46.52 41.80 46.42 42.69Median incone per capita, lari/month 27.45 24.33 22.39 29.84 28.63 29.20 26.68
Mean consunption per capita, lari/month 65.53 64.38 75.69 87.89 62.09 72.10 71.28Median consumnption per capita, lari/month 52.15 52.43 63.03 67.02 50.54 59.84 57.32
Distribution of income per capita by quintiles, lari/month
First consunption quintile (poorest) 18.20 16.66 14.26 14.43 16.62 17.62 16.30
Second quintile 26.04 26.02 20.37 23.61 23.24 25.18 24.08
Third quintile 34.21 29.76 27.39 31.10 34.46 34.12 31.84Fourth quintile 47.44 42.79 37.91 42.02 45.66 47.78 43.93
Fifth consumnption quintile (richest) 98.80 94.05 72.81 104.25 88.69 107.32 94.32
Distribution of consutption per capita by quintiles, lari/month
First consumption quintile (poorest) 20.16 18.59 22.49 25.53 20.65 23.01 21.74
Second quintile 36.47 37.18 43.14 45.70 36.44 42.75 40.28Third quintile 52.07 52.65 63.08 63.86 50.88 59.71 57.04
Fourth quintile 74.28 73.11 89.60 89.69 71.20 82.49 80.06Fifth consumption quintile (richest) 144.73 140.54 159.98 185.02 130.60 152.56 152.24
Discrepancy, income - consunption (lari per capita and percent of consumption on average)
First Quintile (poorest) -1.96 -1.93 -8.22 -11.10 4.02 -5.39 -25%
Second Quintile -10.43 -11.16 -22.77 -22.10 -13.20 -17.57 -40%Third Quintile -17.86 -22.88 -35.69 -32.76 -16.41 -25.59 -44%
Fourth Quintile -26.84 -30.33 -51.69 -47.67 -25.54 -34.70 -45%
F ifth Quintile (richest) -45.94 46.49 -87.17 -80.76 41.91 45.23 -38%
Source: SDS Household Survey database. Note: due to changes in methodology of collecting data on in-kind income and consumption, data for the lasttwo quarters are not fully comparable to previous quarters. For the fill sample in each round, quintiles are based on total nominal (non-deflated)consumption per capita, including consumption of food in kind; incomes also include consumption in kind. All quarterly data are weighted averagesuising survey weights, average over the period of observation is an un-weighted mean for all quarters.
56. Almost all of the observed consumption-income gap is between reported total cashexpenditures and reported total cash income. It is not, as one may have thought, related toconsumption of products in kind, which are imputed and included in the total reported incomemeasures. Further examining the evolution of the gap between observed cash spending andreported cash income in the panel component of the data suggests that it is linked to actualunderreporting of money incomes, and is not a reflection of accumulated cash holdings byhouseholds. To understand the patterns of underreporting better, we decompose theconsumption-income gap by sectors of employment. We find that underreporting of incomes ispositively and closely associated with the degree of informalization in each sector, and with theprevalence of "gray" economic transactions (Table 3). Underreported cash incomes are largestwhere you would expect: among those employed in restaurants and hotels, for whom unreportedtips 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 publicadministration and in public utilities (perhaps reflecting widespread bribes or other pettycorruption practices), as well as for those employed in transport activities and in education.
Y7. To further explore the discrepancy between consumption and income, we compare the datafrom the survey with information from the national accounts. Due to limited information onpersonal incomes, we have to limit our comparison to GDP aggregates. However, thecomparison is revealing: average per capita consumption for 1997, as observed in the survey,almost perfectly matches GDP at factor cost per capita; in contrast, the income data from thesurvey falls short of any GDP-based measure.
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58. All of this evidence suggests that consumption provides a much more accurate measure ofwelfare than income. Moreover, it suggests that any analysis of income, income inequality orincome distribution must make some form of adjust:ment for underreporting of incomes. Ourapproach is simple: for each household, we impute "unrecorded" income as the differencebetween total money spending and total money revenues whenever the former exceeds the latter.This adjustment affects about 90 percent of households in each round, half of them quitesubstantially.
Table 3. Income, Consumption and Estimated Unreported Monetary Income by Sector of Employment(average per household for survey period)
All are unemployed or inactive 279 J41 95Agriculture 274 181 65Mining 322 172 72Manufacturing 279 160 88Electricity, gas and water 240 105 102Construction 316 299 84Trade 239 159 70Hotels and restaurants 411 173 271Transportation, communications 352 243 106Financial services and real estate 343 314 16Public administration, defense 286 153 107Education 245 146 101Health and social services 261 130 113Other personal services 223 100 83
59. Using imputed rather than reported income data has profound consequences for income-based measures of inequality. Since most of "unreported" income, as we have seen, isconcentrated in the middle of distribution, the adjustment has a strong equalizing effect. This isillustrated in Figure 1. The concentration curve for "unreported" incomes lies above the equalityline, suggesting that "hidden" income is a progressive component of total income. The resultingconcentration curve for total (including imputed) income is very close to the (shown)concentration curve for consumption.
60. Inequality in consumption is significantly smaller than the estimates of income inequalitywould suggest. By end-1997, the Gini coefficient Ior per capita consumption was 0.36, and fortotal household consumption it was 0.38 (Table 4). This is comparable to consumption inequalitylevels observed in Indonesia or Vietnam, but higher than in most European and FSU countries.Consumption inequality in Georgia is just below the levels observed in most Latin Americancountries, which have consumption Ginis starting at about 0.4.
61. During 1996-1997 there was a slight improvement in the distribution of consumption,accompanied by an increase in consumption over almost the whole range of the distribution. Theimprovement in the distribution appears to be driven mostly by losses at the very top (top 5%),acd by developments in the mid-part of the distribution. The improvement, however, is notmonotonic, and demonstrates some variability. An issue of concern is that the share of the verybottom of the distribution (bottom 5%) has not changed at all; moreover, for the very bottom ofthe distribution there has been no real consumption growth during the period of observation. Thisrepresents a small, but nevertheless significant, fraction of households who seem to be mired inchronic or long-term poverty, and whose position relative to the median of the distribution isactually deteriorating!
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Figure 1. Lorenz Curve for Monetary Income and Concentration Curves for Consumption and"Unreported" Monetary Incomes
100% __
~~XCumulative percentI /// 1 of monetary incomre
75% . Art_ ,/ X [
- - /_ _Cumulative precent
50% / ; / / . 7,{ of consumption
Cumulative percent 75% -/ Z / i of "unreported"
25% i,ncome
------ _Equality line
0%0% 25% 50% 75% 100% pl fi
Source: SDS household survey data, pooled for all quarters of the survey, using only first interviews
Table 4. Distribution of consumption by consumption quintiles and inequality7 ~ ~ ~ ~ ~ r .,,, ? ' .' n 7r 9 Fa1l97
Individuals (percent to total)
Bottom 5 percent I I I I I
First Quintile (poorest) 6 6 6 6 7 6Second Quintile 11 12 11 11 12 12Third Quintile 16 16 17 16 16 17Fourth Quintile 23 23 24 22 23 23Fifth Quintile (richest) 44 44 42 44 42 42
Top 5 percent 18 18 16 19 16 16
100 100 100 100 100 100
Inequality
Coefficient ofvariation 0.81 0.84 0.74 0.90 0.72 0.77Giini coefficient 0.38 0.37 0.36 0.38 0.35 0.36'Theil entropy measure 0.25 0.25 0.22 0.26 0.21 0.22'Fheil mean log deviation measure 0.25 0.27 0.24 0.25 0.21 0.23
3.2 Mobility
62. We can look more closely at the dynamic properties of the distribution by examining ourthree panel waves of households that were surveyed continuously for a full year. This reveals apicture of significant income mobility, except for those at the very bottom and very top.
163. Table 5 gives us a picture of mobility across consumption quintiles in one year. It showsthat for a typical panel wave, only 20-30 percent of households starting off in quintiles 2-4 are inthe same quintile by the end of the year. For these quintiles, mobility is not limited to moving toa neighboring quintile, but can involve rather large shifts. However, there is much less mobilityat the very top, and especially at the bottom. About 52 percent of households that started off in
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the lowest quintile are in the same position one year later. Similarly, very few of those whostarted off at the top fall below the median within a year. What explains mobility? Do thepersistently rich have different characteristics from the poor? Can this help us draw a picture of"winners" and "losers" during the transition?
Table 5. Transitions between consumption quintiles (second wave of the panel)
Final position (last round, 4 quarters later)
~~ tiI~~o~~st) 52% 19% 13% 8% 7% 100%,t~1e 26% 28% 22% 13% 10% 100%
Startingposition, 1st round 19% 25% 30% 15% 11% 100%le 11% 12% 21% 30% 26% 100%1
5tb~~' (~l~ 4% 6% 20% 25% 44% 100%Note: Quintiles are based on per capita consumption, sample restricted to panel households
64. If we examine households that remain in the top quintile for the full year, we find that theytend to be located in richer regions, and predominantly in urban areas. For example, in urbanAdjaria, as many as 31 percent of all households remained in the upper quintile for the full year.As a result, 12 percent of the better-off in Georgia reside in urban Adjaria (even though its sharein the total population is less than 5 percent). In Samegrelo, about 12 percent of households arein this group of persistently "rich" (and found in both urban and rural areas). Contrary to whatwe may expect, the rich are not exclusively concentrated in Tbilisi: only some 20 percent of allpersistently rich households live there.
65. Most successful households have a head that is self-employed outside agriculture, withindividual entrepreneurs, employers or collective entrepreneurs (cooperative members)representing the bulk of the "rich". About 35 percent of all "rich" head of households are self-employed outside agriculture; and 48 percent of all entrepreneurs remain in the top quintile forthe full year. Among wage earners, Government employees represent the largest share ofhouseholds that managed to stay in the top quintile for the full year. Interestingly, the share of"rich" households where the head is employed by the Government is higher than their share in thepopulation, indicating that budgetary employment can be relatively lucrative. Those employed inprivate firms have an even higher chance to be among the "winners" but given the small size ofthe new private sector, account for only a relatively small share of the rich (about 5 percent).
66. There is a clear positive association between education and being in the top quintile on asustained basis: the share of those with higher education among the persistently "rich" is 34percent, far above their share in the population. In rural areas, successful households areassociated with larger land holdings and more diversified crops (including wheat and corn),which yield higher money incomes. Incomes from farming for "rich" rural households averagesome 145 lari per month, four times higher than for a typical rural household.
