Statistical Hiccups Cause Georgia to Become Lower-Middle Income Country

[Note: This article originally appeared on Eurasianet. It was written by Dustin Gilbreath, a Policy Analyst at CRRC-Georgia. The views expressed within the article do not necessarily reflect the views of CRRC-Georgia or any related entity.]

Georgia’s economy appeared to take a step backward earlier this summer when the World Bank demoted the country to “lower-middle-income” status. The demotion, however, has more to do with statistical hiccups than it does with a substantial decline in economic activity.

In 2016, Georgian officials cheered when the World Bank promoted the country into the ranks of “upper-middle-income” states. It was big news in Tbilisi, the capital. But in July, officials didn’t have much to say when the country slipped back into the “lower-middle-income” ranks.

To understand the up-and-down tale of Georgia’s economic status, one needs to know how the World Bank classifies countries into income groups, a bit about Georgia’s 2002 and 2014 censuses, Georgia’s fluctuating exchange rate, and what country classifications are used for in practice.

To start, the World Bank measures economic status primarily by relying on gross national income (GNI) per capita, which is composed of GDP, as well as incomes flowing to the country from abroad, including interest and dividends. To make these calculations, the Bank uses something called the Atlas method, which accounts for fluctuations in the exchange rate using a three-year, inflation-adjusted average of rates.

Thresholds for each income group change slightly every year based on inflation. In the most recent year, countries with less than $1,005 in GNI per capita were designated low-income countries; those with GNIs from $1,006 to $3,955 fell into the lower- middle-income group; $3,956 to $12,235 were upper middle income; and those with $12,236 and above attained high-income status.

Georgia isn’t the only post-Soviet country to experience a downgrade in recent years due to exchange-rate woes and other factors. Russia, for example, moved down to upper-middle-income status in 2016 after three years in the high-income group.  Meanwhile, Azerbaijan, which is grappling with a severe downturn due to the global drop in energy prices, is at risk of demotion to lower-middle-income status next year. And Kyrgyzstan and Tajikistan appear poised to slip back into the lower-income category.

GNI per capita is a population-based measure. That means that as the number of people decreases, the figure increases. For this reason, the 2014 census made Georgia an upper-middle income country. This fact stems from Georgia’s population size between 2002 and 2014 being estimated using the 2002 census. In 2002, the Georgian government carried out its first census since the last Soviet census in 1989. The census’s final population count is believed to have heavily overestimated the population at about 4.4 million citizens. Between censuses, the population data is updated using birth and death registries. These too had problems, showing that Georgia’s population was growing steadily.

In contrast to the 2002 census, the 2014 census was more rigorous. It showed a 17% smaller population figure than the Georgian National Statistics Office had estimated for 2014. This meant that the per capita figures for GNI jumped, pushing Georgia into upper-middle income status. Notably, estimates of GNI per capita which use more realistic population figures for the years between 2002 and 2014 suggest that Georgia had likely crossed the upper-middle income threshold in 2013.

Even though the Atlas method takes into account fluctuations in exchange rate, GNI per capita is ultimately denominated in dollars for the World Bank’s calculations. In Georgia’s case, the Lari has dropped from around GEL 1.7 to the dollar in early 2014 to about GEL 2.4 to the dollar at the time of this writing. The value of the Lari was even lower for a time. In practice this has decreased Georgia’s GNI per capita figures to the point of knocking the country into a different income category.

Against the backdrop of population estimate revisions and fluctuating exchange rates, Georgia’s economy has been growing, albeit very slowly for a developing country in recent years. Georgia’s economy grew at an average rate of about 5.9 percent from 1995-2013; since 2014, it has grown at an average rate of 3.4 percent

The exchange rate fluctuation is hampering growth prospects. For one, rate volatility makes it harder for businesses to predict costs. In addition, many Georgians have dollar-denominated loans, while their incomes are in Georgian Lari. Although nominal salaries have slightly outpaced inflation, they have not kept pace with the decline in the Georgian currency’s value. Hence, debt payments consume a rising share of income for those trying to pay off dollar-denominated loans. The Georgian Government and National Bank are addressing this situation via a program that subsidizes the conversion of foreign-currency loans into Georgian Lari at a favorable rate.

