Location: Georgia

The Impact of Rising Gasoline Prices on Households in Sweden, Georgia, and Latvia – Is This Time Different?

Posted on December 1, 2023 | FREECE Brief, Policy Papers

20231201 The Impact of Rising Gasoline Prices Image 02

Over the last two years, the world has experienced a global energy crisis, with surging oil, coal, and natural gas prices. For European households, this translates into higher gasoline and diesel prices at the pump as well as increased electricity and heating costs. The increase in energy related costs began in 2021, as the world economy struggled with supply chain disruptions caused by the Covid-19 pandemic, and intensified as Russia launched a full-scale invasion of Ukraine in late February 2022. In response, European governments have implemented a variety of energy tax cuts (Sgaravatti et al., 2023), with a particular focus on reducing the consumer cost of transport fuel. This policy paper aims to contextualize current transport fuel prices in Europe by addressing two related questions: Are households today paying more for gasoline and diesel than in the past? And should policymakers respond by changing transport fuel tax rates? The analysis will focus on case studies from Sweden, Georgia, and Latvia, countries that vary in economic development, energy independence, reliance on Russian oil, transport infrastructure, and transport fuel tax rates. Through this study, we aim to paint a nuanced picture of the implications of rising fuel prices on household budgets and provide policy guidance.

Record High Gasoline Prices, Historically Cheap to Drive

Sweden has a long history of using excise taxes on transport fuel as a means to raise revenue for the government and to correct for environmental externalities. As early as in 1924, Sweden introduced an energy tax on gasoline. Later, in 1991, this tax was complemented by a carbon tax levied on the carbon content of transport fuels. On top of this, Sweden extended the coverage of its value-added tax (VAT) to include transport fuels in 1990. The VAT rate of 25 percent is applied to all components of the consumer price of gasoline: the production cost, producer margin, and excise taxes (energy and carbon taxes).

In May 2022, the Swedish government reduced the tax rate on transport fuels by 1.80 SEK per liter (0.16 EUR). This reduction was unprecedented. Since 1960, there have only been three instances of nominal tax rate reductions on gasoline in Sweden, each by marginal amounts in the range of 0.04 to 0.22 SEK per liter. Prior to the tax cut, the combined rate of the energy and carbon tax was 6.82 SEK per liter of gasoline. Adding the VAT that is applied on these taxes, amounting to 1.71 SEK, yields a total excise tax component of 8.53 SEK. This amount is fixed in the short run and does not vary with oil price changes.

Figure 1. Gasoline Pump Price, 2000-2023.

Source: Drivkraft Sverige (2023).

Figure 1 shows the monthly average real price of gasoline in Sweden from January 2000 to October 2023. The price has slowly increased over the last 20 years and has been historically high in the last year and a half. Going back even further, the price is higher today than at any point since 1960. Swedish households have thus lately been paying more for one liter of gasoline than ever before.

However, a narrow focus on the price at the pump does not take into consideration other factors that affect the cost of personal transportation for households.

First, the average fuel efficiency of the vehicle fleet has improved over time. New vehicles sold in Sweden today can drive 50 percent further on one liter of gasoline compared to new vehicles sold in 2000. Arguably, what consumers care about the most is not the cost of gasoline per se but the cost of driving a certain distance, as the utility one derives from a car is the distance one can travel. Accounting for vehicles’ fuel efficiency improvement over time, we find that even though it is still comparatively expensive to drive today, the current price level no longer constitutes a historical peak. In fact, the cost of driving 100 km was as high, or higher, in the 2000-2008 period (see Figure 2).

Figure 2. Gasoline Expenditure per 100 km.

Source: Trafikverket (2023) and Drivkraft Sverige (2023).

Second, any discussion of the cost of personal transportation for households should also factor in changes in household income over time. The Swedish average real hourly wage has increased by more than thirty percent between 2000-2023. As such, the cost of driving 100 km, measured as a share of household income, has steadily declined over time. Further, this pattern is consistent across the income distribution; for instance, the cost trajectory for the bottom decile is similar to that of all wage earners (as illustrated in Figure 3). In 1991, when the carbon tax was implemented, the average household had to spend around two thirds of an hour’s wage to drive 100 km. By 2020, that same household only had to spend one third of an hour’s wage to drive the same distance. There has been an increase in the cost of driving over the last two years, but in relation to income, it is still cheaper today to drive a certain distance compared to any year before 2013.