67. Contrary to what we may have expected, the income structure of "rich" is not dominatedby "unreported" income; in fact, its share for the persistently rich (25 percent) is lower than forthe population on average. Economic success appears to be closely associated with a greater"visibility" of employment and income and higher reliance on formal, rather than informal,sources.
68. The analysis of households that are persist:ently at the top of the distribution reinforces theconclusions of the poverty profile: labor market status, ownership of productive assets and
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resulting earning opportunities are the key determinants of households ' absolute and relativeposition in the income distribution
3.3 Explaining Inequality
69 There are two ways to analyze the factors driving inequality in Georgia. One is to examineinequalities between different groups of the population, decomposing the contributions of thebetween and within factors. A second is to look at income sources, and analyze whichcontributes the most to increasing inequality.
70. Decomposition of inequality by groups. Previous analysis suggests that the mostimportant determinant of living standards and income levels is employment. Hence we begin bydecomposing inequality (in consumption) by sector of employment. These results are presentedin 'rable 6, which shows average per capita consumption for each group, the extent of inequalityby group, and the contribution of each group to total inequality. It also shows what share of totalinequality is explained by differences in means between groups. Only I percent of the overallinequality can be attributed to differences between sectors of employment; most of the inequalityis wvithin sectors. Self employment, whether in agriculture or outside, is the biggest contributor tooverall inequality, accounting for over one half of the total.
Table 6. Inequality in Consumption by Sector of Employment (4th quarter 1997)
Inactive or unemployed 60.54 0.36 0.24 8SelIf-employed in agriculture 68.80 0.39 0.27 32Employed in budget sphere 75.66 0.34 0.21 14Employed in SOE 72.67 0.33 0.20 12Employed in private firn 78.10 0.32 0.17 8Self-employed outside agriculture 74.03 0.36 0.22 25
Between sectors-> I
Total [ 72.11 0.36 0.23 100
71. The increase in the dispersion of earnings was expected to be an integral part of transition,as returns to education and skills moved to align with market forces. There are signs thateducation is indeed playing an increasing role in determining wage differentials (see Chapter 4),so we may expect education to be a contributing factor to increased inequality. However,differentials between education groups capture only about 2 percent of overall inequality (Table7). Inequality within education groups, and primarily among those with secondary education, is amuch more important determinant of inequality. In this sense, increased returns to skills are beenplayed out as rising dispersion within education groups, where an intensive process of sorting'*vinners" from "losers" is going on.
72. Next we turn to examining intra-regional and inter-regional inequality (Table 8). We findthat, again, variance within regions contributes more to overall inequality than differences acrossregions. Inter-regional differences account for only 3 percent of total inequality (up to 6 percentif we treat urban and rural areas in each region separately).
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Table 7. Inequality by Education of .Household Head (average for survey period)
No one is employed 55.62 0.43 0.34 17%Less than elementary 70.32 0.29 0.14 0%Elementary 65.48 0.38 0.24 9%Uncompleted secondary 62.82 0.37 0.24 11%Secondary 71.01 0.37 0.23 28%Post Secondary 73.59 0.37 0.24 16%University and higher 82.31 0.36 0.22 17%
Between education levels 2%
Total 70.19 0.38 0.25 100%
Table 8. Inequality in Consumption by Regions (4 th quarter 1997)
Kakheti 74.29 75.42 74.0 0.33 | 0.20 | 9% lTbilisi 72.75 72.75 | 0.34 0.21 23% lShida kartli 76.00 58.97 85.39 0.38 0.25 11%Qvemo kartli 79.42 108.19 64.14 0.38 0.26 12%Samckhe-javakheti 76.00 58.39 81.33 0.33 0.20 3%Adjara 83.82 106.92 61.89 0.37 0.25 11%Guria 61.53 60.67 61.86 0.33 0.18 3%Samegrelo 73.63 73.19 73.93 0.28 0.14 6%Imereti 57.64 48.80 65.17 0.37 0.25 20%
Between regions: 3%
Separating urban/rural: 6%
Total 72.10 73.18 70.90 0.36 0.23 | 100%
73. Decomposition of inequality by sources of income. The structure of incomes has changeddramatically from pre-transition times. The most pronounced change has been the collapse in thewage share, from about 60 percent pre-transition to less than a third of total monetary incomes by1996. In contrast, entrepreneurial income and self-employment income have increased inimportance, as has in-kind farm income (imputed income from farm products consumed in-kind).The top panel of Table 9 presents a snapshot of this income structure.
74. Several features stand out. First, in-kind farm income is the most important component ofincome for rural areas, far exceeding the importance of monetary farm incomes. Surprisingly,this is true for all quintiles; in fact, the share of in-kind income for the top quintile is larger thanfor the lower quintiles. Second, "unreported" income is important in both rural and urban areas,but particularly so in the latter, where it accounts for 40 percent of total income. Third, transfers(both State and private) play an important role for the poorest quintile, but somewhat differentlyin urban versus rural areas. The rural poor have much lower private transfers than the urban poor.
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75. The bottom panel of Table 9 examines how each source of income is distributed betweenquintiles. By comparing the shares of quintiles for each source of income with the distribution oftotal income between the quintiles we can tell whether any particular type of income contributesto increasing overall income inequality or to decreasing it. In urban areas, the most unequallydistributed components of income are asset and financial income and farm income, but theserepresent a relatively small part of total urban incomes. The main factors driving inequality inurban areas are actually monetary reported earnings (primarily wages and self-employment) and"unreported" income. In rural areas, the main determinants of inequality are income fromfarrning and in-kind consumption of agricultural products, both of which are very unequallydistributed. The only progressive components of income for both rural and urban areas are statetransfers (mainly pensions); but they represent only a miniscule percent of total incomes onaverage.
76. All monetary reported earnings are quite unequally distributed with respect to totalincome. The concentration coefficient for wages is 0.39, for self-employment income it is 0.49,and for farm monetary incomes it is 0.46. Wage inequality reflects primarily differential returnsto skill and human capital, but also other non-negligible factors such as inter-sectoral differencesin hours worked and productivity, industry-specific wage differentials, and the prevalence ofarrears. Surprisingly, regional factors play a relatively minor role (see Chapter 4 for a moredetailed analysis). The determinants of inequality in earnings from self-employment may beanalyzed in a similar way. In this case, however, inter-regional differences appear to be veryimportant, accounting for nearly one half of total inequality in self-employment earnings.Presumably they reflect different underlying opportunities for business start-ups in differentregions. There are also large differences by sector of employment, with construction yielding thelargest self-employment incomes. And there is evidence of a large gender gap (as for wages) ofabout 35 percent, after controlling for job and individual characteristics.
77. Farm income is one of the most unequally distributed sources of income in both urban andrural areas. The concentration coefficient for total income from land (in-kind and farm income) isa very high 0.50. This, together with its large share in total income, makes it the largest singlecontributor to overall inequality. Inequality in farm income, however, does not appear to belinked purely to patterns of land ownership. If we concentrate only on relatively large farmers(over 1/2 ha of land), we find the same picture of persistent inequalities in income from land thanfor the population as a whole (the own Gini coefficient for land income among relatively largefarriers is as high as 0.55). At the same time we do not find big differences between ruralhouseholds in the size of land holdings. The main factors driving inequality in farm incomes aredifferences in production patterns and in access to information and capital (see Chapter 4).
2-The concentration coefficient of an income component measures how evenly or unevenly that component is distributed over totalhousehold income; negative values tell us that it is progressive (i.e. reduces inequality); a value of 0 tells us that it is neutral; and apositive value suggests that it is inequality increasing. An extreme value of I would reflect that the richest household gets all theincome. For details of decomposition see technical annex 4.1.
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Table 9.
Structure of Income by Consumption Quintiles (percentages to total)
First quintile (poorest) 15 7 0 12 4 7 8 8 3 36 100Second quintile 20 12 1 6 1 6 6 5 3 41 100Third Quintile 22 14 1 4 1 4 7 5 4 38 100Fourth quintile 22 16 1 3 1 4 8 2 2 41 100Fifth Quintile (richest) 17 15 1 1 1 3 9 5 6 41 100ALL URBANT 19 14 1 3 1 4 8 5 4 40 100
J 00g .0 <g: 0Q00 $S0UU:ML:. 0 0 = 0 S0-3^ M2H i M First quintile (poorest) 7 7 13 10 1 3 26 2 6 26 100Second quintile 8 7 12 6 0 1 29 1 5 30 100Third Quintile 7 9 13 4 0 1 29 1 5 29 100Fourth quintile 7 5 15 3 0 1 34 5 4 27 100Fifth Quintile (richest) 5 7 15 2 1 1 41 1 3 24 100ALLRURAL 6 7 14 3 0 1 35 2 4 26 100
Distribution of Income Sources by Consumption Quintiles (percentages to total)
First quintile (poorest) 5 3 2 24 21 11 7 11 5 6 7Second quintile 12 10 13 22 10 17 9 12 7 12 12ThirdQuintile 19 16 10 20 10 18 14 16 14 15 16Fourth quintile 25 25 20 17 11 23 23 11 11 23 22Fifth Quintile (richest) 39 46 55 18 48 31 47 49 63 45 44TOTAL URBAN 100 100 100 100 100 100 100 100 100 100 100
First quintile (poorest) 6 6 5 18 8 15 4 4 9 6 6Second quintile 14 12 10 22 10 14 9 6 14 13 11ThirdQuintile 18 21 15 19 9 17 14 9 21 18 16Fourth quintile 26 17 24 20 21 17 22 52 22 23 23Fifth Quintile (richest) 36 44 47 22 52 38 51 30 35 40 44TOTAL RURAI 100 100 100 100 100 100 100 100 100 100 100* For non-agricultural activities only
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4The Role of the Labor Market'
The labor market is the main channel through which growth affects poverty. Growth reduces povertythrough rising employment, increased labor productivity, and higher real wages. In Georgia, thelabor market has shown outstandingflexibility during a period of severe political and economicturmoil. Thisflexibility has been achieved mainly through the informalization of employment, andthrough the reallocation of labor towards small-scale agriculture. Informalization has dampened theimpact of the crisis and served to protect the poor. However, it remains a short-term response. 7oday,a large and growing fraction of the Georgian labor force relies on self-employment as the primarymeans to earn an income. For some, this is an avenue for earnings mobility and growth, for themajority, however, self-employment remains constrained to low-productivity agricultural or tradingactivities, with little earnings stability and little potentialfor long term earnings growth. Prospects forthefuture hinge critically on the economy's ability to generate new private employment, and toreallocate labor awayfrom these low-productivity activities into higher value added sectors.
