How financially literate are people in Georgia?

Note: This article first appeared on the Caucasus Data Blog, a joint effort of CRRC Georgia and OC Media. It was written by Koba Turmanidze, CRRC-Georgia's President, The views presented in the article are of the author alone, and do not necessarily reflect the views of CRRC-Georgia, or any related entity.

CRRC Georgia data suggests that about half the Georgian public has a basic understanding of interest and inflation rates.

Saving, spending, borrowing, or investing money are everyday decisions people around the world have to make. Making the right decisions requires a certain degree of financial literacy, which some scholars boil down to understanding the basics of inflation and interest rates.

In a bid to gauge the levels of financial literacy in Georgia, CRRC Georgia used questions developed by professors Annamaria Lusardi and Professor Olivia Mitchell to assess an individual’s understanding of inflation, interest rates, and investment.

Lusardi asked around 16,000 participants in a 15-country study the three questions for a 2019 study, which showed that around one in three people can answer all questions correctly and about a half can understand both inflation and interest rates correctly.

As Caucasus Barometer surveys have shown, people’s lives in Georgia are significantly influenced by inflation and interest rates. While very few people save money in Georgia, people borrow intensively. Notably, since 2015  between one in five and two in five Georgians have named inflation as a top issue in the country. 

With this in mind, CRRC Georgia adapted and replicated two of the questions developed by Lusardi and Mitchel — particularly those about inflation and interest rates.

In a January 2022 Omnibus survey, Georgians were asked to imagine that they had an account with $100 in it, and that the account paid a 2% interest rate. They were then asked whether, after five years, there would be more than $102, exactly $102, or less than $102 in their bank accounts.

The second question measured people’s understanding of inflation: again, people were asked to imagine they had a sum of money in their bank account with an interest of 1%, while prices of goods would increase by 2% annually. The respondents were then asked whether they could buy their usual groceries with the same amount of money over time, or if they would pay more or less.

The majority of the public answered each question correctly. Nearly two-thirds (61%) understood interest rates correctly (8% incorrectly, 29% were uncertain, and the remainder refused to answer), and 64% understood inflation correctly (10% incorrectly, 25% were uncertain, and the remaining respondents refused to answer the question). Overall, 51% answered both questions correctly, 26% at least one correctly, and 24% both incorrectly or with uncertainty.

The most important factors associated with financial literacy are education levels and ethnicity. 

Individuals who are more educated are more likely to be financially literate: those with technical education 10 percentage points higher, and those with tertiary education 21 percentage points higher than individuals with secondary education or lower.

Ethnic Georgians are 28 percentage points more likely to answer financial literacy questions correctly than ethnic minorities. 

Notably, internally displaced persons are less likely to understand inflation rates correctly than non-IDPs, but understand interest rates at similar levels. 

Other factors, such as gender, age, having children in a household, employment status, and wealth, are not associated with financial literacy.

When compared with other countries, where similar questions were asked, the results from Georgia show significant similarities and differences. While about 50% can answer both inflation and interest rate questions correctly, just like in other countries, the Georgian data does not confirm gender and age differences documented elsewhere. In contrast, having lower educational attainment and being an ethnic minority is associated with less financial literacy in Georgia. 

The data used in this post is available here.

The CRRC’s 500th post and thoughts about the future of social research

By Hans Gutbrod

When we started this blog, quite a few years ago, we published a few posts, and didn't tell anyone about it. We weren't sure whether the venture would work – and whether it was a good fit for ourselves. Now, with this 500th post, I'm glad to see that our tentative venture took off.
The blog continues to hold a lot of material that may be of interest to readers, as it documents various aspects of work that have been done over the years. Readers, researchers, journalists and the interested public may find it useful to browse whenever they look for information on a specific issue.

An additional tool we built for that purpose is Find Policy, a tool that searches websites of all major Georgian research organizations, and also includes this blog. You can find it here: www.findpolicy.org/georgia

At the occasion of the 500th post, what are some of the issues that lie in the future? How can empirical social science be relevant to the lives of people in the South Caucasus? Here are some ideas.

Quality & Standards
Research organizations succeed because of processes. Being organized is often more important than being smart. If social researchers in the South Caucasus want to be credible, they have to deliver consistent quality, and this may sound difficult. However, there is much experience in how to structure review processes which institutions can draw on.

Such review costs time. Yet it’s an investment that pays off. If research organizations want to make a difference, putting such internal review processes in place is a key component. How to make them stick? Write them up and put them on your website, as a binding policy to commit everyone on the team. You can still override in rare emergencies, but you can’t thrive if you only operate in emergency mode.

Transparency
Fortunately, many organizations in Georgia are transparent about who funds them. In the past, these were primarily Western-oriented institutions. Lately, there is added concern about funding from Russia, seeking to further Russian interests. At first glance, this is legitimate, too, as debate typically thrives on a diversity of opinion. However, all institutions should be transparent about who funds them. They owe this to citizens, who thereby can better understand who paid for research. Organizations that are committed to having an impact should be role models in that regard. Georgia is already doing quite well – and why not become the most transparent country, in that regard, in the world? (Disclosure: I'm campaigning on this issue through an initiative called Transparify.)