While Georgia’s income group status has more to do with how the statistic is calculated than the actual state of Georgia’s economy, the changes have had clear implications. For instance, the Global Fund - an organization that has provided over USD 100 million to Georgia over the years to combat tuberculosis and AIDS - has different rules on aid for lower-middle-income and upper-middle-income countries. Meanwhile, a Brookings Institution study suggests that upper-middle income countries receive aid more often in the form of credits (i.e. loans) than grants when compared with lower middle income countries.

Some development organizations explicitly change lending terms when a country moves from lower middle to upper middle income status, although the World Bank itself does not. Hence, Georgia’s downgrading may have a silver lining, potentially leading to more aid opportunities.

But downgrading also has significant downsides. In political terms, it’s not good news for incumbents because it fosters an appearance among the population that the country is moving backwards. It also can impact the decisions of potential foreign investors. The demotion in status is unlikely to make Georgia a more attractive investment destination.

An interesting implication of the 2014 census: Georgia is likely an upper middle income country

While Georgia has yet to be officially declared an upper middle income country by the World Bank, as a result of the 2014 census, it’s likely to be labeled one after the final census results are published in April of 2016. Interestingly, Georgia likely became one in 2013. Why is this the case and what are the implications? Let’s take a look using the 2014 preliminary census data and a population model developed by Ilia State University’s Giorgi Tsuladze published in a 2014 United Nations Population Fund (UNPF) and International School of Economics at Tbilisi State University (ISET) report.

The 2002 census was way off

In 2002, the Georgian government carried out a population census and found that there were 4.37 million Georgians. This number though was and is widely considered to be suspect. According to the 2014 UNPF report (and notably, Geostat employees at the time), the main problem with the 2002 census was its method of counting the migrant population. Specifically, the 2002 population count included 114,000 migrants who may have been permanently settled abroad rather than temporarily. This number may have been even higher considering that an estimated one million Georgians left the country between 1990 and 2002. Their family members who were interviewed for the census may have been reluctant to report that their relatives had gone abroad and instead reported them as temporary migrants or still in the country for a variety of reasons.

Not only was the census off, but so too were the civil registries which count birth and death registration. Between censuses, governments update population counts based on birth and death registrations, but because many births in Georgia happened and to a certain extent still happen outside of hospitals, births are not always registered. Also important are the lack of death registrations.

Recognizing these problems, Giorgi Tsuladze, a Professor at Ilia State University, made a downward adjustment of the population figure from the 2002 census, an upward adjustment to the birth rate, and a decrease in the estimate of the average life expectancy to estimate the population. In turn, his estimates of the population are quite close to what the preliminary 2014 census results tell us about the Georgian population – there are about 3.7 million people in Georgia (excluding South Ossetia and Abkhazia).

	Geostat population estimate (thou.)	Tsuladze population estimate (thou.)
2002	4,372	4,001
2003	4,343	3,966
2004	4,315	3,931
2005	4,322	3,899
2006	4,401	3,869
2007	4,395	3,839
2008	4,382	3,814
2009	4.385	3,797
2010	4,436	3,790
2011	4.469	3,786
2012	4,498	3,777
2013	4,484	3,768

Source: Tsuladze, G.; N. Maglaperidze and A. Vadachkoria. 2002. Demographic Overview of Georgia. Tbilisi, UNFPA. Cited in
Hakkert, Ralph, Gulnara Kadyrkulova, Nata Avaliani, Eduard Jongstra, Lasha Labadze, Maka Chitanava, and Nino Doghonadze. Population Situation Analysis (PSA) 2014. Rep. Tbilisi: United Nations Population Fund, 2015. Print.