4.1 Labor Market Status and Poverty
78. In Georgia, poor and in non-poor alike derive most of their income (up to 80 percent), fromlabor market sources, either from wages or from self-employment earnings. As a result, the riskof poverty at any moment is closely associated with the extent to which a household participatesin the labor market, and with the way in which the market remunerates its labor. Changes in ahousehold's poverty status over time are tightly linked to changes in the labor market status of itsmembers. This is reflected in strong differences between the poor and non-poor in participationpatterns, unemployment, sector of employment and remuneration.
79. The poor are more likely than the non-poor to be inactive or unemployed. Labor forceparticipation rates for the poor are below those for the non-poor at all ages (Figure 1). Similarly,unemployment rates are higher among the poor for all age groups. These differences are fourdfor both men and women, and if anything, are even more pronounced for the latter.
80. Among those who are working, the poor differ from the non-poor primarily in that theyhave more unstable employment-e.g. are more likely to hold casual or temporary jobs, be oninvoluntary leave or work part time. As a. result, the poor work less hours, on average, than thenon-poor (36 versus 40 per week). About 66 percent of the working poor are self-employed inagriculture, as compared to 50 percent of the non-poor. Outside of agriculture, they tend to beconcentrated in sectors that pay lower wages, such as education or domestic help. Interestingly,the poor are much less likely than the non-poor to be self-employed outside of agriculture,perhaps reflecting that they lack the access to even the small amount of capital (or socialnetworks) needed to establish a small business or activity on their own. The poor are also morelikely to be owed backwages: on average 22 percent of poor wage earners were owed wages bythei.r employers, while only 8 percent of the non-poor reported delayed or irregular wagepayments. Hence, wage arrears may be one factor driving families into poverty.
81. Not surprisingly, there is a large wage gap between the poor and the non poor: on average,the poor earn only 52 percent of the wages of the non-poor. In part, this differential is explainedby endowments: about one-third of the wage gap is explained by differences in education, age,potential experience, gender, sector of employment and location. But two-thirds of the gap isunexplained, and probably reflects the concentration of the poor into less desirable, lowerproductivity occupations within sectors.
1 This Chapter draws extensively from Labor Markets, inequality and Poverty, Technical Paper 2. Volume II. A moredetailed presentation and discussion of the results can be found there.
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Figure 1. Labor Force Participation, Employment and Unemployment by Age
Non-poor in labor force Poor in labor force
0.9 0.9
0.8 0.8 -
0.7 0.7
0.6 0.6-
0.5 ~~~~~~~~~~~~~~~~0.50.404
0.3 0.3
0.2 0.2
0.1 0.1
0 0
a UnempJoyed MEmployed EDOut of labor force U Unemployed EsEmployed D Out of labor force
Source: SDS household survey.-------
4.2 Output and Employment Trends
82. Following independence Georgia experienced a sharp collapse in output, followed by anincipient recovery from 1995 onwards. How did these developments play themselves out in thelabor market? Figure 2, which plots cumulative changes in output and employment, gives us anaggregate picture. As in much of the FSU, changes in employment appear to have greatly laggedthose in output, leading to a sharp drop in aggregate productivity per worker. This was mirroredby a sharp drop in real wages which by 1995 had fallen to about one-tenth of their pre-transitionlevels. An additional price adjustment mechanism used by enterprises to counter output shockswas the delay of wage payments to workers. According to the SDS survey, 23 percent of allworkers who were surveyed during a full year reported being subject to wage arrears at least onceduring that period. The incidence of wage arrears is highest in education, construction, miningand industry, where 30 percent of all workers rerport suffering from delayed wage payments.However, in contrast with what is observed in Russia and other FSU countries where workerssuffer from chronic or persistent wage arrears, in Georgia the majority of workers report sufferingonly one episode of delayed wage payments during the year.
83. Aggregate employment figures are somewhat misleading since they hide a significantadjustment in hours worked: in 1996, about 20 percent of all wage employees reported workingless than 15 hours per week. Hence, there has been a significant adjustment in total labor input.Aggregate figures also hide a significant reallocation of employment across sectors (fromindustry into agriculture, trade and services), and between types of employment (from salariedjobs into self-employment). Employment in industry has fallen sharply, and almost matched thedecline in output (both have fallen by nearly 80 percent). In contrast, employment in agriculturehas expanded rapidly, and almost doubled relative to its 1990 level (even though total agriculturalproduction by end-1997 stood at about 70 percent of its pre-transition level!). This has occurredin a context of radical institutional and ownership changes in Georgian agriculture, where thedominant production form has become small, private (about 0.5-1 hectare) plots. Due to thebreakdown of industrial and trade links with other FSU countries, however, there has been asharp reduction in the use of fertilizers, tractors and other capital equipment, with a consequentnegative effects on agricultural productivity. By 1997, value added per worker in Georgianagriculture was only 100 lari per month, much lower than in any other sector of employment.
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100 Figure 2: Trends in EMDloyment and OUtpt
9090
g60\
40
30
20
10l
1990 1991 1992 1993 1994 1995 1096 1997
I H--GDP -Total employment
Source: IMF; SDS data on employment before 1992.Note: Employment series show a break because of the change in methodology.
8L. The reallocation of employment between sectors is further illustrated by Table 1, whichpresents changes in GDP and employment by sector for 1996-1997 (computed from the SDSsurvey data). Agriculture is the dominant employer, and reported the highest employment growthduring 1996-1997. Most of this growth has taken the form of a rise in self-employment, andwithin self employment, as an increase in the number of unpaid family workers. Trade andtransport are the other growing sectors. Despite a recorded increase in industrial output,enmployment in industry continued to fall during 1996-97, reflecting that there was still significanthcarded labor.
Table 1. Employment and Output Growth by Sector, 1996-97
Agriculture 3 16 1,210Industry 16 -11 126Construction 2 -3 41Trmnsport and communications 37 11 88Trade and catering 13 15 285Other 29 0 482Total 11 10 2,233Source: Official SDS publication, SDS household survey for employment by branch. Note: GDP at factor costs.
85. There has been a continuing reallocation of labor between different types of employment.Most net employment growth has taken the form of self-employment. In contrast, wageemployment has shrunk, both in absolute levels and as a share of total employment (Table 2).This reflects a trend towards growing informalization of the labor market. This trend is visibleeven if we look only at urban markets. Between Summer, 1996 and Fall, 1997 (first and lastsurvey rounds), the share of self-employment in total urban employment grew from just over 20percent to over 40 percent. The largest and most rapidly sector for self-employment (even inurban areas!) was agriculture, followed by trade (which by end-1997 accounted for about 40
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percent of all self-employed in urban areas).2 Together, trade, agriculture and transportationcover 90 percent of all self-employment in urban areas. In addition to those who have self-employment as a sole and primary occupation, 20 percent of wage employees have to supplementtheir meager wages with some kind of self employment. In most cases this is subsistencegardening.
Table 2. Employment by Type, 1996-97
Wage employment 711 704 -9.8State sector 580 569 -1.9Cooperatives 55 47 -14.5Private firms 76 88 +15.8
Self-employment 1,324 1,529 +15.5Total 2,036 2,233 +9.7Source: Official SDS publications, IMF(1998); employment classification is according to primary employment
86. In contrast to the dynamic growth in urban self-employment, total wage employment inurban areas has remained stagnant. Wage employment in new private firms actually expanded bynearly a third between mid-1996 and end-1997, but this growth did not compensate for the fall inemployment in Government, SOE and privatized companies. Among the latter, cuts wereparticularly concentrated in education, electricity, gas and water supply. New private wageemployment is most important in Tbilisi, Adjaria and Samegrelo. Jointly, these three regionsaccount for nearly 60 percent of all private wage employment in Georgia; in contrast, the twopoorest regions, Imereti and Guria account for only 14 percent.
87. As a result of the sluggishness in the contraction of employment, unemployment isrelatively low. Official unemployment, based on the number of registered jobseekers, hasfluctuated between 2.5 and II percent of the labor force. However, these data are deceptive,since there are few incentives or reasons for the unemployed to become registered'
88. A much better picture of unemployment can be obtained from the SDS household surveys(Figure 3). According to these data, in mid-1996 unemployment stood atl2.8 percent of the laborforce (based on standard ILO/OECD criteria for defining the unemployed). Since thenunemployment has fallen rapidly to less than 5 percent of labor force. Using a broad or "soft"definition of unemployment, which includes discouraged job seekers, yields a similar picture,with total unemployment dropping from about 20 percent to 8 percent of the labor force during1996-97. The SDS survey also reveals that unemployment is becoming a phenomenon thataffects very specific groups of the population: especially new entrants into the labor market, andwomen more than men.
2 Some of the expansion in trade represents subcontracting by large wholesalers who economize in this way on variouscosts, including labor (see Technical Paper 4, Volume II).3Benefits are low: in 1996, about 30 percent of the average national; by end 1997, about 20 percent. And are paid fora short period of time (6 months before 1998, 12 months now).
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Figure 3. Unemployment Rate (survey-based)
25 _ _ _ _ _
20
%15.it.10
5
0.-~~~~~~~~~~~~. ... --.. -.-. -..-..-....-. .
Summer Fall 96 Winter Spring Summer Fall 9796 97 97 97
-LFS unemployment rate - "Soft" unemployment rate
89. Regional differences in unemployment are large, with Tbilisi showing the most persistentlyhigh unemployment rate (Table 3). Initial conditions appear to be a crucial determinant ofregional urban labor market performance. The prevalence of large industrial and miningenterprises in Imereti, and of heavy industry in Tbilisi and Shida Kartli can help explain the highunemployment levels observed there. Similarly, urban Guria's dependence on tea processing canheip explain its relatively poor performance.
Table 3. Urban unemployment rate by regions (percent to labor force)
-. >>. S Eunw. : . .1 96 W- s97 ;,_ ig S97 Snmner97 Fall 97
Kakheti 9 4 3 3 3 1Tbilisi 23 17 19 21 16 15Shidakartli 1 6 11 9 10 9 9Qvemo kartli 15 11 8 9 7 5Samtskhe-javakheti 1 13 11 3 2 1Adjara 4 .4 4 2 2 2Guria 27 16 9 3 3 10Samegrelo 12 14 10 7 6 6Imereti 41 38 28 20 19 9
Total urban areas 22 17 16 15 12 10Source: SDS household survey. As the additional cleaning of primary records has been undertaken to remove double-counting insome cases, the numbers may slightly differ from official publications by SDS.