Funding & Finance
Research organizations in the South Caucasus have enjoyed generous support. However, donors often do not understand what it takes to fund consistent quality. For that reason, too, transparency matters. Many research organizations in the South Caucasus arguably are better characterized as bundles of short-term projects. Such funding is valuable, but makes it harder to build up long-term expertise on particular issues. One worthwhile investment for donor money is to (continue to) give core-funding to those institutions that are genuinely committed to doing quality work. One evidence of such a commitment to quality are the standards and the transparency mentioned above.

Policy Relevance
What information should be in social research that aspires to be policy-relevant? There is no consensus on that in the South Caucasus, and arguably not even a sensible debate about some of the core components. Arguably, all policy proposals should be (a) intelligible, (b) calculate costs and benefits, on the basis of sound data, (c) consider alternatives and potential unintended consequences and (d) list major risks and corresponding mitigation strategies. These are some basic criteria that most people should be able to agree on, even while they add further suggestions.

In general, the quality of reports produced by research organizations in the South Caucasus has gone up, but I still read too many reports that fail by some of these basic standards. There also are presentations where I still struggle to understand what’s really being said. By the 1000th post, in šāʾ Allāh, it would be great if these basic problems were under control. Social research would increase its impact and help improve the lives of people in the South Caucasus.

With this happy anniversary note, I pass the ball over to you, readers, for your suggestions on what you would like to see from future social research in the region.

Hans Gutbrod was Regional Director at CRRC from 2006 to 2012, and initiated the CRRC Social Science in the Caucasus blog. He is now with Transparify. He is on Twitter. 

Banking and Financial Services in the Caucasus | CRRC Data

Have banking and financial services penetrated most households in the South Caucasus? Due to the topicality of finance news, an investigation on the usage of banking and financial services in the Caucasus seems justified. As banks fall, get nationalized and panic is spreading, our DI data on the usage of banking/financial services can be useful to understand the 2007 baseline. For instance: How many households in the South Caucasus have saving accounts that could, theoretically, be frozen if the financial situation further deteriorates?

As one can see in the graph above, banking/financial services are not used by the majority of the DI’s respondents. 66% in Georgia have not used banking/financial services compared to 57% in Armenia and 53% in Azerbaijan. Not many households are at risk of having their savings eaten up since only 1% of households in the region have savings accounts. It is remarkable that loans have been taken by so many Armenians (18%), but note that these people may not be owing money right now. For a look at household exposure, check our older post.

Now, let’s have a look at the usage of banking cards, which ought not to be confused with savings accounts. Although that few households have used banking/financial services in the South Caucasus, the numbers on usage of banking card is relatively high in the region, with Armenia being the exception that confirms the rule. 5% in rural Armenia and 23% in the capital are bearers of banking cards. Comparing this with 30% in rural Azerbaijan and 58% in its capital, one can see that the penetration of banking cards in Armenian households is relatively small. However, the largest regional differences are to be found in Georgia. Only 9% of households in rural Georgia have banking cards compared to 55% in its capital.

We also have data on public trust towards banks. But here one important limitation of the data above is that it is from 2007, so that it may not be sufficiently up to date. However, the DI 2008 will soon be available online (and yes, if the data show large inconsistencies, there will be a blog post on it). For the data above, check the CRRC Data Initiative (DI) 2007.

How Supply fails Demand | Pots of Honey

So what plagues local business? In many cases it's the same problem we have in politics as well: there simply is the wrong paradigm. It is self-centered, rather than being other-centered. Or, if that sounds too much like marriage counseling, let's put it this way: too many sellers try to solve their own problems, rather than those of other people. Nothing wrong with that, but it's not how you can succeed in a market. After all, who likes to spend their money on other people's problems? Charity is not a business model, at least not in retail.

Now in the last few days, an email exchange that perfectly illustrates this problem. (Note: I changed names, and the person is not even local. But it demonstrates the perennial problem.)

----------------------------------------
Dear all,

Many of you have purchased honey produced by my in-laws out close to Bakuriani. This year we have a bumper harvest and I can honestly say that the honey is even more delicious than ever. Its great with tea or over hot cereal and is especially effective at warding off colds. Most of the honey sold in the bazroba is adulterated with sugar water, but the one we offer is all natural. Price is 15 GEL per liter [around 10 USD], different sizes can be arranged.

Please contact me off list or call XYZ at 877-1234567 to arrange delivery.

Cheers,
Anna

-------------------------------------
From: Hans Gutbrod
Subject: Re: honey for sale
To: Anna
Date: Saturday, October 4, 2008, 12:19 PM

Hi Anna,

I really liked the honey, but I think you'd market it more effectively if you sell it in small doses. The 1.5 Litre pot that I bought last year (or even the year before?) is still sitting in my apartment, and I am still scraping it...

I think if you sell it in 250g jars, maybe with a small cute label, for 6 GEL, with 1 GEL going towards the charity your husband runs, you'd have even more uptake.

Anyway, I'd happily take 4 jars of 250 g each, and would pay extra for the jars.