Figure 3. Cost of Driving as a Share of Income, 1991-2023.

Source: Statistics Sweden (2023).

Taken all together, we see that on the expenditure side, vehicles use fuel more efficiently over time and on the income side, households earn higher wages. Based on this, we can conclude that the cost of travelling a certain distance by car is not historically high today.

Response From Policymakers

It is, however, of little comfort for households to know that it was more expensive to drive their car – as a share of income – 10 or 20 years ago. We argue that what ultimately matters for households is the short run change in cost, and the speed of this change. If the cost rises too fast, households cannot adjust their expenditure pattern quickly enough and thus feel that the price increase is unaffordable. In fact, the change in the gasoline price at the pump has been unusually rapid over the last two years. Since the beginning of 2021, until the peak in June 2022, the (nominal) pump price rose by around 60 percent.

So, should policymakers respond to the rapid price increase by lowering gasoline taxes? The perhaps surprising answer is that lowering existing gasoline tax rates would be counter-productive in the medium and long run. Since excise taxes are fixed and do not vary with the oil price, they reduce the volatility of the pump price by cushioning fluctuations in the market price of crude oil. The total excise tax component including VAT constitutes more than half of the pump price in Sweden, a level that is similar across most European countries. This stands in stark contrast with the US, where excise taxes make up around 15 percent of the consumer price of gasoline. As a consequence, a doubling of the price of crude oil only increases the consumer price of gasoline in Sweden by around 35 percent, while it increases by about 80 percent in the US. Households across Sweden, Europe, and the US have adapted to the different levels of gasoline tax rates by purchasing vehicles with different levels of fuel efficiency. New light-duty vehicles sold in Europe are on average 45 percent more fuel-efficient compared to the same vehicle category sold in the US (IEA 2021). As such, US households do not necessarily benefit from lower gasoline taxation in terms of household expenditure on transport fuel. They are also more vulnerable to rapid increases in the price of crude oil. Having high gasoline tax rates thus reduces – rather than increases – the short run welfare impact on households. Hence, policymakers should resist the temptation to lower gasoline tax rates during the current energy crisis. With imposed tax cuts, households will, in the medium and long run, buy vehicles with higher fuel consumption and thus become more exposed to price surges in the future – again compelling policymakers to adjust tax rates, creating a downward spiral. Instead, alternative measures should be considered to alleviate the effects of the heavy price pressure on low-income households – for instance, revenue recycling of the carbon tax revenue and increased subsidies of public transport.

Conclusion

To reach environmental and climate goals, Sweden urgently needs to phase out the use of fossil fuels in the transport sector – Sweden’s largest source of carbon dioxide emissions. This is exactly what a gradual increase of the tax rate on gasoline and diesel would achieve. At the same time, it would benefit consumers by shielding them from the adverse effects of future oil price volatility.

The most common response from policymakers regarding fuel tax rates however goes in the opposite direction. In Sweden, the excise tax on gasoline and diesel was reduced by 1.80 SEK per liter in 2022 and the current government plans to further reduce the price by easing the biofuel mandate. Similar tax cuts have been implemented in a range of European countries. Therefore, the distinguishing factor in the current situation lies in the exceptional responses from policymakers, rather than in the gasoline costs that households are encountering.

Gasoline Price Swings and Their Consequences for Georgian Consumers

The energy crisis that begun in 2021 has also made its mark on Georgia, where the operational expenses of personal vehicles, encompassing not only gasoline costs but also maintenance expenses, account for more than 8 percent of the consumer price index. The rise in gasoline prices sparked public protest and certain opposition parties proposed an excise tax cut to mitigate the gasoline price surge. In Georgia, gasoline taxes include excise taxes and VAT. Until January 1, 2017, the excise tax was 250 GEL per ton (9 cents/liter), it has since increased to 500 GEL (18 cents/liter). Despite protests and the suggested excise tax reduction, the Georgian government chose not to implement any tax cuts. Instead, it initiated consultations with major oil importers to explore potential avenues for reducing the overall prices. Following this, the Georgian National Competition Agency (GNCA) launched an inquiry into the fuel market for motor vehicles, concluding a manipulation of retail prices for gasoline existed (Georgian National Competition Agency, 2023).