90. Matching these regional unemployment trends with observed developments inemployment, we find that most of the unemployment reduction in urban areas has been absorbedby t:he expansion of self-employment; primarily (and quite paradoxically) in agriculture, and onlysecondarily in trade and other activities. However, self-employment is by now so dominant, thatit is difficult to expect it to grow equally rapidly in the future. As employment in Governmentand in SOEs are expected to continue to shrink, prospects for continued reductions inunemployment hinge critically on the expansion of formal and informal private employment.Efforts to attract private investment (mainly foreign), and to stimulate small businessdevelopment are crucial in this regard.
4.3 What Has Happened to Earnings?
91. Following a drastic decline between 1990 and 1995, wages increased rapidly, andpractically doubled between 1995 and 1997 in real terms. There are significant wage differentialsbetween Government, SOEs and private firms, with much of the growth in average wages driven
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by developments in the private sector (Figure 4). Controlling for differences in workers'endowments, we estimate that private firms are paying a premium of 20 percent over thegovernment sector, SOE and privatized sector wages. However, take-home wage incomes havebeen fairly volatile in all sectors, reflecting the changing incidence of arrears in the State sector,and episodic windfall rents in the private sector.
92. Rising average real wages have been accompanied by widening wage differentials andearnings dispersion. The Gini coefficient for monthly (non-zero) wages reported in SDShousehold survey was 0.5 in 1996-97, and a bit higher (0.53) for hourly wages. This iscomparable to what was observed in Russia in 19515, and in sharp contrast with the highlycompressed wage structure that existed pre-transition. Similarly, the decile ratio of wages (equalto the 90th percentile divided by 10th percentile) for full time workers in Georgia increased fromabout 3.35 in 1989 to 10 in 1997-tripling in a veiy short time period. However, Georgia'sexperience in this regard is not completely out of line with that observed in other transitioneconomies. For example, the decile ratio for full time workers in Hungary, Poland and CzechRepublic in 1995 was in the range of 3-4; in Bulgaria around 6; in Russia between 7 andI I(official versus household survey data). And if we look at annual wage income, we find thatdispersion in Georgia is very similar to that observed in much of Eastern Europe, and actuallylower than in most countries of the FSU, including the Baltics.
Figure 4. Real Monthly Wage, 1996-1997
Lari, A ugust 1 996 prices
1 0 0
80 -
60 - __
4 0
2 0
0 ..-- .--.. --- - 4 +. -. --..-.-..10/96 2/97 6/97 10/97
8/96 12/96 4/97 8/97 12/97
-4--State real wage r Private real wage
- O---- SOE real wage
Source: SDS household survey; last month toial pay including in-kind wages; full-time employees only.
93. A large part of observed wage dispersion can be attributed to differences in workers'endowments, sector of employment and location. About 55 percent of the observed inequalitycan be explained in this way. Private returns to education are strong and significant, especiallyfor secondary education, which commands a premnium of about 30 percent over incompletesecondary. In contrast, the earnings differential between completed secondary and highereducation is modest, barely 15 percent. Employrnent in the budgetary sector, agriculture or thesocial sectors are all associated with lower wages, as is living in rural areas. There are alsosignificant differences in pay between men and women, with the latter earning 35-40 percent lessthan comparable male workers (controlling for individual characteristics, location, industry butnot occupation). This male-female differential may reflect the occupational segregation ofwomen into lower paid jobs, outright discrimination in pay, or the existence of very large costsassociated with women's more intermittent labor force attachment.
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4.4 Rural Labor Markets: Low Productivity and Low Incomes
94. 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, it has been able to absorba huge inflow of labor released from other sectors. There is practically no unemployment in ruralareas and a high employment rate.
95. The down side of the rural economy's remarkable flexibility has been a decline inp:roductivity, and consequently weak growth in rural incomes. Real earnings in rural areas haveremained practically stagnant during the recent high growth period (1996-1997), despite a recordgrain harvest and favorable weather conditions. The poor performance of rural incomes can beattributed, to different degrees, to unequal access to inputs complementary to labor (fertilizer,tractors and capital equipment); barriers to land transactions and consolidation of holdings; lackof market access and information; scarcity of rural credit; and limited off-farm earningsopportunities.
96. Land market. Georgia's land reform created a fairly equal distribution of land. About 60percent of all arable land is presently in private hands, with an average land holding of about 0.75hectares. Only some 8 percent of agricultural households report that they do not own or cultivateland. There are signs, however, of increasing concentration of landholdings. As of mid 1996, therichest quintile of the rural population owned 23 percent of cultivated land, while the bottomquintile had 18 percent. By end-1997, the share of the richest had increased to 25 percent, whilethat of the poorest had eroded to 16 percent. Such noticeable changes in distribution of land in avery short period of time raise concerns over the role of power and local connections in securingaccess to land; a concern mirrored in the skepticism over the fairness of land reform expressed bysmall farmers during the qualitative assessment.4
97. Although access to land per se is not a determining factor of poverty, there is a clear linkbetween the degree or extent of poverty and the size of a household's land holdings (Chapters Iand 3). Poorer rural households are those with smaller holdings and less diversified crops.Conversely, larger land holdings and more diversified crops are associated with higher moneyincomes, and higher living standards. In this context, the incipient trend towards increasingconcentration could have an adverse effect on poverty.
98. Interestingly, although the richest rural households are those with larger land holdings,small farmers may be actually more efficient than larger ones. Plotting average agriculturalincome per hectare against land holding size reveals a clear inverse relationship (Figure 5).Hence, increasing the land under cultivation by smaller farmers, through sales, lease or rental,could bring about significant efficiency gains and increase rural incomes overall. To date, thebiggest obstacle to this consolidation has been the absence of a clear legal framework regulatingland transactions. The recent adoption of far-reaching legislation on private ownership, titlingand registration, and leasing, should go some ways towards building such a legal basis. What issti.ll needed, however, is the development of the accompanying institutions and mechanismsnecessary for the efficient functioning of the land market, starting with complete cadasters for allrural districts in Georgia.
4See Dudwick, Technical Paper 4, Volume II of the study.
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Figure 5. Land Holding and Productivity
99. Market access. As497-664
evidence by the high share ofrural incomes that is
£, 9;%b«ijt consumed in-kind, the ruralCL "Z;s economy is stillE predominantly non-market.8 , I4lEitdl!l The breakdown ofE previously-existinga 4 marketing and trading
arrangements, physicalisolation, difficult terrain and
23.4823 -, ' " ,,, severely deteriorated05 1.95 infrastructure are all
Land holding and productivity i,nRural Georgia contributing factors. Whilemost rural households appear
to have some difficulty in accessing markets, this constraint appears to be particularly serious forthe poor. Poor households are more likely to be physically isolated, and less likely to exchangeproduce or animals in the local market than non-poor ones. Among rural households with landthat were interviewed four consecutive times during 1996-97, some 73 percent reported at leastone sale of their produce; 27 percent did not report a single sale (reflecting the general low levelof market development in rural areas). Among poor rural households, the fraction that did notsell any of their agricultural produce on the market during the whole year was as high as 45percent.
100. Access to rural markets also implies access to information, which helps farmers use theirassets, both land and labor, more productively. This includes access to technical assistanceservices provided by private or public agencies (agricultural extension). One of the reasons forlow productivity of rural employment is the lack of adequate technical information on advancedcultivation methods. For example, despite boom ing cereal production, some farmers did notenjoy a rise in income, since they were planting the wheat varieties deemed not of the standardrequired by the bakeries, which resulted in lower prices. When the technical advice comes hand-in-hand with extending the credit to farmers, it leads to sustainable improvements in productivity.
101. Rural credit. The recent success of an exte nsion and rural credit project to help farmersgrowing cereals (TACIS-RARP project) has proven the high potential of this kind of interventionto increase the efficiency of the rural sector while benefiting the poor. In 1997, the projectchanneled about 27 million lari to the farmers, traders and millers in the grain sector. The highestharvest of cereals in recent years was achieved manly through rising yields rather than increasingharvest areas. The encouraging trend is the high incidence of small-scale credits, particularly tofarmers' credit unions. This effort is supported also by various international organizations,including the World Bank, which is implementing targeted intervention to help small farmers.
102. Limited off-farm eamings opportunities. Rural, off-farm employment plays only a limitedrole in supplementing agricultural incomes. The main off-farm activities in rural Georgia are nothTghly lucrative. The main employers are education (with 25 percent of all off-farm wageemployment in rural areas), trade, health care and public administration. But even Governmentemployees in rural areas rely on cultivating their own land plots to provide for food.
103. Despite their low level, off-farm earnings seem to play an important role in liftinghouseholds out of poverty. While only 22 percent of poor rural households in Georgia receive
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any wages from off-farm activities, as much as 33 percent of non-poor households supplementtheir farming with wage earnings. A higher share, and higher incomes from self-employment onof-'f-farm activities in rural areas are observed precisely in the areas with the lowest rural povertyincidence. For example, in Samegrelo, while earnings from agriculture are well below thenational average, earnings from non-agricultural activities are 50 percent higher than on average,contributing greatly to the fact that this region has the lowest incidence of rural poverty. On thecontrary, Imereti has the lowest level of earnings per self-employed in off-farm activities, despitebeing close to the national average in earnings from agriculture; it is one of the regions mostaffected by rural poverty.
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5The Safelty Net'
The collapse offiscal revenues in Georgia all but destroyed the pre-existing formal safety net, whichwas reduced to a bare minimum. An extensive informal safety net has emerged in its place:migration, petty trade, family support networks atnd clans constitute its main pillars. However, thecoverage of this informal safety net isfarfrom being universal, and many families slip through thecracks. An exception are IDPs from internal co iflicts, who have benefited much more than anyother group from state programs and have received a large share of all humanitarian assistanceprovided to Georgia. The main challenge for the formal safety net for the near future will continueto be a lack offiscal resources. Despite these constraints, however, the formal safety net has animportant role to play in poverty alleviation. Given the small overall poverty gap, even a small butwell targeted poverty benefit can have a significant impact on poverty.
5.1 The Importance of the Informal Safety Net
104. Under central planning most Georgians were provided with a universal array of socialbenefits, comprising widespread subsidies on goods and services, nominally free health andeducational services, quasi-permanent employment, and a number of other social entitlements.The collapse of the planned economy brought witli it an end to most subsidies and entitlements,and a drastic curtailment of state support for health and education services. Traditional formalforms of social protection were reduced to a bare minimum, and a myriad of informalmechanisms or coping strategies sprung up in their place. Today in Georgia, as in manyneighboring FSU republics, informal coping mechanisms-migration, petty trade, subsistencegardening -are essential elements of the safety net. In sheer size, private (informal) monetarytransfers are at least as large as formal transfers (Table 1). And this does not take into account theimportance of non-monetary mechanisms such as family connections in obtaining jobs or accessto services.