Best,
Hans

-------- Original Message --------

Subject: Re: honey for sale
Date: Sun, 5 Oct 2008 12:21:00 -0700 (PDT)
To: Hans Gutbrod

Hi Hans,

I've sold small jars in the past at the Christmas bazaar, but it's really not worth our time, not to mention the mess. We have 2 tons of honey this year! If you'd like 2 half-liter jars, I can do that.

Cheers,
Anna

--------------------------------------------

So effectily Anna (not her real name) is trying to solve her problem of 2 tons, rather than my problem of how to consume that honey.

Pooh the Bear would be impressed.

Note the maths: 4 x 250g @ 6 GEL = 24 GEL; subtract additional cost for label and jars, and you still could make more than 20 GEL, an extra 5 GEL on the 15 GEL per liter. And that price is realistic, since the market that Anna is advertising to is NOT price sensitive, merely focusing on quality and convenience.

At least as important, Anna is cutting herself off from a natural extra market: honey as a nice gift in and from Georgia. A small, well-labelled glass of honey works well, it's a present that anyone would like to give and receive. Conversely, who will schlepp 1 liter pots anywhere?

These giant pots of honey to me are emblematic of why supply so often fails to meet demand. Sweetness undesired, at least in that shape and form. No wonder, then, that you still have so much foreign honey lining local super-market shelves. I sometimes even wonder whether these little stories and lessons are not at least as important in characterizing the business malaise than the larger economic explanations.

Any other instances you have come across? Any suggestions for how we could measure this phenomenon?

The Open Budget Index | Georgia, Azerbaijan and the World

The Open Budget Index, a project of the Center on Budget and Policy Priorities, released the first-ever independent and non-governmental Budget Transparency Ratings in October 2006. The index endeavors to provide the practical information needed to analyze the transparency and accessibility of a government’s budgetary processes—and thus better equip citizens and legislators in lobbying for governmental accountability and targeted, effective policymaking. The 122 multiple-choice question questionnaire, conducted by local experts in 59 participating countries across the world, is available on the Open Budget Index’s website, as is the data from each country’s answers. The survey’s questions target generally accepted public financial management and practices and the availability of certain budgetary documents governments should release to the public over the course of the budgetary year. The Open Budget Index did not evaluate the actual quality of the information provided by the government.

While one might presume that public access to governmental budgetary records and processes is a given in highly developed Western nations, the findings of this study refute this assumption: only six of the 59 countries were found to adequately provide all of the general budgetary documents (the winners were France, New Zealand, Slovenia, South Africa, the UK and the US). Over a third of the surveyed countries- 39%- shared only “minimal” or “scant” information with their citizenry. The study emphasized that the extent of a country’s budget transparency is very much influenced by the willingness of the government to share, and that a lack of capacity is not a legitimate excuse or constraint.

Georgia and Azerbaijan were part of the surveyed lot, and both were found to provide only minimal information to citizens. Their scores were nearly identical, with Georgia barely edging out Azerbaijan’s score of 30% with 33%. Russia fell in a higher category, providing “some” information to citizens with a score of 48%. The findings were presented in a somewhat confusing way, however- when you looked at the individual country summaries, it appeared as though Georgia was far more forthcoming- 6 out of 7 of their budget documents were coded as “Available to the Public,” whereas Azerbaijan had only one budgetary document open to the public, two were not even produced, and four were produced but for internal use only. Azerbaijan’s legislature does not provide public hearings on the budget at all, whereas Georgia makes an attempt but only opens a limited amount of hearings to the public. What may have bumped up Azerbaijan’s score disproportionately was the executive’s budget proposal, as the study scored it a 48 out of a possible 100%, with Georgia attaining only 28 out of a possible 100%.

Fortunately the website includes all of the aggregate scores so one can explore the methodology and results of the survey’s findings. You can check it out here.

Financial Sector Snapshot - Armenia

A special issue of the Armenian Journal of Public Policy (published by AIPRG, with CRRC's Heghine Manasyan as one of the Editors) is devoted to Financial Sector Development. All the papers are engaging for non-specialists.

Snapshots:

• the estimated 2004 after-tax earnings of ALL Armenian banks is around 18,5 million USD (which, almost needless to say, is very low by comparison)
• given that banks are small, they can only serve small or medium-sized enterprises (which in turn often cannot meet the underwriting standards)
• a major impediment to growth of deposits is the fear of the tax police (although their actual rights are limited)
• there exist around 500 000 accounts in Armenia, almost all located in Yerevan

(Source: Financial Sector Assessment of Republic of Armenia, Emerging Markets Group, under contract to USAID 2005)

All of this matters to development and the ability of those without access to networks of wealth and power to become successful entrepreneurs (see the post below, on Douglas North).

Given the low earnings, one recalls the joke about the Bata Shoe Factory representative being sent to southern India on a market study. The first representative comes back, dejected, saying "we don't have a chance there, they all go barefoot." A second one goes out, calls back from a payphone and says "HUGE opportunities! Millions of potential customers!"

So what do the low earnings tell us? Are they a symbol of opportunity, or a symptom that nothing goes?

Ideas on this, and much more, in the Armenian Journal of Public Policy's special issue of December 2005.