The objective of this part of the policy paper is to address two interconnected questions. Firstly, are Georgian households affected by gasoline price increases? And secondly, if they are, is there a need for government intervention to mitigate the negative impact on household budgets caused by the rise in gasoline prices?

The Gasoline Market in Georgia

Georgia’s heavy reliance on gasoline imports is a notable aspect of the country’s energy landscape. The country satisfies 100 percent of its gasoline needs with imports and 99 percent of the fuel imported is earmarked for the road vehicle transport sector. Although Georgia sources its gasoline from a diverse group of countries, with nearly twenty nations contributing to its annual gasoline imports, the supply predominantly originates from a select few markets: Bulgaria, Romania, and Russia. In the last decade, these markets have almost yearly accounted for over 80 percent of Georgia’s total gasoline imports. Furthermore, Russia’s share has substantially increased in recent years, amounting to almost 75 percent of all gasoline imports in 2023. The primary reason behind Russia’s increased dominance in Georgia’s gasoline imports is the competitive pricing of Russian gasoline, which between January and August in 2023 was almost 50 percent cheaper than Bulgarian gasoline and 35 percent cheaper than Romanian gasoline (National Statistics Office of Georgia, 2023). Given the dominance of Russian gasoline in Georgia, the end-user (retail) prices of gasoline in Georgia, are closer to gasoline prices in Russia than EU gasoline prices (see Figure 1).

Figure 1. End-user Gasoline Prices in Georgia, Russia and the EU, 2013-2022.

Source: International Energy Agency, 2023.

However, while the gasoline prices increased steadily in 2020-2022 in Russia, gasoline prices in Georgia increased sharply in the same period. This more closely replicated the EU price dynamics rather than the Russian one. The sharp price increase in gasoline raised concerns from the Georgian National Competition Agency (GNCA). According to the GNCA one possible reason behind the sharp increase in gasoline prices in Georgia could be anti-competitive behaviour among the five major companies within the gasoline market. Accordingly, the GNCA investigated the behaviour of major market players during the first eight months of 2022, finding violations of the Competition Law of Georgia. Although the companies had imported and were offering consumers different and significantly cheaper transport fuels compared to fuels of European origin, their retail pricing policies were identical and the differences in product costs were not properly reflected in the retail price level. GNCA claims the market players coordinated their actions, which could have led to increased gasoline prices in Georgia (National Competition Agency of Georgia. (2023).

Given that increased gasoline prices might lead to increased household expenditures for fuel, it is important to assess the potential impact of recent price developments on household’s budgets.

Exploring Gasoline Price Impacts

Using data from the Georgian Households Incomes and Expenditures Survey (National Statistics Office of Georgia, 2023), weekly household expenditures on gasoline and corresponding weekly incomes were computed. To evaluate the potential impact of rising gasoline prices on households, the ratio of household expenditures on gasoline to household income was used. The ratios were calculated for all households, grouped in three income groups (the bottom 10 percent, the top 10 percent and those in between), over the past decade (see Figure 2).

Figure 2. Expenditure on Gasoline as Share of Income for Different Income Groups in Georgia, 2013-2022.

Source: National Statistics Office of Georgia, 2023.

Figure 2 shows that between 2013 and 2022, average households allocated 9-14 percent of their weekly income to gasoline purchases. There is no discernible increase in the ratio following the energy crisis in 2021-2022.

Considering the different income groups, the upper 10 percent income group experienced a slightly greater impact from the recent rise in gasoline prices (the ratio increased), compared to the overall population. For the lower income group, which experienced a rise in the proportion of fuel costs relative to total income from 2016 to 2021, the rate declined between 2021 and 2022. Despite the decline in the ratio for the lower-level income group, it is noteworthy that the share of gasoline expenditure in the household budget has consistently been high throughout the decade, compared to the overall population and the higher-level income group.