Table 1. Georgia: Total Safety Net Expenditures in 1997
All formal safety net monetary transfers 149.1 2.2
of which pensions* 106.0 1.6
Informal (private) monetary safety net transfers 161.0 2.4
of which remittancesfrom abroad 41.8 0.6
All in-kind transfers** 56.6 0.8
of which State*** 25.0 0.4
Total estimated safety net expenditures (state and private) 366.7 5.4
Note: data on formal safety nets are based on the household survey: official estimate of total budgetary monetary transfers is 155 mln. Iari.* Data on actual payment of benefits excluding the transfer for eleciricity payments, estimate based on survey data gives 103 mln. lari of actuallyreceived pensions in 1997** The sum of private in-kind transfers based on the survey (gifts in-kind received, including related to rituals) plus the electricity tariff rebate
*** Estimate of electricity tariff rebate financed from various social budgets in 1997.
105. The informalization of income sources and social protection mechanisms has affected allGeorgian households, regardless of income level. For the poorest quintile of the distribution,income from subsistence agriculture, self-employment, sale of assets and private transfers jointly
I This Chapter is based on background materials by Alexander Marc, and on the paper by Nora Dudwick, Georgia: AQualitative Study of Impoverishment and Coping Strategies, Technical Paper 4, Volume 11 of this study.
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represent well over one half of all reported incomes, and probably a significant fraction of"unreported" incomes as well (see Chapter 3, Table 9). However, earnings from self-ernployment activities and subsistence agriculture also constitute an important fraction of theincomes of the non-poor (at least 30-40% of reported incomes): in other words, these elements ofthe informal safety net are core subsistence strategies for poor and non-poor alike! Relative toother quintiles, the poorest quintile rely more on sale of assets (distress sales) and privatetransfers; less so on self-employment earnings and wages. The poor also rely more on formaltransfers from the state; but the latter are presently too small to have a large impact on livingstandards. The activities covered by this informal safety net vary, but the following forms are themore prevalent:
106. Small trade and services is one of the most important, and successful, coping mechanisms.According to the qualitative study, many Georgians equate the market economy with the right toengage in petty trade. This trade, typically involving domestic or intemational buying and sellingon a small scale, provides many people with incomes ranging from subsistence levels tosubstantial. Interestingly, women have come to play an important role in trade, even when itinvolves behavior once considered unseemly for women, such as traveling abroad by themselvesand absenting themselves from their families. Cross border trade seems to be the most profitable,and in many cases is done illegally.
107. Although petty trade is veryI .orml sw.ai trade in Jgavakheti common, not all households are
able to engage in it and make aIn~~00ia U-a> tiade pWe wit e
living. In fact (as discussed in
Chapter 4), poor families are lesstoiafie .vati&k b likely to be involved in such trade
3 - i se os':11 than non-poor ones. One problemb Ithi di6t :d t for poor families is the need for
-, -y -e .i . start up capital. If a trader does notsefliAlthopoftentmwiIIhnig have such capital (obtained usually
,tol yt~ciila IfS~theY indicate that necessary through the selling of assets or by'*star v.erapes at leas t U$$FOO borrowing from family members),
-hkdail~proflt~mnaycome -- -:S4 m ... he/she has to resort to borrowing onl , f A W S f^e and Coping the informal market, but often at
very high interest rates. AnotherL . barrier to engaging in petty trade,
which is particularly severe for the poor, are the many bribes and informal payments required "tostay in business".
108. Sale of assets. Selling household assets and durables, including jewelry, clothing,household items, linens, and fumiture, continues to be used as a strategy to "tide" manyhouseholds over during difficult periods. It seems to be particularly important for the lowestquintile of the distribution, where it represents a relatively large proportion of household income(nearly 10 percent). As in other FSU republics, sale of assets is also emerging as a strategy tosmooth income over time, through which households purchase assets when they have money andsell them when they experience a drop in income, due to seasonal fluctuations, wage arrears, orother unforeseen events. The relative importance of asset sales in the informal safety net is areflection of the malfunctioning of other (formal and informal) insurance mechanisms.
109. Labor migration. Relatively little information exists on migration and the ensuingimportant flow of remittances. However, many respondents in the qualitative study mentionedreceiving gifts, money or clothing from relatives working abroad. And in the SDS survey,
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remittances account for nearly 2 percent of total reported household income for the averageGeorgian family, and for over 6 percent of the income of households in the lowest quintile. In1997, total remittances form abroad (as inferred from the SDS survey) amounted to about 42million lair or 0.6% of GDP. Estimates of people who have left Georgia to work abroad since1991 vary from about 300,000 to 800,000. The bulk of permanent migration took place duringthe early years following independence. These migrants were mostly either ethnic minorities wholeft the country definitively or migrants with contacts/networks abroad, who kept family membersin Georgia. Most migrants left for Russia, with Greece as a second important destination(especially for residents of Batumi and Tbilisi). Current migration flows are of a more temporarynature, and relate purely to work opportunities abroad. Labor migration has becomeextraordinarily important in South Ossetia, which experienced high unemployment even duringthe Soviet period.
110. Subsistence gardening/agriculture. During the years of crisis subsistence agriculturebecame the main receptacle for surplus labor, and the core of the informal safety net in both ruraland urban areas. Still today, incomes from agricultural self-employment and subsistencegardening constitute over one-half of the incomes of all the population, and over 70 percent ofincomes in rural areas. Even in urban centers, agriculture has become the largest (and fastest)growing sector of employment-much of it made tip of unpaid family workers laboring in small,family-held plots. In Imereti, for example, agricultural self-employment accounted for 60 percentof all urban employment in 1997; in Guria and Kakheti, it accounted for 55 percent! For urbandwellers, small plots in the urban periphery have become a core part of the safety net; as a result,a large part of intra-family (and intra-clan) transfers comprise agricultural products in kind.
I 1. Family transfers and support. Intra-household transfers (within family or within clan)represent a sizable proportion of household incomes, especially in urban areas. Monetary familytransfers account for as much as 10 percent of total reported incomes of the urban poor. Thisfigure is even larger if one includes transfers in-kind. But family support goes beyond transfers:family or clan connections (see below) are key in securing access to jobs or services. Accordingto the qualitative survey, the most important strategy for finding either private or publicemployment is to use one's "connections", or to pay a bribe. In the words of a young Georgianfrom Batumi, "to find good work, without connections-this is fantasy". Family has also playeda role through changing household composition: the regrouping of previously nuclear householdsunder a single roof has served as a natural coping mechanism, that takes advantage of theexistence of significant household economies of scale. As a result, most Georgians presently livein some form of extended multigenerational household. As unemployment is particularly severefor first-time job seekers, families are also providing support to their children much longer thanthey used to.
112. Connections and clan support. Connections, through families or clans, have becomeextremely important, particularly in terms of securing employment in either the private or publicsectors. Often, the jobs secured may not provide high pay in themselves (as is the case, forexample, with many public sector jobs), but they do provide access to all sorts of advantages,privileges, and again, further connections. The importance of these other "benefits" is illustratedby the fact that, despite the extremely low level of public sector wages, state employee face anauch lower risk of poverty (especially chronic poverty) than other population groups.
1 13. Exclusion from informal safety net. Because of the importance of social ties andconnections, the informal safety net can easily exclude groups that are outside the network-basedsupport system-a high risk in a country as fragmiented and ethnically diverse as Georgia. Theimportance of connections and "exchange of gifts" mentality have created a vicious circle, inwhich the poor, who have little to offer either in terms of gifts or connections, find themselves
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increasingly excluded and isolated from job opportunities and access to services. Weakenedcommunity ties, increasing distrust towards officials and the state, and sharpened socialstratification have all contributed to weakening social solidarity, and to growing socialdisintegration. In its most extreme form, this is revealed in cases of abandonment of children,child labor, prostitution, or others directly linked to the limitations of the informal safety net.2
5.2 The State Safety Net does not Protect the Poor
114. The formal safety net currently comprises three main cash benefits (family allowances,pensions and unemployment benefits), and some additional programs such as tariff discounts onelectricity and transport, direct payments for electricity, and student stipends. In addition, theState provides significant benefits to IDPs displaced by the conflict in Abkhazia, both in cash andas consumer subsidies. Because of their importance and magnitude, IDP benefits are reviewedseparately in section 5.3 below.
Table 2. Main (Budgetized) Social Safety Net Programs in Georgia, 1997
Pensions* 962,000 127.9 122.0Family allowances 350,000" 15.9 7.8Refugee benefits** 282,000 52.9 52.9Unemployment assistance 20,000 3.0 1.5Student stipends 23,000 1.3 1.3Including direct payments to Sakenergo for electricity consumed by pensioners.
" As originally planned. Actually paid out to only about 240,000 in 1997.* Includes all budgeted refugee programs including direct payments for electricity, but not other in-kind subsidies.
.15. The combination of macroeconomic crisis, hyperinflation and complete fiscal collapseeroded cash social benefits to a bare minimum. Starting in early 1995, the Government tried toreverse this trend in the wake of (slowly) improving fiscal revenues. Since then benefits havernore than tripled in real terms, although they still remain well below subsistence levels. With aview to concentrating its meager resources on the most vulnerable, the Government has takcen anumber of measures to improve the targeting of social benefits. In February 1996, the retirementage was increased by five years (in a single step - something unprecedented in the FSU). And inearly 1997, the soviet-era system of universal child allowances was replaced by a system offamily allowances targeted to three categories of poor families. Nonetheless, benefit levelsremain extremely low (representing only 20-30% of the cost of the minimum survival foodbasket). Moreover, actual budget expenditures have often lagged the already modest plannedallocations: in 1997, for example, actual spending on family allowances amounted only to 7.8million lari, less than one-half of planned expenditures of 15.9 million. Similarly, at differenttimes during 1998, the Government accumulated arrears on pension payments; and actualspending on family allowances during the first 10 months of the year was only 3.2 million, ascompared to a planned annual allocation of 14.4 million. As of end- 1997, actual total socialsafety net expenditures, including pensions but not refugee benefits, amounted to around 2percent of GDP (or 13.5% of total spending). Refugee benefits represented an additional 0.8% ofCGDP.
