Household income and consumption patterns in Georgia

After the collapse of the Georgian economy in the 1990s, the country slowly started to recover, and between 2000 and 2014, the gross national income grew from $3.4 billion to $16.7 billion (in current USD). According to the National Statistics Office of Georgia, the official unemployment rate in Georgia was 12.4% in 2014, but according to numerous surveys the rate is much higher. Compounding matters, the low salaries of the majority of those who are employed make it difficult for many families to make ends meet. According to World Bank statistics in 2012, 15% of Georgians still live below the national poverty line, which is slightly under $1.25 a day.

Classic micro-economic theory tells us that consumption depends on income levels, but also on the type of good. Normal goods, a good example of which in Georgia would be an Opel Astra if we are talking about cars, are consumed less when income falls. Inferior goods, on the other hand, are consumed when consumers do not have enough money to buy something better – with cars, one would choose a Zaporozhets instead of an Opel. Or, when a family’s budget is tight, they might buy no-name sports shoes rather than Nikes, or a standard mobile phone rather than a smart phone. Finally, demand for luxury goods (a Land Rover instead of an Opel) increases more than proportionately as incomes increase.

Recently, we saw that most people in Armenia, Azerbaijan, and Georgia cannot afford to buy certain durable goods. But, when income is scarce, it also obviously influences everyday choices, such as what to eat for dinner, when to turn on the heater, and whether to buy your child that chocolate bar she really wants.  

So how does the consumption of everyday goods differ by income level in Georgia? The chart below shows the percentage of households in Georgia which report restricting consumption of certain foods because of their limited income.

Note: The original scale measuring household income was recoded for this chart. GEL was converted into USD. The income groups “USD 401-800”, “USD 801-1200” and “More than USD 1200” were combined into “More than USD 400” and the groups “USD 0”, “Up to USD 50” and “USD 51-100” were combined into  “Up to USD 100”. Only “yes” answers are reported. Error bars indicate a 95% confidence interval.

As expected, the percentages of households limiting consumption differ by income group, with households in the highest income group limiting their consumption the least. Importantly, this trend is obvious in spite of the fact that we did not control for the size of households for this blog posts, i.e. did not take into account per capita income of the household members, or number of children or elderly in the households.

Even in the group with the highest household income, about one in four households limits consumption of beef – and reports doing so solely due to budgetary difficulties. In the $251-400 income group, between 8% (potatoes) and 54% (beef) of Georgians say they restrict consumption of certain goods. In households with an income between $101-250 these shares increase to 14% and 76%. In the poorest households, with less than $100 income per month, four out of five households report limiting consumption of beef and one out of five limits even the consumption of staple foods like potatoes.

In each income group, the highest percentage of households limits consumption of beef and sweets/chocolate, while the smallest percentage limits consumption of potatoes. Milk and vegetables are somewhere in between. In addition to the obvious explanation suggesting that higher shares of households limit consumption of beef and sweets/chocolate simply because these are relatively expensive, this trend might also be explained by what economist call income elasticity of demand. The concept is a measure of how sensitive consumption is to changes in income. Among food products, beef and sweets are probably seen more as luxury rather than absolute necessities, because of comparatively high prices and potential substitutes.

Hence, how Georgians limit their food consumption differs by both income group and type of food. Yet, looking at this issue only from the monetary income perspective does not take into account cases when, in rural settlements, families produce their food themselves.

Interested in this or a similar topic? Browse the Caucasus Barometer and other CRRC survey data here.

Home appliances in the South Caucasus: Purchasing trends, 2000-2013

A fair share of the Armenian, Azerbaijani and Georgian population still lives in poverty and cannot afford to buy certain durable goods. According to CRRC’s 2013 Caucasus Barometer survey (CB), in Georgia, 28% of the population reported they did not have enough money for food; 33% had enough money for food, but not for clothes, and for 31% there was enough money for food and clothes, but not for durables. Only 7% of the population reported they could afford to buy durables, and a further 2% said they had enough money to buy anything they needed. The situation is similar in Armenia, but slightly different in Azerbaijan where less people report not having enough money for food (22%).

Using data from CB 2013, this blog post looks at ownership of washing machines, refrigerators and air conditioners in Armenia, Azerbaijan and Georgia, and, if the respective item was purchased in 2000 or later, when it was purchased.

Of the three durables we discuss in this blog post, refrigerators are the most widely owned (by 94% of households in Azerbaijan, 79% in Armenia and 78% in Georgia). Approximately half of the households have at least one automatic washing machine in Azerbaijan and Georgia, while the respective share is a bit higher in Armenia. Only a small share of households in Armenia and Georgia has at least one air conditioner, while the respective share is reported to be much higher in Azerbaijan (29%). Unsurprisingly, in all countries, the ownership of these appliances is higher in the capitals compared to other settlements.

Analysis of the time of purchase of these household appliances in Georgia shows growth in purchases from 2000 until 2008, followed by a decline that may be connected to the 2008 world economic crisis. In 2010, the purchases increased and then dropped again in 2011. In 2012, air conditioner purchases increased, while washing machine purchases dropped and refrigerator purchases remained stable. Less air conditioners and automatic washing machines were purchased in 2013.

