Colloquium 1996 Panel II : Living Standards, Social Welfare and the Labour Market

New Trends in Income Distribution in the Caucasus Region Michael Tokmazishvili Director, Georgian Research Centre for the Economy and Economic Policy in Transition, Tbilisi Summary In the Caucasus region the process of transition to the market economy has resulted in a significant worsening of the economy. This has been related to the national conflicts arising from the territorial reallocation, on the one hand, and from an increase of the size of the shadow economy on the other. At present, three regulations on income distribution are in force. These regulations cover public, market and moral-ethnic rules. The latter two ways of distribution are still in the stage of development. The wages and salaries earned in the private and public sectors, income received from private farms, and income earned in small business and handicraft sectors have become the complex source of incomes for the population. The size of these incomes, in total per family, makes up only the minimum amount for the living conditions. The economic reforms in the Caucasus region are only in the initial stage, and they have not yet touched sharply the social sphere. Accordingly, some means of social protection have emerged, but these cannot be an alternative to creation of effective conditions of social insurance and a corresponding institutional environment.

Introduction The republics of Georgia, Armenia and Azerbaijan, located in the Caucasus Region, are distinguished by their multi-nationality and the acuteness of problems common to all of the post-communist countries which are involved in the process of building modern states and market economies. In the Caucasus region the intensification of economic problems is conditioned by the internal wars and ethnic conflicts, together with other problems linked to territorial reallocation of lands. Though, a well-known current axiom says that in such wars, the winner ultimately turns out to be a loser, as its wealth is destroyed as well. In the Caucasus region, the wars in 1989-1993 were followed by migration and a disrupted and declining economy which increased the deficit in the state budget, delayed social and economic reforms, worsened the living conditions of the population, and increased hunger and poverty. At present, immigrants make up 8 % of the population of the Caucasus. The income of two thirds of the population is almost below minimum living standards. In the republics of the Caucasus the situation has been aggravated by institutional and political instability, wrecked structures of the branch economies, lack of markets, and interrupted transport communications among the republics and other countries. The attempt at forceful reallocation of the wealth of the Caucasus countries has intensified the economic crisis previously inherited from the Soviet Union. Among the post communist countries the Caucasus is the region where the most extreme situation is being experienced. Three Rules for Income Distribution in the Caucasus Region The size of their income defines the existence of people, satisfaction of their material, social and intellectual requirements, and establishment of social stability. This is the way of biological, social and cultural development of every person. In the republics of the Caucasus region the process of regulating incomes is generally based on the activities of market forces. The latter are self-organising, in order to satisfy the requirements of people and provide for creating the "economic person". The government and social institutions have taken significant part in the process of formation of the "economic person". The difference between the spheres of interest and requirements of people and their potential abilities has become more visible. The resolution of these issues is one of the main tasks in the relationship between the countries of the Caucasus region. The different levels of existence of the population is a problem of social justice and different approaches should be undertaken to meet the interests and requirements of different peoples. The institutionally and politically non-organised republics of the Caucasus region are involved in this process. According to a well-known theory, wealth is the result of activities produced by the people thinking rationally, while poverty is a misfortune and natural event and the fault of individuals. Caucasus people, like every nation, have their own way of development. The present situation in these countries is bad in terms of the short social cycle of development, but the long term, which encompasses their peculiarities and history, does not present hopeless perspectives yet. In the present transitional period the institutional condition of the Caucasus is worth consideration, in particular, the characteristic process of market formation and creation of an independent country, the alterations in domination of private and state sectors etc., causing the changes in incomes for the various strata of society. The reallocation seriously influences the changes between the state and the people. The field of income distribution is being influenced by moral and ethnic events, and expectations on freedom, equality, solidarity etc. Public and market systems are created to realise the above-stated perspectives. The market system focuses on the unification of labour and property ethics. It includes the assurance of the "self-welfare" of each person, if he works and engages in entrepreneurship. It also focuses on the moral and business ethics of labour, but it cannot guarantee a stable income. This leads to a polarisation of the population due to the different size of their incomes. The distribution system in the public sector is characterised by an egalitarian tendency in rendering assistance and preferences to the families. To these two systems of distribution should be added the historical ethnic relationship, which has recently been activated. Income distribution is considered a consequence of the habits and moral criteria characteristic of each nation. In the Caucasus, all these three rules of distribution have an effect on the income of the population. Hence, distribution systems, having market, moral and ethnic characteristics, keep expanding. The different criteria are assumed as a basis for various kinds of incomes. Every society is faced with this issue: which way to choose. Theoretical works, connected with this problem, involve generalisation of the existing economic