116. Social Assistance Benefits (Family Allowances). The family benefit program wasintroduced in early 1997, to replace the previous system of universal child allowances. It wasintended to cover some 350,000 individuals (in 175,000 households), of which 90,000 weresingle pensioners (defined as pensioners with no legal relatives of working age); 110,000 were
2 As documented by Dudwick in her social assessment.
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disabled individuals, and 150,000 were unemployed in three narrowly-defined categories. Due tolack of resources, this last category was reduced during the year to families with no employedmembers and at least one registered unemployed. The benefit level was set to equal the standarddeduction for the income tax, which was 9 lari per month. One-person households received 100percent of this standard benefit; two-person households received 80 percent per person (7.2 lariper person per month); while households with three persons or more received 60 percent perperson per month (5.4 per person per month). Plarnned funding for the family benefit in 1997 was15.9 million lari, but actual spending amounted only to 7.8 million, less than one-half of plannedexpenditures.
117. In 1998, the family benefit program was reduced in scope. Eligible categories werereduced to one: (legally) single poor pensioners. ]Benefit levels were kept the same. Some40,000 households with about 55,000 members received the benefit during the first half of theyear. During the second half, the benefit was rarely paid out for lack of resources. Plannedfunding for 1998 budget was 14.4 million lari, but actual spending for the first 10 months of theyear amounted to only 3.2 million lari. The difference was due in part to a shortfall in revenues,but also to a reallocation of spending towards other (non-social) categories, by both central andlocal budgets.
118. In addition to a severe lack of funds, the family benefit system faces the problem that it isfunded out of the central budget, but delivered through local budgets with little accountability.Transferred funds are theoretically earmarked, but in practice the central government has littlecapacity to monitor or enforce payments, and the funds can be easily reallocated to other uses.The situation is expected to worsen in 1999, as the transfer will no longer be earmarked: in otherwords, local governments will have a nominal responsibility to pay out the family benefit, butthere will be no direct link between the central transfer and actual payments. On a more positivenote, the Government has expressed its commitment to keep the allocation for the poverty benefitin the 1999 budget at the same level as was originally planned for 1998 (14.4 million). Theseresources will continue to be targeted only to single poor pensioners, but the benefit level will beincreased to 18 lari for a single person household (29 for a two-person household)-sufficient tobring the average consumption of poor single pensioners close to the level of the poverty line.
119. As discussed in Chapter 1, single pensioners face a high risk of extreme poverty, especiallyin urban areas. The average monthly consumption of poor single pensioners is very low (only 38lari per month). And this group typically lacks the connections (to family or clan) that are soimportant in Georgia to ensure survival. Hence, lhe benefit appears to be well targeted.Unfortunately, the budget envelope is so small that many other families at risk of poverty arenecessarily excluded: most importantly, families with disabled members, families with noworking members; families with more than 3 children; and single adults with dependents.
120. Given Georgia's existing resource constraints, very little can be done in the short term toextend social assistance coverage to other families at risk. Several possible measures, however,could be implemented to improve targeting and alleviate the resource constraints. first,transferring the social pension budget (which pays pensions to individuals with no workinghistory) to the family allowance program, which focuses on poor pensioners; second, improvingthe eligibility for disability benefits to focus on t]he truly disabled; and third, targeting specialpensions for war veterans and others to the groups more at risk (for instance, war veterans withdependent members). These simple measures could allow for an increase in the level of benefitsreceived by eligible beneficiaries, or alternatively, resources could be used to extend the existinglimited family allowance program to other groups at high risk.
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121. In the longer term, cash benefits should stay limited to individuals not able to uwork and notsupported by families with members able to work-i.e. mainly pensioners living alone and thedisabled. The poor able to work should be supported through self targeted employment schlemesorganized to provide the minimum level of subsistence (see section 5.5 below).
122. Supplementary cash and non cash benefits are important in some urban municipalities.These were nominally inherited from the Former Soviet Union, but in practice are relevant onlyin the few municipalities with meaningful fiscal resources. For example, the city of Tbilisi givesan annual transfer of 50 lari to some 4,800 families that are perceived to be needy. Similarly, in1996, the city of Poti allocated some 125,000 lari in the form of free or subsidized firewood to3650 families, and distributed some 12 tones of kerosene and 10 tones of coal for free. However.in general the extent and nature of these programs is not well documented; nor are they reflectedin the SDS survey.
1:23. Tariffdiscounts and other consumer subsidies. In many municipalities, certain groups(often the elderly, defense, medical and education personnel) are eligible to receive certainservices at discounted rates or free of charge (this applies primarily to urban transport, electricity,water and other urban services). In some cases, these costs are subsidized by local budgets; moreolten, they are de facto subsidized by the providers. Unfortunately, the extent and real costs ofthese measures are not well documented. Only for the electricity sector is it possible to makesome inferences.
124. According to the Tbilisi electricity distribution company (Telasi), in Tbilisi alone there are44,814 customers who are eligible for a 50% discount on electricity tariffs, an additional 13,118customers are eligible for a 100% discount (about 17% of all consumers). According toSzakernergo, some 123,000 customers in all of Georgia are eligible for discounts (approximately20% of all consumers). Outside of Tbilisi, however, it is unclear how widely these discounts areapplied. In Rustavi, for example, they were recently eliminated with minimum complaints Fromthe population.
125. Given Georgia's rationed supply of electricity, and widespread non-payment by thepopulation, it is hard to infer the true cost of these discounts. According to the SDS survey, theaverage Georgian household spends 14.7 lari per month on energy and fuel (about 5% of totalhousehold monthly expenditures). Approximately 60% of this figure is spending on relativelyexpensive heating fuels (kerosene and wood), with only 24% of the energy bill representingoutlays on electricity. Hence, the average family is spending some 3.5 lari per month onelectricity, or the equivalent to 60 kWh at current retail tariffs. One way to "cost' the transfer isby applying the discount to that base (i.e. 50% of the price of 6OkWh or about 1.75 lari per monthper household). However, given significant non-payment by the population and the proliferationof illegal connections, actual electricity usage for those receiving supply is likely to be higherthan that. Assuming that average household usage is around 150 kWh per month,' the expectedvalue of the tariff discount (for those receiving the discount and electricity supply) would rangefrom 4.5 lari per month (for those eligible for a 50% tariff reduction) to 9 lari per month for thoseeligible for the full 100%. In Tbilisi alone, this would amount to some 320,000 lari per month, or3.8 million lari for the year. This is comparable to what was actually spent o01 the whole farmilyaJlowance program in 1998!
It Is impossible to determine, with any degree of reliability. actual average monthly consumption of electricity byhouseholds in Georgia. However, the comparison with Armenia, which has a similar climate and housing stock.suggests that an average of 150 kWh per month is a reasonable estimate.
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126. There is some debate about the exact list of categories eligible for discounts: the mostreliable information suggests that some 18 categories of households are eligible for the 50%discount; in addition, disabled veterans of WWII are eligible for a 100% discount. Thesediscounts were enacted under 13 different legislative acts, of which 9 are old soviet laws. Thecategories can be broadly grouped into: (a) employees of the Ministry of Internal Affairs andState Security; (b) veterans of all wars; (c) distinguished pensioners; (d) people affected byChernobyl; and (e) others. From the poverty profile, we know that among these categories, onlythe disabled face a high risk of poverty. Clearly, employees of the Ministry of Internal Affairsand State Security are not particularly likely to be poor. Similarly, veterans of WWII, whoreceive a pension of 45 lari per month rather than th- regular 11.8 lari per month pension, are notlikely to be poorer than other groups. According the SDS survey, "special" pensioners haveincomes that are at least 50% higher than the basic pension benefit. Or in other words, some ofthe pensioner households who are eligible for the discount are less likely to be poor thanpensioners who are not eligible. In sum, the tariff dscounts are not targeted to the poorestgroups. not only do they represent an inefficient instrument for social assistance (since the cost isborn by the provider), but they are also most likely inequitable. These discounts should bephased out, and the only truly vulnerable category (1:he disabled) made eligible for the familyallowance program.
127. Pensions. The current system of pension benefits was introduced in 1991, with thecreation of the Social Insurance Fund (SIF). Initially, benefits were linked to pre-retirementwages and the length of covered employment. In early 1995, with the system on the verge ofcollapse, differentiated pensions were abandoned and replaced with a flat-rate pension. InFebruary 1996, the retirement age was increased to 60 for women and 65 for men. At the sametime, an attempt was also made to improve collections of the payroll tax which finances thesystem. As a result of these reforms, the dependency ratio decreased from 67 % in 1994 to 55 %in 1996; the pension replacement ratio increased from 14.5% to 27.6%; and the payroll taxcollection increased from 0.7% of GDP to 1.2 % of GDP. Today, the SIF pays pension benefitsto old-age pensioners, disabled persons, and war veterans as well as their survivors. Individualswith no working history receive a social pension, for which women become eligible at 65 andmen at 70. The cash benefit is currently 11.8 lari per month for old-age pensioners and thedisabled; 45 lari per month for war veterans. In addition, for each pensioner a monthly amount of1.8 per pensioner is transferred directly from the budget to Sakernergo to cover the cost of theirelectricity consumption.4 The Ministry of Defense administers a system of pensions for officers,which provides eamings-related pensions of, on average, 60 lari per month. Pension benefitscurrently amount to about 1.8 % of GDP.
128. The pension system is financed mainly through a payroll tax. Since 1997, the payroll taxfor employers in the private sector is 27 percent, and the employee contribution is I percent.Despite the high rate, payroll taxes cover only about 60 percent of pension outlays. This revenueshortfall is typically compensated by the central govemment, and often translates into significantarrears and irregularities in the payment of pensions. As of May, 1998, for example, the systemhad accumulated arrears of about 4 months worth cf pensions. In its present form, the pensionsystem is financially unsustainable. It is meant to deliver pensions to a large number of eligiblebeneficiaries (some 962,000 pensioners or 18 percent of the official population), but collects itsrvvenues on an extremely small base. Compliance with payroll tax laws is estimated to be onlyabout 12 percent. In 1996, for example, wages over which contributions were paid amounted toonly about 4 percent of GDP. The total wage bill, including the informal sector, was estimated at
4 At current tariffs this amount corresponds to about 30 kWh of electricity. But it is transferred to Sakernergoirrespective of whether the pensioner actually receives electricity or not In this sense, it acts more as forcedconsumption of electricity than as a payment to the pensioner per se.
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:33 percent of GDP. Clearly there is a need to extend the tax base to agricultural workers, theprivate sector and small businesses.
129. Although the real value of pensions have increased significantly in real terms since theirlow point in 1994, the pension benefit falls far short of the costs of even the minimum "survival"food basket, which is estimated at 40 lari per month. The pension benefit is also low relative tothe average wage: the ratio is currently around 9 percent. In sum, the pension system deliversvery low benefits at a relatively high cost.