The slightly greater impact from the rise in gasoline prices for the upper 10 percent income group is driven by a 4 percent increase in nominal disposable income, paired with an 8 percent decline in the quantity of gasoline (Figure 3) in response to the 22 percent gasoline price increase. Clearly, for this income group, the increase in disposable income was not enough to offset the increase in the price of gasoline, increasing the ratio as indicated above.

For the lower 10 percent income group, there was a 23 percent increase in nominal disposable income, paired with a 9 percent decline in the quantity of purchased gasoline (Figure 3) in response to the 22 percent gasoline price increase . Thus, for this group, the increase in disposable income weakened the potential negative impact of increased prices, eventually lowering the ratio.

Figure 3. Average Gasoline Quantities Purchased, by Household Groups, per Week (In Liters) 2013-2022.

Source: National Statistics Office of Georgia, 2023.

Conclusion

The Georgian energy market is currently fully dependent on imports, predominantly from Russia. While sharp increases in petrol prices have been observed during the last 2-3 years, they do not seem to have significantly impacted Georgian households’ demand for gasoline. Noteworthy, the lack of impact from gasoline price increases on Georgian households’ budgets, as seen in the calculated ratio (depicted in Figure 2), can be explained by the significant rise in Georgia’s imports from the cheap Russian market during the energy crisis years. Additionally, according to the Household Incomes and Expenditures survey, there was in 2022 an annual increase in disposable income for households that purchased gasoline. However, the data also show that low-income households spend a high proportion of their income on gasoline.

Although increased prices did not significantly affect Georgian households, the extremely high import dependency and the lack of import markets diversification poses a threat to Georgia’s energy security and general economic stability. Economic dependency on Russia is dangerous as Russia traditionally uses economic relations as a lever for putting political pressure on independent economies. Therefore, expanding trade and deepening economic ties with Russia should be seen as risky. Additionally, the Russian economy has, due to war and sanctions, already contracted by 2.1 percent in 2022 and further declines are expected (Commersant, 2023).

Prioritizing actions such as diversifying the import market to find relatively cheap suppliers (other than Russia), closely monitoring the domestic market to ensure that competition law is not violated and market players do not abuse their power, and embracing green, energy-efficient technologies can positively affect Georgia’s energy security and positively impact sustainable development more broadly.

Fueling Concerns: The True Cost of Transportation in Latvia

In May 2020, as the Latvian Covid-19 crisis began, Latvia’s gasoline price was 0.99 EUR per liter. By June 2022, amid the economic effects from Russia’s war on Ukraine, the price had soared to a record high 2.09 EUR per liter, sparking public and political debate on the fairness of fuel prices and potential policy actions.

While gas station prices are salient, there are several other more hidden factors that affect the real cost of transportation in Latvia. This part of the policy paper sheds light on such costs by looking at some of its key indicators. First, we consider the historical price of transport fuel in Latvia. Second, we consider the cost of fuel in relationship to average wages and the fuel type composition of the vehicle fleet in Latvia.

The Price of Fuel in Latvia

Latvia’s nominal retail prices for gasoline (green line) and diesel (orange line) largely mirror each other, though gasoline prices are slightly higher, in part due to a higher excise duty (see  Figure 1). These local fuel prices closely follow the international oil market prices, as illustrated by the grey line representing nominal Brent oil prices per barrel.

The excise duty rate has been relatively stable in the past,  demonstrating that it has not been a major factor in fuel price swings. A potential reduction to the EU required minimum excise duty level will likely have a limited effect on retail prices. Back of the envelope calculations show that lowering the diesel excise duty from the current 0.414 EUR per liter to EU’s minimum requirement of 0.33 EUR per liter could result in approximately a 5 percent drop in retail prices (currently, 1.71 EUR per liter). This at the cost of a budget income reduction of 0.6 percent, arguably a costly policy choice.

