Georgia in a turbulent world: 2014 in review

Calling 2014 turbulent for the world seems almost euphemistic. The world witnessed renewed Russian revanchism with the war in Ukraine and annexation of Crimea, the emergence of a highly successful militant Islamic organization, Islamic State in Syria and Iraq, and the persistently tense situation in Israel erupted into another war between Israelis and Palestinians. Not only did the world see conflict, but it also witnessed the outbreak of the Ebola epidemic in West Africa and electoral gains for the far right and left in Europe. Notably, Turkey continued on its path which has swung against secularism and democracy in recent years.

In contrast, Georgia, a country known for its prolonged territorial conflicts and volatile politics, was relatively calm in 2014. This, though, is not to say that the events which shook the world in 2014 did not reverberate through Georgia. Quite to the contrary, the Ukraine crisis resonated in Georgia and the conflict in Syria holds consequences for the country. Georgia’s domestic politics, while tame in comparison to the recent past, also had unexpected and difficult moments.

The crisis in Ukraine reminded the Georgian public of the threat posed by Russia, and for many it was also a reminder of what could have happened in 2008. As a CRRC blog post pointed out in September, Georgians’ perception of Russia as a threat increased during the crisis. Moreover, the crisis in Ukraine hastened the signing of Georgia’s long sought after Association Agreement with the European Union. While the Agreement was originally scheduled to be signed no later than August 2014, after the Ukraine Crisis, the European Union moved up its signing to no later than June 2014, ultimately culminating in the signing on June 27th.

One of the most unexpected outcomes of the Ukraine crisis is the proposed appointments of a number of former Georgian United National Movement officials to the Ukrainian Cabinet of Ministers. Former Minister of Health and Social Affairs of Georgia, Aleksandre Kvitashvili, and former deputy Minister of Internal Affairs, Eka Zguladze, have taken up the same posts in the Ukrainian government. Notably, ex-president Mikheil Saakashvili turned down the Vice Premiership of Ukraine to keep his Georgian citizenship. While the proposed appointments have not been received with absolute unanimity from the governing Georgian Dream Coalition, Foreign Minister Tamar Beruchashvili has noted the importance of maintaining good relations with Ukraine.

The Ukraine crisis was not the only global event to reverberate in Georgia in 2014. The war in Syria and Iraq, which has resulted in massive loss of human life and mass displacement, also touched Georgia. After the start of the conflict, Georgia’s previously ultra-liberal visa regime made it relatively easy for Syrians to settle in the country. Notably, some ethnic Abkhaz Syrians fled to Abkhazia from the conflict. This year though, a number of young people from the Pankisi Gorge in northeastern Georgia have joined the war in Syria and Iraq, becoming not only members, but also high level commanders of the militant Islamic organization, Islamic State.

On a different note, Georgia’s Euro-Atlantic integration took another step forward this year with agreement on a “Substantive Package” with NATO. This package was given to Georgia to increase interoperability with NATO countries, while also serving as a substitution for a Membership Action Plan which in the context of the Ukraine crisis and the unsettled conflicts in Abkhazia and South Ossetia, may have provoked Russia’s ire.

In what some commentators have viewed as a response to NATO’s substantive package, Abkhazia and Russia signed a treaty, including a mutual defense clause similar to Article 5 of NATO’s Washington Treaty. Both Abkhazians and Georgians have heavily criticized the treaty. The Georgian government has described this treaty as a further step in Russia’s occupation of Abkhazia, and Abkhazians have criticized the treaty for giving up too much autonomy. While the first draft of the treaty was titled “Agreement on Alliance and Integration” it was later changed to “Agreement on Alliance and Strategic Partnership” (emphasis added) as a result of Abkhaz protests. Significantly, the Kremlin-favored candidate Raul Khajimba was elected to the de-facto presidency of Abkhazia, following a June revolution in the breakaway republic.