1.30. In the short-term, efforts to strengthen the system must focus on extending the base for thepayroll tax, and on improving efforts to track and register reczpients. These tracking mechanismsaLre currently very weak, and it is possible that the system has a high level of ghost recipients.Other possible steps which could be taken include: a further rise in the retirement age forwomen; tightening eligibility criteria for disabled pensioners; making the benefit formula morerestrictive; and improving the transparency and accountability of the SIP Also, the system forlump-sum, direct payments of electricity charges for pensioners should be phased out, as theelectricity companies become privatized. These direct payments take away control frompensioners over part of their benefits. To the extent that they are not linked to actualconsumption of electricity, they represent a redistribution of income from pensioners in areaswith severely deficient or no electricity supply to retirees who do receive electricity. And theyhamper the emergence of a culture of paying for electricity. Moreover, any rationale formaintaining such a system disappears once distribution companies have been sold to new privateowners, who will face their own incentives for enforcing payment discipline.
131. If relatively little can be expected from the pension system in the short term to protect thepoor, urgent reforms are needed in the medium term to create a system that is sustainable andthat pays benefits at levels above the poverty line. Georgia faces a particular challenge becauseof its demographic profile: its population is older than in any other ECA country of similarincome levels. But Georgia also faces an unprecedented window of opportunity, as the presentcrisis has de facto reduced both the political and economic costs of undertaking a drastic reformof the PAYG system. The steps necessary to establish a new system are: (i) to strengthen thePAYG in the short and medium term, and transform it into a system that pays a minimum flatbenefit to the elderly, with no link to contributions; (ii) to introduce (over the medium term) asecond pillar-i.e. a mandatory and fully funded system, or in other words, a real old ageinsurance scheme. This system could be complemented by a voluntary, private pension thirdptillar, for which preliminary legislation has already been adopted. The first pillar (the PAYG)could disappear in the long term once the old age insurance system is fully functional.
1:32. Unemployment Benefits. Georgia pays unemployment benefits for up to six months toeligible persons who have been laid off. Payments are made at local State Employment OfiFices,and financed out of the Employment Fund (EF), which collects a 1 percent payroll tax from thenon budgetary sphere. In 1996, benefits were paid at the rate of lari 9.8 for the first two months,lari 7.8 for the next two months, and lari 6.8 for the final two months. This amounted to justunder 30 percent of the average wage in 1996; but by end- 1997, it represented only about 1 8percent of the average wage. In addition, for each registered unemployed, the EF transferred 1.3lari directly to the electricity company to cover the cost of electricity consumed by theurnemployed. In 1998, the unemployment benefit was raised to 13 lari, the direct payment forelectricity was discontinued, and benefit coverage extended to a 12 month period. Still, thereplacement rate remains very low (about 20 percent).
5Eka Vashakmadze, The Reform of the Pension System in Georgia, Tbilisi, 1998.
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Figu re :
Georgia: registered unemployed, 1992-98
250000^ =R Registered jobseekers
200000 - with status of
150000 unemployed
100000 \X
5 \ 000 e of which: receivingom benefits
0-
ol 0 9 09 0, a,
'0 'o t 0
5, ' E E E E 5 E
Source: Ministry of Labor and Social Protection.
133. Only a small fraction of the unemployed actually receive benefits. Because of the limitedduration of benefits, many recipients have exhausted their eligibility, and less than 20 % of theregistered unemployed actually receive a benefit (Figure 1). Moreover, because of the low levelof benefits, and the irrelevance of local employment offices to the job search process, incentivesfor the unemployed to register are low. Trends in the number of registered unemployed seem tobear no relation to overall economic developments, but rather lag changes in the regime ofgranting unemployment benefits and family allowances. For example, the number of registeredjob seekers almost tripled between June and September of 1997 in response only to theannouncement of eligibility rules for family allowances, which included families with registeredunemployed. Registered unemployment started to fall as soon as the list of beneficiaries forfamily allowances was narrowed to exclude the unemployed.
134. Unemployment benefits are generally set up to insure against the loss of income fromshort-term unemployment, and to give persons who become unemployed the opportunity to lookfor appropriate alternative employment. The Georgian system of unemployment benefits,however, does not function as an insurance scheme; rather it has the flavor of a social safety netscheme, albeit an inefficient one. Replacement rati.os are very low; coverage is negligible; and asa safety net, the scheme is not very accurately targeted.
135. Despite the EF's small financing base and low tax rate, it supports several activitiesbesides income maintenance, such as retraining, and temporary job creation. Given the lack ofresources, and widespread international evidence on the high cost and low effectiveness of thesetypes of measures, these activities should be discontinued. Moreover, given that Georgia atpresent lacks the resources to operate a true Unemployment insurance scheme, it vwould makemore sense to eliminate the EF altogether. This would save resources currently spent on theadministrative costs of running the Fund, and would allow for a lowering of the payroll tax.Responsibility for maintaining some sort of last-resort safety net for the unemployed could betransferred to the central budget, and take the form of a modest increase in thefamily allowancescheme to include fimilies with at least one unemployed member and no working members.AIternatively, the unemployed could be reached through self targeted employment or publicworks schemes organized to provide the minimum level of subsistence to those who are able towork (see section 5.5 below). Ir. the medium term, as the economic situation irproves and theeconomy becomes more formalized, the introduction ofa real unemployment insurance schemecould be considered; but its advantages and potential cost should be carefully assessedbeforehand.
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5.3 IDPs Receive a Disproportionate Share of State and Humanitarian Assistance
136. Some half-million people were displaced from,their homes by the civil conflicts in theregions of Abkhazia and South Ossetia. Nearly 290,000 have been dispersed through Georgia,with the largest concentration in Tbilisi. Others have remained in Samegrelo, the regionbordering Abkhazia, and in Lower-Swaneti. In 1996 a UNHCR-sponsored survey registered282,000 people as IDPs. Contrary to commonly held perceptions, the analysis of the SDShousehold survey suggests that IDPs that have resettled on their own or have integratedthemselves into local communities (the refugee population that does not remain institutionalized)face a lower risk of poverty than the average Georgian household (4 percent of them are poor asopposed to 10 percent of the total population). And they face the lowest risk of extreme povertyof almost any population group. The surveys show, moreover, that one out of four refugeesiamilies have left the country.6
:137. The fact that IDPs face a relatively lower risk of being poor contrasts sharply with tie factthat they receive a large share of State and humanitarian assistance. The IDP program is one ofGeorgia's largest safety net programs, ranking second only to old age and invalidity pensions. In:997, Republican budget expenditures for this program totaled some 53 million lari; the plannedallocation for 1998 was 62 million lari. The program comprises a diversity of cash and non-cashbenefits (Table 3). The major component is the monthly stipend of 11 lari per refugee for thoseIDPs living in hotels or Government institutions; and of 12 lari pre refugee for families living intheir own accommodations or with other families. In addition, for each of the 160,000 IDPs thathave settled on their own, the budget transfers 1.8 lari per month directly to Sakernergo to pay fortheir electricity; another 3.8 lari per refugee are transferred for each of the 124,000 IDPsestimated to be living in hotels or refugee centers. An additional 7 lari per person per month ispaid to those families that have resettled on their own to cover housing costs and other utilities.IDPs also receive public transit subsidies, including free subway tickets for those living in Tbilisi,and passes for ground transports such as buses. The Ministry of Refugees and Accommodationnmaintains a special assistance fund for the destitute. In addition to benefits paid out through theMinistry of Refugees, IDPs who are also old-age or invalidity pensioners receive a 20 percentpension supplement. IDPs also receive free education and are exempt of fees. And the BasicEtenefit Package of health care services provided free to the population has integrated in itscalculation free health services for 140,000 IDPs in 1998. The costs of these free or subsidizededucation and health services are born by the Ministries of Education and Health respectively.Not counted in the budget is the value of the rent of the buildings occupied for free by the IDPs,but that would be probably high, especially in the case of hotels in city centers.
138. IDPs have also benefited from a large proportion of the humanitarian assistance in food,medical, and other aid provided by governmental and non- governmental organizations toCGeorgia. Although the magnitude of humanitarian assistance has decreased since 1994, itremains substantial. Total humanitarian assistance received between April, 1994 and March,1995 was estimated at US$62.7 million; between April, 1995 and May, 1996 at US$60.4 million;and between June, 1996 and May, 1997 at US$30.6 million. In 1996, some 800,000 beneficiariesreceived humanitarian assistance; in 1997, beneficiaries amounted to 340,000 people (a largefraction were IDPs).
6The survey does not sample IDPs living in state provided shelters (hotels or other structure). It is therefore difficult tocompare the poverty status of this specific group of IDPs with the rest of the population. These IDPs are probablymore vulnerable than the ones that have been integrated in local communities.
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Table 3. IDP program 1997 and 1998(In million lari)
Monthly benefit 34.9Utilities for people housed by the state 12.4Free metro fare (Tbilisi) 3.0Ground transport 0.6Special repairs of dwellings 1.5Special assistance fund for destitute families and children 0.2
Interest paid for banking service 0.3Total 52.9Not included: value of free education; BBP.
139. IDP benefits are high in comparison with family allowances, unemployment benefits andeven pensions. Not including benefits in kind, in 1998 an IDP family of four would receive amonthly cash benefit of 38.8 lari per month, above the average budgetary monthly wage of 35lari. In contrast, a non-IDP family of four would normally not be eligible to receive any statesupport since eligibility for the family allowance has been limited to legally single pensioners. Ifthe non-IDP family were to comprise a pensioner or an unemployed person, they would beeligible for a pension of 11.8 lari or an unemployment benefit of 13 lari-still well below thelevel of IDP benefits. Even ifIDP benefits are not by themselves sufficient to lift a familycompletely out of poverty, they still provide non negligible support in comparison to thatreceived by other Georgians. Moreover, IDPs are eligible for benefits regardless of other incomeor asset ownership. And as discussed above, in many cases, IDPs are better off than other groupsof the population.
140. The contrast between benefits received by IDPs and those received by other, often moreneedy, families highlights the need to improve the targeting of assistance to IDPs, to limiteligibility only to those who truly need it. This is irnportant from a social equity point of view. Italso is pressing because of the open-ended character of the IDP program. In the absence of asolution to the conflicts in Abkhazia and South Ossetia, there is no clear horizon for the phasingout of the IDP program; the burden on the state's meager resources could continue indefinitely.Mechanisms of self-targeting could be usefully employed to select the most needy. Linkingpayment of the monthly stipend to participation in Ipublic works, for example, could serve toweed out those with alternative, more lucrative sources of income from work. This couldfunction as a self-contained program or as part of a broader public works scheme designed totarget resources to those able to work. Alternatively, registration requirements could be increasedsignificantly, so as to impose a sufficiently high cost on recipients, to again weed out those whodo not truly need the benefit.