In response to recent years’ price increase, the Latvian government opted to temporarily relax environmental restrictions, making the addition of a bio component to diesel and gasoline (0.065 and 0.095 liters per 1 liter respectively) non-mandatory for fuel retailers between 1st of June 2022 until the end of 2023. The expectation was that this measure would lead to a reduction in retail prices by approximately 10 eurocents. To this date, we are unaware of any publicly available statistical analysis that verifies whether the relaxed restriction have had the anticipated effect.

Figure 1. Nominal Retail Fuel Prices and Excise Duties for Gasoline and Diesel in Latvia (in EUR/Liter), and Nominal Brent Crude Oil Prices (in EUR/Barrel), January 2005 to August 2023.

Source: The Central Statistical Bureau of Latvia, St. Louis Federal Reserve’s database, OFX Monthly Average Rates database, The Ministry of Finance of Latvia, The State Revenue Service of Latvia.

The True Cost of Transportation

Comparing fuel retail prices to average net monthly earnings gives insight about the true cost of transportation in terms of purchasing power. Figure 2 displays the nominal net monthly average wage in Latvia from January 2005 to June 2023 (grey line). During this time period the average worker saw a five-fold nominal wage increase, from 228 EUR to 1128 EUR monthly. The real growth was two-fold, i.e., the inflation adjusted June 2023 wage, in 2005 prices, was 525 EUR.

Considering fuel’s share of the wages; one liter of gasoline amounted to 0.3 percent of an average monthly wage in 2005, as compared to 0.12 percent in 2023, with diesel displaying a similar pattern. Thus, despite recent years’ fuel price increase, the two-fold increase in purchasing power during the same time period implies that current fuel prices may not be as alarming for Latvian households as they initially appeared to be.

Figure 2. Average Nominal Monthly Net Wages in Latvia and Nominal Prices of One Liter of Gasoline and Diesel as Shares of Such Wages (in EUR), January 2005 to June 2023.

Source: The Central Statistical Bureau of Latvia.

Another factor to consider is the impact of technological advancements on fuel efficiency over time. The idea is simple: due to technological improvements to combustion engines, the amount of fuel required to drive 100 kilometers has decreased over time, which translates to a lower cost for traveling additional kilometers today. An EU average indicator shows that the fuel efficiency of newly sold cars improved from 7 liters to 6 liters per 100 km, respectively, in 2005 and 2019. While we lack precise data on the average fuel efficiency of all private vehicles in Latvia, we can make an informed argument in relation to the technological advancement claim by examining proxy indicators such as the type of fuel used and the average age of vehicles.

Figure 3 shows a notable change in the fuel type composition of the vehicle fleet in Latvia. Note that the decrease in the number of cars in 2011 is mainly due to a statistical correction for unused cars. At the start of the 21st century, 92 percent of Latvian vehicles were gasoline-powered and 8 percent were diesel-powered. By 2023, these proportions had shifted to 28 percent for gasoline and 68 percent for diesel. Diesel engines are more fuel efficient, usually consuming 20-35 percent less fuel than gasoline engines when travelling the same distance. Although diesel engines are generally pricier than their gasoline counterparts, they offer a cost advantage for every kilometer driven, easing the impact of rising fuel prices. A notable drawback of diesel engines however, is their lower environmental efficiency – highlighted following the 2015 emission scandal. In part due to the scandal, the diesel vehicles growth rate have dropped over the past five years in Latvia.

Figure 3. Number of Private Vehicles by Fuel Type and the Average Age of Private Vehicles in Latvia, 2001 to 2023.

Source: The Central Statistical Bureau of Latvia, Latvia’s Road Traffic Safety Directorate.

Figure 3 also shows that Latvia’s average vehicle age increased from 14 years in 2011 to 15.1 years in 2023. This is similar to the overall EU trend, although EU cars are around 12 years old, on average. This means that, in Latvia, the average car in 2011 and 2023 were manufactured in 1997 and 2008, respectively. One would expect that engines from 2008 have better technical characteristics compared to those from 1997. Recent economic research show that prior to 2005, improvements in fuel efficiency for new cars sold in the EU was largely counterbalanced by increased engine power, enhanced consumer amenities and improved acceleration performance (Hu and Chen, 2016). I.e.,  cars became heavier, larger, and more powerful, leading to higher fuel consumption. However, after 2005, cars’ net fuel efficiency started to improve. As sold cars in Latvia are typically 10-12 year old vehicles from Western European countries, Latvia will gradually absorb a more fuel-efficient vehicle fleet.