situation, but in practice it is implemented by means of social and political collisions. It is also worth mentioning that quantitative analyses of incomes and their comparison, due to their specificity, include a large number of contradictions. That is why conditional estimates are generally produced. In the republics of the Caucasus this conventionality is conditioned by complications in determining the size of the shadow economy and by the obsolete working systems of the state departments, which makes it rather difficult to get the information for comparison. Due to the decline of the economy, together with a reduction of incomes, certain tendencies are initiated among the peoples of the Caucasus. These tendencies have historical roots and are mainly based on everyday life and cultural and moral-ethnic values. The trends express characteristics of producing and distributing income in the republics of the Caucasus, and we will emphasise these values below. Resources of Household Incomes and the Rules for Distribution In the republics of the Caucasus, household incomes are produced by employment in both public and private sectors and distributed according to the form of their value and kind. In recent years the share of the private sector in the whole economy has been continuously growing. Bankruptcy of state-owned enterprises, reduction of their effectiveness and the complicated financial situation have caused a decrease of wages and salaries, and their functional significance in the sector has been completely lost. Their average size is 4-6 times less than the minimum value of a consumer's basket. They have taken on a symbolic meaning of labour evaluation and their share of incomes of the population generally averages 1/4. In recent times employment in the private sector has kept expanding. The official average salary paid in this sector does not significantly exceed the average salary in the public sector. However, the share of income from non-registered profit is relatively high. Agricultural land is a major source of income in the private sector, though land reform and privatisation have not yet attained a perfect profile in the republics of the Caucasus. But as a whole, everything that has been executed has had a positive effect in the employment of labour resources. Some 35% of the population of the Caucasus is engaged in the private sector of agriculture. In contrast with other countries, economic reforms in the Caucasus have not been followed by a radical polarisation of the population of the villages. In order to avoid unemployment, a large number of inhabitants of towns returned to land which belonged to their fathers and grandfathers, but they still keep in touch with the town. The phenomenon of a "population with two addresses" has emerged. These circumstances partially explain the indicator of registered unemployment in Georgia, which is 8-12 %, whilst the same figure for the European countries at the most critical periods was more than half of the population able to work. Generally, the existence of a "population with two addresses" cannot be considered as a peculiarity for only the Caucasus (especially for Georgia and Armenia). That category of population exists to some degree in every country. "Strata with two addresses" exist not only among working people, but also among intellectuals. This arrangement makes unemployment less risky. In moral and ethnic relationships of the peoples of the Caucasus the practice of care for children and old people by relatives should be noted. In the mountainous areas families are still made up of several generations, with a number of families unified and living together. The expensive life forces people of a family to take care of their grown children and parents. This is mostly displayed in the relationship between children and parents. Old age pensions are not enough to make ends meet, even for a week. Children are obliged to take care of old parents as part of their family. A similar relationship exists between relatives. This explains the lack of "houses for old people" in the Caucasus. Some new trends of income production and distribution are connected with the creation of self-employment and activation of people's savings. The sale of property, accumulated in the past, gives the population a way to survive, in the form of self-employment. People create working places themselves, by establishing small markets for retail sale in a disorganised way, or by developing small handicrafts. The share of self-employment in total employment has been increased. It is worth mentioning that in the republics of the Caucasus the economic activities of the majority of public sector employees have become more like the economic behaviour of the unemployed. The small salaries in the public sector influence people to seek additional working places and to be employed at three, four and sometimes more places simultaneously. Besides work in the public or private sector, self-employment and work on farms create the general incomes for a large number of families. Income from humanitarian assistance, especially for refugees and children, makes up a significant share of income among the population of the Caucasus region. Also included is income from preferences or staple goods. In the process of liberalisation of prices, staple goods were distributed at low prices for special cards. Nowadays complete liberalisation has been carried out and subsidies have been finally cancelled. Liberalisation of prices has been accompanied by a strict monetary policy. Despite some minor differences, economic reforms carried out in the republics of the Caucasus region are identical in principle. Initial liberalisation of trade and prices has been executed, the process of privatisation of enterprises has been started and is now approaching completion, the rate of inflation has been reduced to a certain extent and the national currency has been stabilised. Reforms in the social sector are only in the process of development. Hence, it is natural that the policy of income distribution cannot be based on the corresponding institutional principles. As a result, poverty has reached a mass character. People who have high labour potential have joined the ranks of the poor and polarisation of the population is still evident. Some peculiarities have been outlined in addition to the above-mentioned problems: first, the consumption of goods being distributed by non-monetary channels is continuously growing; second, poverty is spread geographically and distribution