Speaking of entirely domestic events, in 2014, intolerance again manifested itself in Georgia with a number of islamophobic and homophobic events. The most extreme example of islamophobia this year was when residents of Kobuleti decapitated a pig and nailed its head to the front door of a Muslim boarding school in protest of the schools opening. On May 17th, the physical violence of 2013 protests against the International Day Against Homophobia and Transphobia was avoided since the anti-homophobia rally was cancelled due to the fear of repeated violence. Instead, the Georgian Orthodox Church along with its supporters celebrated a “day of family values” on May 17th, a clear act of symbolic violence.

The political scene was also somewhat turbulent. The Georgian Dream Coalition experienced its first serious crack with the dismissal of Irakli Alasania from the Defense Minister post in November and the subsequent withdrawal of the Free Democrats from the coalition. Notably, the public’s appraisal of the Georgian Dream Coalition’s performance has decreased in 2014. While in November 2013 50% of the population rated their performance as good or very good, only 23% of the population reported the same in August 2014. The municipal elections in 2014, which demonstrated a high level of competition compared to many elections in the past, also held a number of surprises. Importantly, the newly emerged Patriotic Alliance garnered nearly 5% of the vote nationally and forced a second round in gamgebeli elections in Lanchkhuti.

Elections and coalition politics aside, an event in Georgia which remains unsettled to this day is the charging of Mikheil Saakashvili with a number of crimes he allegedly committed while in office. Saakashvili has denied any wrong doing and accused the current government of a political witch hunt. The government has claimed that they are attempting to demonstrate that everyone is equal before the law and that justice, which was precarious during UNM rule, has returned to Georgia.

While the world shook in 2014, Georgia mainly felt the weaker aftershocks of world events in 2014, and although Georgia experienced crises in miniature, it has navigated domestic issues with a relative grace. Still, the crises in Ukraine and Syria left their mark on Georgia, and will continue to impact Georgia in 2015.

Does public opinion accurately gauge government performance in the South Caucasus?

Robert Putnam’s 1993 work Making Democracy Work: Civic Traditions in Modern Italy marked a seminal moment in the development of institutionalism. Putnam’s exhaustive study of the relationship between the governed and governing in the Italian regions contained the discovery that public opinion provides an accurate picture of actual government performance: “The Italians’ gradually increasing satisfaction with the regional governments … corresponded to real differences in performance,” and in each region Putnam’s measurement of performance was “remarkably consistent with the appraisals offered by the regional attentive public and by the electorate as a whole.” While Italy was the focus of his study, Putnam’s findings can be applied broadly as he draws identical conclusions across regions with disparate social, economic, and historical conditions. Can his insight on the relationship between public opinion and government performance be transposed onto any or all of the countries of the South Caucasus?

The three states comprising the South Caucasus – Armenia, Azerbaijan and Georgia – are characterized by varying degrees of governmental effectiveness. Public opinion data from the CRRC Caucasus Barometer survey (CB) also shows differing levels of trust toward government in each country. This blog post asks the following question: does public trust in government institutions in the South Caucasus countries reflect the actual performance of government? Drawing on CB data as well as the Government Effectiveness dimension of the World Bank’s Worldwide Governance Indicators project (WGI), this blog post finds an apparent mismatch between levels of public trust in state institutions and measures of actual performance.

The populaces of the three South Caucasus states demonstrate divergent attitudes toward the institutions that make up government. Azerbaijanis report more positive views of government, reporting relatively high levels of trust in the Parliament, President, and Prime Minster and ministers. Georgians are less trusting of the Parliament, Prime Minster and ministers, but demonstrate more trust in the courts, the ombudsman and political parties. While it is not possible to say with certainty whether the average Georgian or Azerbaijani has more trust in government institutions overall, it does seem apparent that Armenians demonstrate the least trust. In 2013 residents of Armenia indicated the highest levels of distrust on almost every relevant CB question. The only incidence in which Armenians demonstrated levels of trust slightly higher than a neighboring country was when asked how much they trust or distrust their country’s local government. 35% of Armenians indicated trust, compared to 28% of Georgians.