Conclusion

The increase of purchasing power, a shift to more efficient fuel types and improvements in engine efficiency have all contributed to a reduction of the overall real cost of transportation over time in Latvia. The recent rise in fuel prices to historically high levels is thus less concerning than it initially appears. Moreover, a growing share of cars will not be directly affected by fuel price fluctuations in the future. Modern electric vehicles constitute only 0.5 percent of all cars in Latvia today, however, they so far account for 10 percent of all newly registered cars in 2023, with an upward sloping trend.

Still, politicians are often concerned about the unequal effects of fuel price fluctuations on individuals. Different car owners experience varied effects, especially when considering factors like income and location, influencing transportation supply and demand.

First, Latvia ranks as one of the EU’s least motorized countries, only ahead of Romania, with 404 cars per 1000 inhabitants in 2021. This lower rate of vehicle ownership is likely influenced by the country’s relatively low GDP per capita (73 percent of the EU average in 2022) and a high population concentration in its capital city, Riga (32 of the population lives in Riga city and 46 percent in the Riga metropolitcan area). In Riga, a developed public transport system reduces the necessity for personal vehicles. Conversely, areas with limited public transport options, such as rural and smaller urban areas, exhibit a higher demand for personal transportation as there are no substitution options and the average distance travelled is higher than in urban areas. Thus, car owners in these areas tend to be more susceptible to the impact of fuel price volatility.

Second, Latvia has a high Gini coefficient compared to other EU countries, indicating significant income inequality (note that the Gini coefficient measures income inequality within a population, with 0 representing perfect equality and 1 indicating maximum inequality. In 2022, the EU average was 29.6 while Latvia’s Gini coefficient was 34.3, the third highest in the EU). With disparities in purchasing power, price hikes tend to disproportionately burden those with lower incomes, making fuel more costly relative to their monthly wages.

These income and location factors suggest that inhabitants in rural areas are likely the most affected by recent price hikes. Distributional effects across geography (rural vs urban) are often neglected in public discourse, as the income dimension is more visible. But both geography and income factors should be accounted for in a prioritized state support, should such be deemed necessary.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Risks of Russian Business Ownership in Georgia

Posted on November 27, 2023 | Policy Brief

Image of Tbilisi at night representing risks of Russian business ownership in Georgia

This policy brief addresses risks tied to Russian business ownership in Georgia. The concentration of this ownership in critical sectors such as electricity and communications makes Georgia vulnerable to risks of political influence, corruption, economic manipulation, espionage, sabotage, and sanctions evasion. To minimize these risks, it is recommended to establish a Foreign Direct Investment (FDI) screening mechanism for Russia-originating investments, acknowledge the risks in national security documents, and implement a critical infrastructure reform.

Russia exerts substantial influence over Georgia. First and foremost, Russia has annexed 20 percent of Georgia’s internationally recognized territories of Abkhazia and South Ossetia. Further, it employs a variety of hybrid methods to disrupt the Georgian society including disinformation, support for pro-Russian parties and media, trade restrictions, transportation blockades, sabotage incidents, and countless more. These tactics aim to hinder Georgia’s development, weaken the country’s statehood, and negatively affect pro-Western public sentiments (Seskuria, 2021 and Kavtaradze, 2023).

Factors that may also increase Georgia’s economic dependency on Russia concern trade relationships, remittances, increased economic activity driven by the most recent influx of Russian migrants, and private business ownership by Russian entities or citizens (Babych, 2023 and Transparency International Georgia, 2023). This policy brief assesses and systematizes the risks associated with Russian private business ownership in Georgia.