of incomes is focused on regional equalisation. Incomes in the Shadow Economy One of the characteristic features of the republics of the Caucasus is the high share of the shadow economy and its large scale. First of all, it should be noted that the shadow economy (or hidden economy) is the negative system of the economy organised according to market relations and regulations and which is prohibited under active legislation of the country. But it still exists illegally and generates income for its leaders and for the participants of this economy. The shadow economy executes production of goods and services of the population for a definite fee, which is not registered in official statistics. It involves three blocks of the economy: Non-official economy - economic activities, which include producing of goods and services, when incomes are not registered and the relevant taxes are not collected. Fiction economy - bribery, speculative transactions, every kind of swindle related to money. The underground economy - hidden entrepreneurship, which includes economic activities prohibited by law. The "grey" markets reached the largest scales, in comparison with "white" and "black" markets, in the Caucasus republics. At first sight, such markets are based on a human and honest way of providing assistance and delivering services. In reality, it is a trade system with preferences, where the unwritten principle "hand washes hand" governs. The shadow economy has grown to large size during the Caucasus wars. Representatives of the shadow economy were interested in the changes being implemented by the government of the country. For this reason they have been participating in elections, and creating their own military groups. As the shadow economy became politically oriented, the "Mafia" formed structures which encompassed entrepreneurial elements, together with some representatives of state offices. They have been sharing incomes of the state budget, gaining their share from company profits and limiting the powers which opposed their activities. The eternal conflicts and military activities in the Caucasus were very handy for them, as they were given the opportunity to sell weapons and receive large incomes from state budget funds, thus robbing companies and the population. They were assisted by some of the intelligence services, the so-called "fourth power", which was focused on creation of social opinion beneficial to them. One of the significant types of shadow income in the Caucasus has been created by artificial acceleration of inflation by means of development of "mild" or "cheap" monetary policy. In Georgia, in 1992-1993, credits allocated on the basis of the issue of money heated up the economy and hyperinflation increased rapidly. The low interest rates caused "a credit attack", which could not stimulate production, but instead created the stimuli for illegal currency exchange. Then credits were "leaking" from the republic as a flight of hard currency. Entities trading by credits were interested in increase of the inflation rate. The result was full destruction of the state budget of Georgia and dissipation of the funds, granted by the banks. A weak tax policy has promoted this process. In Georgia the share of taxes in GDP was only 2,6% in 1993, or five times less than the same parameter in the poor countries of Africa. Nowadays this figure is equal to 9% of GDP, and the forecast is 14% in a year. It is quite difficult to estimate the precise size of the shadow economy. But by our estimates and those of specialists of different economic services, the specific share of the shadow economy in GDP was approximately 45-70% in Georgia and 40-60% in Armenia in 1992. We have some reasons to believe that these figures have been definitely reduced, at present. Political Trends of the Economy In the republics of the Caucasus, social and economic reforms display the regulating role of market relations in the distribution of income and resources, creating an open model of economy, which ensures the development of relations and creates an economy of national type. The main idea is that periodically the subconscious universal tendency of a socially stable society is emerging, demanding that the nations stop the civil wars and co-operate. This tendency guarantees a stable future. It is based on the human factor and strives to ensure a stable social life. It should fully display the abilities of each nation to restore skills and working ability. Human prosperity is the main and independent factor of economic development, including honest distribution, based on an assessment of economic results within the meaning of entrepreneurship and effective activities of nations. The lack of these among Caucasian peoples makes them look quite weak on the world map. For the establishment of social justice, the assistance of young independent countries is rather important, countries which should limit deep differentiation of income by means of socio-economic insurance of a large part of the population. In order to satisfy social demands, the government should give opportunities to people to earn income and increase private interest. The liberal concept, which favors a decrease of state economic power, under present conditions of our country, cannot ensure the above mentioned social justice. It is necessary to strengthen the weak countries and provide assistance to them. Nowadays, countries of the Caucasus region cannot actively implement the main function of income distribution. They cannot ensure social protection of the population nor create conditions for a mechanism of social protection. They leave the "load" to uncontrolled market forces, and the population is forced to appeal to means of self-protection and to look for ways out independently. State responsibility for the population has fallen into decay. In order to create a socially-oriented economy, non-traditional distribution of income cannot be the result of public intervention alone. It is also influenced by the lack of appropriate institutions. A system of social protection and relevant employment institutions do not exist, nor is there an approach directed to the regulation of incomes. Finally, a major problem is the lack of systems of alternative financing, which is the general issue which should be first addressed. Resolution of these and other problems hindering socio-economic reforms would provide the achievement of the final goal - human prosperity, and the assurance of security, equality and stability of human life.