141. In addition to improving the targeting of cash benefits to IDPs, in-kind benefits should bephased out. Most of the burden of financing these benefits is born by providers of the services, orby other users. The government should assess carefully the cost of maintaining them, and if thesein-kind benefits to IDPs are to be kept, the budget should fully cover the costs.
142. The authorities should continue their efforts to integrate remaining IDPs housed iniustitutions into local communities, as the evidence from the household survey suggests that oncethis happens, IDPs are able on their own to dramatically improve their living conditions. Thisintegration is made difficult by the awkward legal status of many IDPs. IDPs can not acquireland in Georgia but may only lease it. They cannot purchase apartments, and their movementsare restricted because of registration of residence requirements. This legal situation does notsupport their integration in the Georgian economy, and should be evaluated.
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143. The collapse of transfers to poor groups of the population is correlated with the fact thatthe Government has given priority to protecting the level of t:ransfers to IDPs. In the currentcontext, this may ultirnately create tensions between IDPs and other members of Georgiansociety. And it does raise questions of equity and allocation of resources. Somile of these choicesmay need to be reevaluated. It is also urgent that the status of iDP be clarified, and that theybenefit from the same ownership rights than any other citizen ofL Georgia.
IF.4 The Voluntary Sector and Civil Society. Still in its Infancy
1 44. The world of NGOs and associations dealing with vulnerable groups in Georgia is smallbut vibrant. The Government has adopted an open and liberal policy towairds hNGOs, and it is lesscumbersome to obtain the status of NGO in Georgia than in many neighboring countries. Manyrnunicipalities and regional Governments have shown interest in working with the NGO sector.
145. Anumberofcivil> z _ . la~Of ~society organizations hlave
Di -t, iiemerged since indepenidence.InSome, like the Georgian
., Organization of invalidis,have undertaken im-pressiveadvocacy work andimplemented successfulIprograms to support theirmembers. The GeorgianOrganization of Invalid~s, forinstance, lobbied Parliamentto pass a Law on theHandicapped; and obtained
ex.istin social chall , Gthat all taxes paid by theorganization be reinvested in
L ~~~~~~~~~~~~~~~~~activities benefiting in-valids.Other associations and NGOs are dealing with issues related to IDPs, street children, and theelderly. A number of Intemational NGOs have set-up programs to train and support theelergence of local NGOs. For example Save the Children and the Eurasia Foundation have set-up training and support centers, as well as small grants programs. Considering the magnitude ofexisting social challenges, Georgian NGOs still remain underdeveloped and their activitieslinited in scope, but they are off to a promising start.
146. As in the case of other FSU countries, lack of local financing represents a major limitationto the sustainable development of local NGOs. At the same time, the availability of relativelylar-ge pools of donor funds sets up some perverse incentives: many groups and individuals aretrying to obtain the NGO status solely in order to attract funds from donors, often with very weakprngramn proposals and sometimes even hiding a commercial activity.
5.5 Strengthening and Improving the Safety Net
147. Many of the comprehensive reforms needed 'to support the poor and vualnerable groups willbe possible only -when the fiscal situation of the State has improved and that more mon-ey will beavailable to finance any prograrns. However, as discussed in Chapter 2, even a small, but well-targeted poverty benefit, can play a crucial role in dampening poverty. If the family allowancewere to be kept even at the very low level observed in the 1997 budget (relative to GDP) but wereaccurately targeted, it would still be sufficient to reduce the incidence of poverty by several
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percentage points. Needless to say, if the social assistance budget were to be increased morerapidly (to 1% of GDP by 2007), the impact on poverty would be large (Figure 2).
Figure 2.
Poverty in Georgia: future paths under different levels of poverty benefit(New poverty line)
12% , - --
~-9%
2 3% -
0%- Ei1997 1998 1999 2000 2001 2002 2003 2004 20()5 200)6 2007
Percent poor - initial level --o-Poverty incidence- base case and no targeting of actual (1997) poverty benefit
% Poverty incidence - base case, increase in poverty benefit to the planned 1998 levels and targeting l
L-Poverty incidence - base case, targeted poverty bene:fit gradually increasing to I% of GDP by 20071
148. How can targeting of existing benefits be impiroved in the short term? And if theGovernment were to allocate more resources to the s3ocial safety net, how should it do so? Wedistinguish here between some immediate (very short term) responses, and those that require aslightly longer (one or two year) horizon.
149. Very short term responses (1999):
• Protect the family allowance system. Ensure that the allocation in the 1999 budget is at leastthe same level as in the 1998 budget, and that unlike in 1998 it is fully paid out. Eliminatetariff discounts to special population groups and other in-kind benef its. Replace with a directpayment (through a modest increase in the fami ly allowance system) for those groups ofrecipients who are truly needy, mainly the disabled (categories I and II).
* Eliminate direct payments ftom the budget for electricity. This can be phased ingeographically, starting with Tblisi, as electricity distribution companies are privatized.
* Improve the targeting of assistance to IDPs. T];lirough self-targeted public works, proxymeans testing or frequent registration requirements. Redirect released resources to the familyallowance program or towards establishing public works programs as discussed below.
Short-medium term responses. Establishing a more comprehensive social safety net(1999-2000):
The design of a comprehensive safety net i n Georgia has take into account two keycharacteristics of Georgian poverty. First, that poverty is closely linked to labor market status.Second, that poverty is mainly transient and that families move in and out of poverty frequentlyover time, so that accurate targeting is difficult. Moreover, this safety net has to be designedwithin a context of limited resources-a constraint which will remain in place for a long time.
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How can a safety net be designed within this context and still achieve its key objective ofprotecting (insuring) the poor against unexpected drops in income? The specific strategyproposed here focuses on a very simple principle: limit administered transfers and cash benefitsto identifiable vulnerable groups who are unable to work. and assist the poor who are able towork through self-targeted public works and other programs that support employment.
* Limit transfers (family allowances) to those who cannot work: poor elderly, the disabledwith no other support, single adults with dependents. By focusing available transferresources on these specific groups, benefit levels can be increased to more significant levelsand truly help bring recipients out of poverty. This can be done without imposing anunrealistic burden on the State budget.
* Support the poor able to work through self-targeted workfare programs (see Box). Suchprograms would essentially combine the best features of an Employment Guarantee Schemewith those of Social Funds aimed at promoting labor intensive projects in poor areas. Toensure that the money goes only to those who need it, without undermining the incentives toseek a normal job, the wage offered has to be low (at the level of local wage rate forunskilled manual labor in "normal" times). The government guarantees the financing of thewage costs of the program, and possibly part of the non-wage costs, with local communitiescoming up with the financing of remainder of non-wage costs.
Such a workfare scheme has several advantages over administrative systems or other forms ofcash benefits. First, it relies on self-targeting, so it is not necessary to identify a priori whatcategories of individuals or families will need support. Second, by linking benefits to work, itavoids creating a culture of dependence. Third, it can function effectively as a permanentinsurance scheme for the poor that protects them against any unexpected downturn in theirincomes. As such, it is particularly well-suited to respond quickly in crisis situations. It is inessence a permanent program or institution, with little administrative discretion, which laysdormant in good times, but is triggered automatically by increased demand for workfare whenthere is a shock to incomes (whether because of seasonal fluctuations, droughts, ormnacroeconomic crisis).
E - : itsof a Good Workfar Program
A ted be belovdl* mas '' ;irketae ullar tgicture or the
ibiuityf< p*iticiga ion shouldte 'avoided; idealy, the only restriction should be the
* .. .Fis unavo e (b+ecs ofbdet consainbts) he th program should be targeted to poor
--. y(s of wa. bill in total ost) shouldbe higher than normal for similar. projects inb: j~eii6 on the reMtia given to inmediateincome
hould tbe targete towardpoor areaS to easure*& the asets creaed ae of maidmunSiibr~jcts argte'to non-poor a-reas shoul require Tinancing fromi thecsihei~none sbo04cg backIto the wv9or : gegt
. a~en,M~ ~Aiwra~si~ig Wotare WorldBankPesearch Obswr . abrW y 1999.
One of the challenges of establishing such as scheme is how to finance it. Demand forworkfare is likely to be countercyclical: i.e. it goes up in bad times, precisely when theGovernment has less resources. Hence, it is important to separate its financing from the annualbudget cycle. One way to do this is by capitalizing a Fund (perhaps using privatization receipts),which will then finance the implementation of public works programs. On a small scale, it could
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be piloted through the Georgia Social Investment Fund, which is financing a program ofcommunity based infrastructure rehabilitation. The GSIF program could be increased in size andadditional labor intensive projects be carried out in urban centers. Alternatively, it could bepiloted through a completely separate Fund.
Two approaches can be used for the implementation of public works programs. One option isto implement the work through small private contractors. In this case labor intensity is ensuredthrough the design of selection criteria for the infrastructure to be rehabilitated, and by limitingaccess to work contracts to small-size contractors from the private sector. In this case no specificconditions are set on hiring of labor other than a low wage rate. Another possible approach is tohave the work implemented by local governments directly, with the wage level set at a levelslightly under the market wage for unskilled manual workers. The local government wouldensure that works are carried out using labor intensive methods. This method has been used insome large scale programs in Latin America and in Asia. However, this requires havingrelatively strong and accountable local governments. And public wages have to be high enoughso that workers from local government and public sector are not tempted to supplement their jobswith participation in the public work scheme. Using this second approach in Georgia at presentcould risk a high misuse of funds.
s _
5b.. W . Fr W; 2.
X~~~~~~~~~~~~~~~~
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150. Other measures to support this new safety net.
* Eliminate the EF and shifting responsibility for protecting the unemployed to the new publicworks program. Eliminate the EF and reallocate the resources saved to the family allowanceprogram (or reduce the payroll tax to stimulate employment).
* Continue to improve the efficiency of the PAYG pension system.* Increase incentives for good and efficient NGOs to expand their activities. Focus efforts on
attracting local financing, improving institutional capabilities, and ensuring goodcoordination with national policies.
* Introduce self targeting mechanisms to orient what is left of humanitarian assistance to thepoorest. Ensure that remaining flows of humanitarian assistance go to the poorest groups.Replace distribution of humanitarian aid to socio-economic categories with self-targetedmechanisms (soup kitchens, food to mother and children with special needs at local healthcenters etc).