Georgian Inequality Coefficient Is Close to Latin American Countries
29 September, 2011
Georgian Inequality Coefficient Is Close to Latin American Countries

Georgia outweighs its Caucasian neighbor countries in terms of income inequality and stands closer to Latin American countries, which bespeaks of the absence or small size of middle class in the country.
The size of middle class is an acute problem in Georgia. Skeptics worry that it does not exist at all while official statistics assure it does. However, Geostat, official statistics body, does not provide with the conspicuous data on the percentage of middle class. It provides with the

share of population below poverty level [that increased by 3.3% since 2007 to 9.7% in 2010] but what is the remaining 90.3% of Georgian population is not quite clear as Geostat does not employ the so called Gini Coefficient [named after Italian Statistician Corrado Gini] that is the most widely used and understandable indicator for measuring income equality of population.
Gini Coefficient is a mathematical concept, measuring equality from 0 to 1 and is often presented as a percentage from 0 to 100. Low indicator of Gini Coefficient means high income equality in a society and vice versa. And Georgia’s Gini coefficient standing at 40.8 [as Economic Policy Research Center (EPRC), a non-governmental watch-dog, calculated within the framework of its quarterly report of Georgian Economic Outlook, being carried out since 2011] is quite high, which bespeaks of serious social and economic challenges in the country.
The first issue of the EPRC paper covering the first half of the year was aired on September 23, 2011 and its major topic was inequality and Gini coefficient.
According to it, Georgian authorities often focus on such concepts as income, both national and per capita, overlooking other important indicators, such as the economic inequality, which is indispensible for a realistic assessment of living standards and the level of poverty in the country.
“It is precisely the inequality in the income growth across the country’s population that represents one of the major challenges for improving the standard of living in Georgia, and as such, deserves a heightened attention from the experts as well as the relevant state institutions,” Nino Evgenidze, a spokesperson of EPRC, told Georgian Journal.
A comparison helps better assess the picture: Scandinavian countries have an indicator of around 25, while the continent of Africa is characterized by a relatively high indicator (around 70). Even within the region, where the post-Soviet countries likewise have high indicator, Georgia still outweighs some of its neighbors in terms of inequality: Azeri and Armenian Gini coefficient is 16. 8 and 30.2 respectively.
However Georgia has a lower inequality as compared to Russian Federation (43.7) and Turkey (41.2) and Georgian indicator closely resembles the coefficients of Latin American countries (Venezuela 43.4, Uruguay 47.1, Columbia 58.5) characterized by the absence or a small size of middle class, EPRC experts say.
A high indicator of income inequality is troubling, EPRC warns, as far as there is a negative relationship between inequality and human development while the basic economic experience dictates that flattening of the equality indicator might be directly associated with improvements in the overall health and education outcomes, as well as economic growth.
Notwithstanding one existing point of view that a high level of inequality might give people incentive to work harder and foster entrepreneurial activities, the wealth of international experience shows that the costs related to high level of income inequality far exceed any benefit that it may bring about in the country.
High levels of inequality may lead to lower social cohesion and civic engagement, which eventually translates into higher political instability. Also numerous studies find direct correlation between the inequality level and crime rate (especially homicides), mental health problems, and teenage pregnancy.
Serious inequality constrains government to use important market mechanisms, such as changes in prices for public service or fines, since it may lead to even deeper inequality by causing overwhelmingly stronger deprivation among the poor citizens.
“Even though a successful market economy cannot function and develop without incentives that imply some inequality of income, we have argued that a high level of income inequality also poses a problem to economic development. We believe that the problem of income inequality needs to be addressed with due diligence. The government bodies should carefully assess this issue and decide whether or not the distribution of income deemed to be sub-optimal,” EPRC experts say.
If so, special polices should be directed towards ameliorating the inequalities. There are two basic approaches to address the issue – changing the factors that produced the inequality, or compensating the outcomes.
Georgian government mostly addresses to the less effective compensation-based method by making direct payments or transferring benefits in kind (payments made in the form of providing “free” goods and services) to less privileged households. This method did not alleviate the problem in fact as the payments are very minimal.
The best world practice shows the cause-fighting method is much more effective. Some governments have employed progressive taxation– taxing the rich proportionally more than the poor to reduce the amount of income inequality in society, others chose instituting minimum wage legislation to raise the income of the poorest workers, or targeted on education accession to maintain the competitive environment.
The EPRC recommends Georgian government to undertake the cause-fighting policy [rather than subsidies] that usually is more effective as the practice shows and that Georgian authority has never attempted.

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