Note: This graph only displays the percentage of people who reported distrust in the respective institution. The original question asked, “Please tell me how much do you trust or distrust … [institution]?” Values were re-coded from a 10-point scale used in the questionnaire to the three-point scale used in this text, with original values 1-4 corresponding with the response “distrust” (shown here), 5-6 being “neutral,” and 7-10 corresponding with “trust.” While the graph displays data from 2013 only, this blog post drew on data from 2008 onward. 

In attempting to answer the central research question, this blog post investigates whether the greater propensity to trust state institutions appears alongside higher WGI scores for government effectiveness in each country. While a comprehensive model of governmental effectiveness is the task of a deeper, more comprehensive analysis, this blog post relies on the Government Effectiveness aggregate of the WGI. This metric is intended to measure “the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.” The indicator is aggregated from 15 individual indicators of governmental effectiveness including the World Bank Country Policy and Institutional Assessment, Economist Intelligence Unit, Bertelsmann Transformation Index and Gallup World Poll.

Provided that the findings of the index paint an accurate picture of the subject at hand, it brings up mixed results with regards to Putnam’s aforementioned conclusion. In each year 2006-2013 Georgia’s score bested those of the other two countries in question, thus the relatively high levels of trust observed in Georgia appear alongside regionally impressive scores for governmental effectiveness. As for Azerbaijan, it scored the lowest of the three South Caucasus states in every year in which scores were awarded. In 2008, the year corresponding to Azerbaijan’s lowest score on the WGI, 87% of Azerbaijanis reported trust in the President and 52% in the Parliament, both measures being higher than those found in Georgia and Armenia (the first being much higher), even though Azerbaijan received a WGI score of less than half of either of its neighbors. Thus it does not appear that public opinion accurately reflects reality in the case of Azerbaijan.

Note: These scores represent percentile rankings. Not all of the 15 indicators used in the Government Effectiveness metric are available from each country in every year. For example, in 2013 a total of 11 indicators were used to compile Armenia’s score, compared to 10 for Georgia and 9 for Azerbaijan.

When observing the case of Armenia, viewing CB findings in relation to the WGI index indicates possible dissonance between public opinion and governmental effectiveness. While Armenia scored slightly lower than Georgia on the WGI each year from 2006 and 2013, CB results show that Armenians’ reported trust in government institutions has been much lower than that in Georgia. This could indicate that Armenians are overly pessimistic about the performance of their government, that Georgians are overly optimistic, or a combination of both. In each case, a possible explanation is that Georgia’s scores on the WGI have almost invariably trended upward, starting at a trough of 39.5 in 2005 before peaking at 69.9 in 2012. Armenia, on the other hand, has seen only modest and uneven gains, with public trust in Parliament, the President and the executive government each declining over the same period. Georgian optimism may stem from the appearance of progress, while Armenian pessimism could be the product of a general malaise in the performance of government.

On the whole, it appears that Putnam’s observation cannot be applied neatly to the three states of the South Caucasus. The Azerbaijani public demonstrated the highest levels of trust in almost every governmental institution listed on the CB, even as the country received the lowest scores on the WGI. Georgia scored the highest of the South Caucasus states on the WGI, while public trust in government appeared to be generally lower than in Azerbaijan. Trust in Georgia was significantly higher than in Armenia despite scores on the WGI being only slightly higher. Thus, viewing Georgia and Armenia in relation to one another also appears to uncover a mismatch between perception and reality.

To gain more information on public opinion in Armenia, Azerbaijan and Georgia, please visit the CRRC regional website or refer to the CRRC’s online data analysis tool.

How does job satisfaction vary by job profile?

A number of fields, including economics, sociology and psychology, study issues related to job satisfaction. Using CRRC Caucasus Barometer (CB) 2013 data, this blog post looks at how job satisfaction differs by job profile.

For the first time in 2013, CB used the International Labour Organization’s International Standard Classification of Occupations (ISCO-08) to measure the status of respondents’ jobs (referred to as “job profile” for the rest of this blog post). The level of job satisfaction was measured using the following questions:

• “To what extent do you agree or disagree with the statement: ‘I am doing something that many people need?”
• “Overall, how satisfied or dissatisfied are you with your job?”
• “To what extent do you agree or disagree with the statement: ‘I feel valued at work?”