Sectoral Overview of Russian Business Ovnership

Russian business ownership is significant in Georgia. Recent research from the Institute for Development of Freedom of Information (IDFI) has addressed Russian capital accumulation across eight sectors of the Georgian economy: electricity, oil and gas, communications, banking, mining and mineral waters, construction, tourism, and transportation. Of the eight sectors considered by IDFI, Russian business ownership is most visible in Georgia’s electricity sector, followed by oil and natural gas, communications, and mining and mineral waters industries. In the remaining four sectors considered by IDFI, a low to non-existent level of influence was observed (IDFI, 2023).

Figure 1. Overview of Russian Ownership in the Georgian Economy as of June 2023.

Source: IDFI, 2023.

There are several reasons for concern regarding the concentration and distribution of Russian business ownership in the Georgian economy.

First, it is crucial to keep Russia’s history as a hostile state actor in mind. Foreign business ownership is not a threat in itself; However, it may pose a threat if businesses are under control or influence of a state that is hostile to the country in question (see Larson and Marchik, 2006). Business ownership has been a powerful tool for the Kremlin, allowing Russia to influence various countries and raising concerns that such type of foreign ownership might negatively affect national security of the host country (Conley et al., 2016). Similar concerns have become imperative amidst Russia’s full-scale war in Ukraine (as, for instance, reflected in Guidance of the European Commission to member states concerning Russian foreign acquisitions).

Further, Russian business ownership in Georgia is particularly threatening due to the ownership concentration within sectors of critical significance for the overall security and economic resilience of the country. While there is no definition of critical infrastructure or related sectors in Georgia, at least two sectors (energy and communications) correspond to critical sectors, according to international standards (see for instance the list of critical infrastructure sectors for the European Union, Germany, Canada and Australia). Such sectors are inherently susceptible to a range of internal and external threats (a description of threats related to critical infrastructure can be found here). Intentional disruptions to critical infrastructure operations might initiate a chain reaction and paralyze the supply of essential services. This can, in turn, trigger major threats to the social, economic, and ecological security and the defense capacity of a state.

Georgia’s Exposure to Risks

Identifying and assessing the specific dimensions of Georgia’s exposure to risks related to Russian business ownership provides a useful foundation for designing policy responses. This brief identifies six distinct threats in this regard.

Political Influence

Russia’s business and political interests are closely intertwined, making it challenging to differentiate their respective motives. This interconnectedness can act as a channel for exerting political influence in Georgia. Russians that have ownership stakes in Georgian industries (e.g. within electricity, communications, oil and gas, mining and mineral waters) have political ties with the Russian ruling elite facing Western sanctions, or are facing sanctions themselves. For instance, Mikhail Fridman, who owns up to 50 percent of the mineral water company IDS Borjomi, is sanctioned for supporting Russia’s war in Ukraine. Such interlacing raises concerns about indirect Russian influence in Georgia, potentially undermining Georgia’s Western aspirations.

Export of Corrupt Practices

The presence of notable Russian businesses in Georgia poses a significant threat in terms of it nurturing corrupt practices. Concerns include “revolving door” incidents (movement of upper-level public officials into high-level private-sector jobs, or vice versa), tax evasion, and exploitation of the public procurement system.  For instance, Transparency International Georgia (2023) identified a “revolving door” incident concerning the Russian company Inter RAO Georgia LLC, involved in electricity trading, and its regulator, the Georgian state-owned Electricity Market Operator JSC (ESCO). One day after Inter RAO Georgia LLC was registered, the director of ESCO took a managerial position within Inter RAO Georgia LLC. Furthermore, tax evasion inquiries involving Russian-owned companies have been documented in the region, particularly in Armenia, further highlighting corruption risks. We argue that such corrupt practices might harm the business environment and deter future international investments.

Economic Manipulation

A heavy concentration of foreign ownership in critical sectors like energy and telecommunications, also poses a risk of manipulation of economic instruments such as prices. The significant Russian ownership in Armenia’s gas distribution network exemplifies this threat. In fact, Russia utilized a price manipulation strategy for gas prices when Armenia declared its EU aspirations. Prices were then reduced after Armenia joined the Eurasian Economic Union (Terzyan, 2018).