Importantly, as shown in the chart below, the changes in the shares of the households purchasing these appliances coincided to a certain extent with the dynamics of GDP per capita, with the exception of 2013, when GDP per capita increased slightly compared with the previous year, while purchases of washing machines and air conditioners dropped.

Note: In 2001 and 2002, approximately the same shares of households purchased refrigerators, washing machines and air conditioners in Georgia.

In Armenia, the purchasing patterns of these appliances follow a trend similar to Georgia, with one exception: purchases of air conditioners increased in 2013.

Azerbaijan was also affected by the world economic crisis. However, GDP per capita continued to increase after 2009, while purchases of household appliances decreased. A possible explanation here might be that the GDP growth in Azerbaijan is connected to natural gas and oil sales. Hence it most likely reaches economic elites and less so the general population and its purchasing power.

To sum up, there are still many households in the region who do not own certain household appliances e.g., automatic washing machines and air conditioners. Residents of the capitals are better equipped with these appliances than people living outside the capitals.

To explore this topic more, have a look at the Caucasus Barometer data, here.

Inflation in Armenia? | Lecture by IMF Representative

Readers here may not be aware that actually our Armenian CRRC also runs its own blog, to announce and describe CRRC's events. One of the most recent events was a lecture by the IMF Resident Representative in Armenia, Dr. Nienke Oomes.

Dr. Oomes discussed what is happening to prices in Armenia, and offered a very comprehensive analysis. For a quick overview over the event, click here. Her PowerPoint presentation, which sets out her argument in good detail and includes four recommendations (more effective inflation targeting, facilitating reduction of import prices, tightening fiscal policy, and increasing the public's knowledge of inflation targeting), is available.

One snapshot:



Curious? The full presentation, with 38 slides, is right here.

(Incomplete) BigMac Index for the Caucasus

When comparing iPod pricing across the South Caucasus, we promised more information on the Big Mac index. As described then, the Big Mac index has been suggested by the Economist as a measure of purchasing power parity. The argument is that Big Macs across countries bundle identical products and services, and therefore can serve as a comparable basket.

Unfortunately, the comparison is incomplete: no McDonald's yet in Yerevan (with various explanations offered, including that the region is served through Turkey). That may lend some credence to the Golden Arches Theory of Conflict Prevention, which suggests that countries that have McDonald's are less likely to be in conflict with each other, because they are in the same globalized orbit. (But this theory happens to be dubious, so Ron MacDonald is not yet standing in line for the Nobel Peace Prize.)

How do Georgia and Azerbaijan compare? In Azerbaijan, a Big Mac goes for 2.5 New Azerbaijani Manat, which currently puts it at 2.73 US dollars. At 4.60 GEL, the Georgian Big Mac is at 2.60 USD, 13 Cents less.

Comparing this with the 2006 Big Mac Index (admittedly one that looks forward to an update), the Caucasus is between Hungary (2.90) and Mexico/South Korea (2.63). If you believe the theory behind the index, the Caucasus is sort of close to purchasing power parity, since the American Big Mac costs $3.10.

By comparison, the Euro-BigMac is at 3.86 USD, the Swiss at 5.10, but the Chinese Yen, radically undervalued, at 1.30. Strikingly, the Russian Big Mac is a lot cheaper and goes for 1.83 USD, and the Ukrainian is in the same league at 1.88 dollars.

As with the iPod, pricing may be driven by maximising the margins, not by the actual basket. MacDonald's in both countries is an upmarket product. In Russia and Ukraine it plays to the mass market and is priced accordingly.

Scale will also play a role: with few restaurants in the Caucasus, McDonald's does not enjoy the advantages of scale. On that level, the index underlines that the local cost of doing business still is higher than it will be in Poland, Ukraine, Russia or Hungary.

Comments welcome.

iPods in the Caucasus: Indexing or Pricing?

Half-serious, half-joking, the Economist put forward the Big Mac Index as a comparative tool to measure purchasing power and currency valuation. The idea was that McDonald's, wherever it is, has standardized procedures for doing identical Big Macs -- consequently price differences should be fairly indicative of discrepancies in purchasing power. An overview of the idea is here (somewhat ungenerously, the Economist makes its Burgernomics available only to subscribers).

Recently an Australian bank suggested a similar comparison of iPods. Arguably this is more of an indicator for smart predatory pricing, since iPods sell for much more than their production costs. So what does this mean for our region of the world? You probably would expect sales price in the South Caucasus to be fairly homogenous.

Well, it isn't. Taking the 2 GB Nano iPod for comparison, the newly opened Apple shop in Yerevan asks its customers for a cool 288 US dollars. In Tbilisi, the same iPod will set you back 224 US dollars, whereas in Baku, the Apple website lists its price as 199 US dollars.

Various explanations are being offered. Azerbaijan may have a larger local customer base, allowing them to charge less for the individual item. Armenia may have higher transport costs, or simply a dealer that can keep a very straight face. It is also possible that many Armenian customers actually shop abroad, and those that are left locally are prepared to pay the premium. Internationally, the Caucasus stretches across the higher medium-range. In Brazil the same iPod Nano costs a whopping 327 US dollars, in the US a mere 149. Azerbaijan is somewhere close to the UK, Ireland, Finland. Details, with some discussion, here.

Further hypotheses welcome. Thanks to JonathanK for pointing out the topic, and our CRRC staff for instant research. A comparison of the Big Mac Index in the Caucasus to follow.