According to CB 2013 data, Georgians with different job profiles report different levels of perceived importance for their job. Georgians holding a high profile job are nearly twice as likely (75%) as Georgians holding low profile jobs (40%) to think that they are doing something that many people need.

Note: Suggested answer options for the job profile question included Manager; Professional; Technician / Associate professional; Clerical support worker; Service / Sales worker; Skilled agricultural / Forestry / Fishery worker; Craft and related trades worker; Plant and machine operator / Assembler; Elementary occupation; and Armed forces occupation. Each of these categories suggests a different level of qualification, payment and prestige. For this blog post, the options “Manager” and “Professional” were combined into the category ”high profile occupations,” while the other categories were grouped into the category “low profile occupations.” Options “Don’t know” and “Refuse to answer,” relevant for less than 3% of the employed, were excluded from the analysis. It should be mentioned that the findings presented in this blog post only apply to Georgians who reported having a job at the time of the interview (39% of the sample), and that the ratio between high and low profile occupations is not equal (23% and 77%, respectively).

Similarly, the assessments of job satisfaction also differ by job profile. The share of employed Georgians who report being satisfied with their job is greater among high profile job holders.

Following the same logic, the number of respondents who completely agree with the statement “I feel valued at work” is nearly twice as high among high profile job holders (47%) than among low profile job holders (25%).

Job satisfaction varies by job profile among employed Georgians. The charts above indicate these differences: the employed who believe they do an important thing for others and feel valued at work tend to have high profile jobs (managers, professionals). For more data on job profiles in Georgia and the South Caucasus check out the CRRC’s Online Data Analysis tool, here.

State capacity in the South Caucasus: How do you measure how much the state can do?

State capacity is a concept which has gained wide interest from political scientists in recent years as an important concept for economic development and regime classification, yet it still lacks agreed upon definitions and indicators. Its definitions vary, with different scholars highlighting different aspects of the concept based on their angle on the subject, but some definitions of state capacity are broader than others. A good example of a broad definition of state capacity is “the state’s ability to implement public policy” (Rogers and Weller, 2014).

The lack of agreement on indicators and definitions is due to the inherent multidimensionality of the concept. This multidimensionality is well exemplified by Fjelde and De Soya’s 2009 article which identifies state capacity as a state’s ability to coerce, co-opt, and cooperate with society. While the authors provide indicators for these capacities, their schema seems more to describe a state’s relationship and interactions with citizens rather than state capacity in and of itself.

The fact that different scholars have theorized different capacities including fiscal capacity, bureaucratic-administrative capacity, and coercive capacity as component parts of state capacity further illuminates the multidimensionality of the concept. This blog post looks at three of the many possible indicators which could be used to gauge state capacity in the South Caucasus: revenue excluding grants as a share of GDP for fiscal capacity, taxes on income, profit, and capital gains as a share of total revenues for bureaucratic-administrative capacity, and military expenditures as a share of central government expenditures for coercive capacity. So, how strong are the South Caucasus states?

Fiscal capacity is considered one of the most important state capacities by most authors as without the financial means to accomplish a stated policy, that policy will likely never be realized in practice. The graph below presents World Bank data for state revenue excluding grants as a share of GDP and shows how much the South Caucasian governments collect from their societies. What appears most prominently is that Azerbaijan’s fiscal capacity far outstrips that of Georgia and Armenia, which exhibit similar levels of extraction. It is important to keep in mind here that revenue consists not only of taxes but also funds collected through fines, fees, and resource rents. The latter are particularly important for Azerbaijan as the government received 54% and 65% of state revenues from oil and gas in 2005 and 2011 respectively. Without its oil wealth, Azerbaijan would collect significantly less in revenues.