Income classifications

The second important part of this story is understanding how countries are classified into income groups. The World Bank classifies countries by Gross National Income per capita (slightly different than Gross Domestic Product per capita – see here for exact definitions).

Countries with a per capita GNI of less than $1,045 are considered low income countries. Countries with greater than $1045, but less than $4,125 GNI/capita are classified as lower-middle income countries. Countries below $12,736 but above $4,125 GNI/capita are considered upper middle income countries, and countries above the $12,736 mark are considered to be upper income countries.

Since, a country’s income classification is based on the size of its population, and as we saw above, Georgia’s official population size was inflated by a fairly sizable margin for the past twelve years, Georgia’s GNI per capita (as well as GDP per capita) was underestimated.

Georgia probably moved from the lower-middle income to the upper-middle income grouping in 2013 when GNI per capita moved from from $3914 in 2012 to $4240 in 2013 (based on Tsuladze’s population estimates). In 2014, using the preliminary census data, Georgia’s GNI was $4489/capita. Hence Georgia has very likely moved income groups, barring a major miscount of the preliminary census data of roughly 330,000 people.

Why does this matter?

Well, it is good and bad news for Georgia.

To start with the bad, aid is sometimes distributed based on a country’s economic status. There are many other important factors at play (see here for a discussion of the subject), but nonetheless it is often considered in aid decisions. Hence, Georgia may expect lower levels of aid in the coming years as its per capita economic statistics are adjusted upward following the finalization of the 2014 census in 2016.

When it comes to the good news for the country, Georgians are doing better than the numbers suggested. This does not change the facts on the ground and widespread poverty experienced in Georgia, but in the long run it can lead to a number of benefits. For instance, foreign private capital flows may increase as the country may be perceived as a more enticing investment environment, having moved to a higher income category.

The upward adjustment will also be important for Georgia’s Euro-Atlantic integration prospects. One of the key factors which the EU has identified as a barrier to prospective membership for countries in its neighborhood is low income levels, and as Georgia’s income level gradually increases, it will make Georgia a more attractive partner country. Notably, the lower population also means that per capita income is increasing at a higher rate than previously thought. In the short term, it may also help ease fears over migrant flight from Georgia (which is likely an inhibiting factor at present for Georgia in the EU visa liberalization process). It is important to note that if income inequality persists in Georgia, economic growth is unlikely to deter migrants from attempting to make their way to the EU, though a fuller treatment of this subject is beyond the scope of this post.

On the grand scheme of things, the adjustment is good as well. While not necessarily good for Georgia, countries in more dire straits may receive more aid that would have been aimed at Georgia. Better decisions about what kind of aid the country receives may also result from the more accurate data and income categorization.

Although we should not expect to see the official income categorization change to upper-middle until after Geostat has published the final census numbers and adjusted its population estimates for 2002-2014, it should occur in the next few years.

To take a look through the preliminary 2014 census results, take a look here, and for the estimates of the population size which this blog is based on as well as other interesting data and analysis on Georgia’s demographic situation, take a look at the UNPF/ISET report, here. Notably, Georgia is not the first and surely not the last country to have a major economic indicator readjustment based on something besides economic growth. Ghana and Nigeria both have had large changes to their economic indicators in recent years caused by how GDP was calculated rather than growth with interesting implications. Listen to this Planet Money story to find out more.

Ask CRRC | Survey vs Census

Q: What’s the difference between a survey and a census?

A: In short – census takers attempt to contact all members of a population, while surveyors select a sample of people from the population and use the responses of those people to draw conclusions about the proportions of people in the greater population holding various opinions.

There are many advantages to conducting a survey rather than a census, and here are some key examples: 

Firstly, results can be produced much more quickly with a survey than with a census. Imagine that you want to gauge Georgian political opinion just before an election. How much time would it take you to interview every adult Georgian? How many interviewers would you need to train in order to conduct all of the interviews in the month before the elections? A political opinion survey conducted by CRRC immediately before the May 2010 elections employed 100 interviewers to attempt 3,284 interviews. The adult population of Georgia is approximately 3.5 million persons, meaning that a census would require roughly 106,577 interviewers.

