The FINANCIAL — Georgia has the largest gap between rich and poor in the region. The country’s Gini coefficient, describing income inequality, is 0.41 (from 0 to 1 where 0 is perfect equality and 1 is total inequality).
The measure is 0.33 in Azerbaijan, 0.30 in Armenia and 0.40 in Russia. Estonia’s measure is 0.36 and Turkey’s – 0.39. The development of small and medium business and increased educational level were named as the main stimulating factors for the development of the country’s middle class. However, experts do not expect any significant improvement regarding income inequality to occur at any stage in the near future.
According to the IMF October report, unemployment in Georgia will increase by 1.7% compared to the previous year and will reach 16.7%. Moreover, a further increase in this indicator to 17.3% is expected in 2014. According to the IMF, unemployment will increase at a lesser degree in Azerbaijan, Russia and Turkey than in Georgia.
According to the data of the CIA World Factbook the amount of Georgia’s population below the poverty line was 9.2% in 2010. The number of socially at risk persons account for more than 170,000 today, according to the Social Service Agency.
“The measure of the Gini coefficient in Georgia has varied from 0.40 to 0.43 during the past 7 years. As far as we can tell, it remains practically unchanged. The lowest rate – 0.40 was recorded in 2006 and the highest – 0.43, in 2010,” Nino Evgenidze, Executive Director at the Economic Policy Research Center (EPRC), told The FINANCIAL.
Evgenidze said that class imbalance is common in transforming economies. She sees the resolution of the problem happening over the course of time in terms of stable economic growth. “Creating a non monopolistic environment for business development is an important factor,” she said.
“The development of small business is also an important aspect in the elimination of class imbalance. In countries with a high share of small and medium business the imbalance of income is respectively lower. Over 80% of total production is produced by large enterprises in Georgia while the remaining 20% is the share of small and medium business. This hampers the development of the middle class,” said Evgenidze.
“Income inequality is due to the country’s social and economic model. Its elimination depends on many factors, including the level of fees and education,” said Nona Gelitashvili, PhD, Professor at the Black Sea International University.
“The development of the middle class requires much more time and effort than it seems at first glance. Deliberate and long-term policies are needed. Equal distribution of income and the strength of the middle class, mainly common in social market economy and social democratic countries, are conditioned by very high social fees. The Government manages to cover high costs, thanks to their high taxes. However, the question is how such an approach is satisfying citizens. For example, in Scandinavian countries the Gini coefficient does not exceed 0.25 and social equality is at the highest level. However the number of unsatisfied people who have to pay increased taxes to cover the costs is increasing year by year. On the other hand, a part of the population is satisfied and feels secure in the event that unemployment or other social risks arise,” said Gelitashvili.
In addition, Evgenidze, EPRC, said that the current high unemployment rate also encourages and is a cause of the existing inequality. “Problems relating to the qualifications of the labour force are another hindering factor in this regard,” she said.
“The growth of social spending is another way to eliminate class imbalance. However, in this case the existence of a developed economy, like in Scandinavian countries, is important. Otherwise the country will face not only imbalance but such serious economic problems as we witnessed in Greece,” said Evgenidze.
“Economic growth should be long term and irreversible with time in order to properly develop the middle class. In recent years, Georgia’s economic growth has been observed, although the country has had significant “failures”, such as the 2008 war, the 2007 crisis and the unstable political environment. Another important factor was that the recent economic growth of Georgia was due to significant activity by the Government. It was mostly the contractor companies of the Government though, and its employees, that benefited. Concentration of business activity in small business groups also prevents the formation of a stable middle class,” said Evgenidze.
According to Gelitashvili, radical changes are not expected in the coming years and particularly in this next one. “Only minor changes are expected in the future, like the case has been during the past 6 years. According to the OECD’s general recommendations, it would be good to establish more progressive income taxes and improve the quality of education,” she said.
“A certain portion of the population has been forced to leave the country, which has increased the taxes. It has reduced the economic pie. In this case poor people get less during distribution. Therefore, a more correct approach would be to distribute but moderately, so as not to reduce the economic pie,” Gelitashvili said.
“All of this will contribute to the development of the middle class, as well as to greater social equality. However, the implementation of such policies depends on the gradual introduction of the social model which Georgia will ultimately choose,” she suggested.
Without significant economic growth, especially under 1, 1 or 3 percent economic growth, the chances of improving the Gini coefficient are rather unlikely for Evgenidze.
“In general, two main approaches exist for solving this problem: changing the factors that cause the distribution or compensating the existing results. In Georgia, in politicians’ programmes it is the second approach that prevails, which is the distribution of compensation,” she said.
“Governments all over the world take various initiatives in order to reduce growing inequality. For example it is widely known that poor households face difficulties in providing qualified education for their children. As a result, they only get opportunities to be employed at lower paid positions than children from rich families. High tuition fees is one of the main factors hindering the attainment of higher education or qualifications for those from lower-income families. Policy-makers intending to eliminate the social-economic imbalance should target that,” Evgenidze suggested.
“Progressive taxation is another economic strategy which can be used to reduce inequality. Fixing a minimum wage in order to increase poor workers’ salaries would be helpful. However, it is clear that these measures have negative sides too. They can become a hindrance to economic growth,” Evgenidze told The FINANCIAL.
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