Definitions of bureaucratic-administrative capacity often center on a state’s ability to collect and manage information (Hendrix, 2010). This capacity is central to a state’s ability to act and likely enables a state to have fiscal and coercive capacity. For example, if a state is unable to gather information on potential militants within its territory it will be unlikely that it can coerce or co-opt them into compliance. In order to successfully cooperate with society, information gathered must be channeled into usable and comprehendible forms which enable the government to act.

Income, profit, and capital gains taxes as a share of total taxes are a useful indicator of bureaucratic-administrative capacity. While at first glance it may be taken to indicate fiscal capacity, income taxes are more closely related to bureaucratic-administrative capacity, because this form of taxation is both a relatively difficult and relatively desirable tax to collect (Rogers and Weller, 2014). The desirability of income tax stems from the fact that it generally provides a revenue stream which does not drastically fluctuate. In most circumstances, however, it is a relatively difficult tax to collect (though the system of income tax payment by employers has lowered this difficulty in Georgia, Transparency International Georgia has noted that non-compliance with income tax remains problematic). As such, the share of income tax as a percentage of total state revenues proxies how well a state can extract from and manage information on its population. The graph below presents taxes on income, profits and capital gains (two other taxes which are similar to income tax) as a percentage of total taxes collected. The graph demonstrates that Georgia’s bureaucratic-administrative capacity on this measure is higher than that of Armenia or Azerbaijan. While Azerbaijan’s relative weakness in this sector is likely caused by hydrocarbon revenues, Georgia’s relative strength likely comes from the reforms in tax collection and enforcement, which started with the tax code passed in 2005.

A final important capacity of state is its ability to coerce its population; without the capability to put down paramilitaries or suppress violent groups, a state can quickly devolve into chaos. Taking military expenditures as a share of central government expenditures as an indicator of coercive capacity, the graph below gives a possible indication of coercive capacity. This indicator, though, also likely describes the changing relative importance of coercion to each state over time, as one would expect the share of total expenditures dedicated to military expenditures to increase if security issues became relatively more important – hence Georgia’s relatively high expenditures in 2008, which are largely a result of the 2008 August War with Russia. When looking at the figures, it is important to note that Azerbaijan’s budget is significantly larger than either Georgia’s or Armenia’s and as such has a much larger absolute level of coercive capacity.

This blog post has looked at three of the many possible indicators of state capacity. For readers interested in the subject, this 2010 article by Cullen Hendrix goes through a wide variety of indicators, although the data set used does not include any of the South Caucasus countries.

Have any ideas about other indicators? Join the conversation on Facebook or at CRRC-Georgia’s office on December 10th for the Works-in-Progress talk: State/party capacity and constraints on state action: Operationalizing and indexing state capacity in Georgia and Armenia.

SME Performance in Georgia and Armenia: Part 2

As discussed in the first blog post of this series, the results of the CRRC Caucasus Barometer (CB) survey show that Georgians demonstrate higher levels of interpersonal and institutional trust than Armenians.  These types of trust are important indicators of social capital, which is often taken as a necessary condition for the presence of a robust, productive entrepreneurial class and small and medium enterprise (SME) sector. While Georgians express higher levels of trust in their fellow citizens as well as in formal institutions such as the judiciary and Parliament, economic data shows that the country’s SME sector suffers from a dearth of productivity. This blog post looks at survey data shedding light on economic conditions in Georgia and Armenia as well as policy research on the state of SMEs in each country, finding impediments to rural development and the high cost of financing to be potential causes for the relative lack of productivity by Georgian SMEs.

Productivity of the SME sector (defined as value added per employee) is significantly lower in Georgia when compared to Armenia. Emblematic of the lack of productivity in Georgian SMEs is the preponderance of small-scale agriculture. Many legally designated “small enterprises” are in fact subsistence agriculture proprietorships with little or zero cash turnover, a situation which Rudaz 2012 refers to as “entrepreneurship by default.” A report from the International Fund for Agricultural Development found that as late as 2005, 83% of rural households were dependent entirely on subsistence agriculture and that a “typical” rural household consumed 73% of what it produced. By 2013, however, the CB found that 59% of rural Georgians reported receiving household income from the sale of agricultural products, indicating an existence at least slightly above subsistence level agricultural production.  On the other hand, 27% of Georgia’s rural inhabitants reported no household income from salaries or sales of agricultural products. Rural Armenians are somewhat less likely to sell agricultural products (50% reported household income from this source), but more likely to receive salaries. However, 25% percent of rural Armenians responded “no” to their households having received income from either source. Thus one cannot decisively discern from the data at hand whether rural Armenians are more likely to receive cash income than rural Georgians.