Secondly, the far smaller number of interviews conducted in a survey means that you can allocate more of your resources towards ensuring quality. Would you want to spend your money providing a competitive salary to 100 quality interviewers and training them well, or would you rather spend your money paying a minimal wage to 106,577 interviewers and training them insufficiently? In short, a survey allows for more resources to be allocated to other aspects of the process. CRRC invests resources in ensuring quality throughout the survey process, including performing checks to ensure interviewer integrity and entering the data from each interview into the database twice in order to catch data entry errors.

Thirdly, with a survey you can spend your time and money making sure that you collect information on all members of your sample. You can revisit houses where you didn’t find people at home the first time. This is important because certain parts of the population are harder to reach than others. For example, women, older people, and unemployed people are all more likely to be at home when an interviewer visits. These demographic groups may have different answers to survey questions than their counterparts, and a sample that over-represents them may be biased. CRRC interviewers randomly select a respondent in each selected household. If that household member isn’t home, the interviewer schedules a re-visit to the household, and makes a total of three visits to attempt to find that household member at home. This ensures that the sample contains a representative mix of men and women, young and old, employed and unemployed.

The reasons listed above are all interrelated – time, money, and manpower are always limited, and conducting a survey allows an organization to gain as much information as possible for the resources that they expend. However, in some cases the situation is even more extreme – in some cases, the object of measurement has to be destroyed in order to be measured. Think of how a manufacturer measures the number of calories per cookie: they burn a cookie in a machine called a bomb calorimeter, shown in the figure above. The number of calories in the cookie is a measure of how much heat the cookie produces when burned. Not every cookie is identical, so manufacturers take a sample of cookies. They burn each one in a bomb calorimeter, and report the average number of calories generated per cookie in the sample. If they performed a census on the population of cookies and burned every cookie, there would be nothing left to sell.

Migration from Georgia: capturing data

Migration is one of the major stories in the former Soviet Union. However, we know surprisingly little about the actual patterns, since they are difficult to measure. George Tsuladze has done some research, on the basis of the 2002 census.

His research shows that the official census data is not very good at capturing migration. By definition, a census cannot reach people that are no longer at home, and often entire families migrated. In this case, all they leave is a locked door (or another family living in there, talking about themselves).

Another reason is that respondents often don't like giving honest answers about members of the household being abroad. Women being left alone at home, with their children, typically won't really want to tell a stranger ("what's that, again? A census?") that their husband isn't likely to be back in the next few months. Voter lists, ownership, taxes, entitlements, extra income through remittances, general distrust of the state -- all sorts of reasons not to be upfront.

Moreover, migration is seasonal: sometimes people just go for the summer (especially if they work in construction, or other seasonal sectors). So any May and June, although a good time for going around the country, is a bad time for capturing migration.

Tsuladze does cite the data there is, with all the caveats:

• about 59% of immigrants are male, 41% female;
• of the female migrants, 34% are single when emigrating
  
• about 43% of male, and 36% of female migrants support families that have stayed at home (this is actually a fairly low number, and may reflect some reluctance to admit receiving remittances; or an insufficient clarification what "financial support" means)
• all of the nationalities living in Georgia have fairly high numbers of emigration, but the Greeks emigrate disproportionally (no news here, though)

I would still like to know:

• What exactly are the patterns?
• What are the percentages of migrating with the entire family?
• and: some studies of how families develop.
  

Tamara Zurabishvili is doing more research work on migration, on a CRRC-fellowship, doing an alternative census with an orientation towards comparing actual census data with her own work. She will survey 1200 households in Daba Tianeti, an area particularly affected by emigration.

At any rate, innovative techniques for capturing the real data are needed, not least for estimating demographic trends.

The UNHCR wanted to translate George Tsuladze's work, so it may become available in English.