The first blog post of this series determined that available measures of social capital appear to be insufficient to explain differences in SME productivity between the two countries. So, what are possible causes for the lack of productivity gains in Georgia’s SME sector? With regards to agricultural SMEs, a potential culprit mentioned in the previous installment of this series is the fragmentation of agricultural land, with the average private holding in the country being only 1.25 hectares. The consolidation of small plots into larger and more efficient commercial farms has been impeded by an inefficient system of land registration and poorly defined property rights. Restrictions on the purchase of agricultural land by foreigners and foreign-owned businesses have also precluded potentially productive investment in the sector. While the Constitutional Court struck down a law banning land purchases by foreigners in June, 2014, a new draft of the law will allow private foreign persons and foreign companies established in Georgia to purchase plots of up to 100 hectares. Fragmentation is a problem in Georgia, but it also bears mentioning that the average private plot in Armenia consists of 1.3 hectares, scantly larger than in Georgia. Land fragmentation appears to be an obstacle to the growth of Georgia’s SME sector, but it doesn’t appear to be a decisive one. 

As for palpable factors which may explain the lack of growth by both Georgia’s agricultural and non-agricultural SMEs, the difficulty of obtaining financing should not be overlooked. The average interest rate spread in Georgia (the difference between the interest paid on deposits and the interest charged on loans) is 11.3%, the highest spread of the former Soviet republics and significantly higher than the average spread of 7.3% in Armenia. This means that the cost of borrowing outstrips the incentive to save, with the result being that an entrepreneur in need of financing to buy land and equipment or hire employees is faced with very high borrowing costs. In Armenia, this problem occurs but on a smaller scale.

The high cost of financing stems in part from the lack of collateral held by SMEs, which discourages lending. Rudaz also reports the existence of a “law giving tax authorities the right to use the collateral of tax payers who owe money to fiscal authorities,” which allowed the tax authorities to seize the collateral of those owing back taxes. To be more specific, in cases in which a person has outstanding debts to both the tax authorities and a financial institution, the claims of the tax authorities take precedence. This interpretation was corroborated by Eka Gigauri of Transparency International Georgia. As a result, domestic financial institutions face higher financing costs when borrowing from abroad, and banks have become reluctant to accept collateral. There is also a general sentiment of political risk associated with Georgia; the country has a moderate-to-low credit rating of BB-, which hampers the ability of banks to procure external funding. These developments translate into higher borrowing costs for households and businesses.

To summarize, academic studies produced by Knack and Keefer (1997) and Bjornskov and Meon (2010) emphasize the importance of social capital on the success of entrepreneurship, and CB survey data show that Georgians exhibit significantly higher levels of social and institutional trust (which are among important indicators of social capital) than Armenians. Social trust is often taken as a necessary condition for economic growth. However, it is not a sufficient condition, as indicated by measurements of productivity (SME turnover per employee) being much higher in Armenia than in Georgia. This indicates that more palpable factors are inhibiting the growth of Georgia’s SMEs, with agricultural land fragmentation and the difficulty in obtaining financing being possible explanations. However, it must be conceded that none of the factors presented in this study, when viewed in a vacuum, appear sufficient for explaining the divergent performances of SME sectors in Georgia and Armenia. A more comprehensive study is necessary to reach solid conclusions.

For more information about public opinion in the South Caucasus, including data pertaining to social capital and the economic situation, refer to the CRRC online data analysis tool. If you have some criticisms, evidence or insights to add to the discussion, please feel free to contribute comments.