Espionage

Russian-owned businesses within Georgia’s critical sectors also pose espionage risks, including economic and cyber espionage. Owners of such businesses may transfer sensitive information to Russian intelligence agencies, potentially undermining critical infrastructure operations. As an example, in 2022, a Swedish business owner in electronic trading and former Russian resident, was indicted with transferring secret economic information to Russia. Russian cyber-espionage is also known to be used for worldwide disinformation campaigns impacting public opinion and election results, compromising democratic processes.

Sabotage

The presence of Russian-owned businesses in Georgia raises the risk of sabotage and incapacitation of critical assets. Russia has a history of using sabotage to harm other countries, such as when they disrupted Georgia’s energy supply in 2006 and the recent Kakhovka Dam destruction in Ukraine (which had far-reaching consequences, incurring environmental damages, and posing a threat to nuclear plants). These incidents demonstrate the risk of cascading effects, potentially affecting power supply, businesses, and locations strategically important to Georgia’s security.

Sanctions and Sanction Evasion

Russian-owned businesses in Georgia face risks due to Western sanctions as they could be targeted by sanctions or used to evade them. Recent cases, like with IDS Borjomi (as previously outlined) and VTB Bank Georgia – companies affected by Western sanctions given their Russian connections – highlight Georgia’s economic vulnerability in this regard. Industries where these businesses operate play a significant role in Georgia’s economy and job market, and instabilities within such sectors could entail social and political concerns. There’s also a risk that these businesses could help Russia bypass sanctions and gain access to sensitive goods and technologies, going against Georgia’s support for international sanctions against Russia. It is crucial to prevent such sanctions-associated risks for the Georgian economy.

Assessing the Risks

To operationalize the above detailed risks, we conducted interviews with Georgian field experts within security, economics, and energy. The risk assessment highlights political influence through Russian ownership in Georgian businesses as the foremost concern, followed by risks of corruption, risks related to sanctions, espionage, economic manipulation, and sabotage. We asked the experts to assess the severity level for each identified risk and notably, all identified risks carry a high severity level.

Recommendations

Considering the concerns detailed in the previous sections, we argue that Russia poses a threat in the Georgian context. Given the scale and concentration of Russian ownership within critical sectors and infrastructure, a dedicated policy regime might be required to improve regulation and minimize the associated risks. Three recommendations could be efficient in this regard, as outlined below.

Study the Impact of Adopting a Foreign Direct Investment Screening Mechanism

To effectively address ownership-related threats, it’s essential to modify existing investment policies. One approach is to introduce a FDI screening mechanism with specific functionalities. Several jurisdictions implement mechanisms with similar features (see a recent report by UNCTAD for further details). Usually, such mechanisms target FDI’s that have security implications. A dedicated screening authority overviews investment that might be of concern for national security and after assessment, an investment might be approved or suspended. In Georgia, a key consideration for designing such tool includes whether it should selectively target investments from countries like Russia or apply to all incoming FDI. Additionally, there’s a choice between screening all investments or focusing on those concerning critical sectors and infrastructure. Evaluating the investment volume, possibly screening only FDI’s exceeding a predefined monetary value, is also a vital aspect to consider. However, it’s important to acknowledge that FDI screening mechanisms are costly. Therefore, this brief suggests a thorough cost and benefit analysis prior to implementing a FDI screening regime in Georgia.

Consider Russian Ownership-related Threats in the National Security Documents

Several national-level documents address security policy in Georgia, with the National Security Concept – outlining security directions – being a foundational one. Currently, these concepts do not specifically address Russian business ownership-related threats. When designing an FDI screening mechanism, however, acknowledging various risks related to Russian business ownership must be aligned with fundamental national security documents.

Foster the Adoption of a Critical Infrastructural Reform

To successfully implement a FDI screening mechanism unified, nationwide agreement on the legal foundations for identifying and safeguarding critical infrastructure is needed. The current concept for critical infrastructure reform in Georgia envisages a definition of critical infrastructure and an implementation of an FDI screening mechanism. We therefore recommend implementing this reform in the country.

Conclusion

This policy brief has identified six distinct risks related to Russian business ownership in several sectors of the Georgian economy, such as energy, communications, oil and natural gas, and mining and mineral waters. Even though Georgia does not have a unified definition of critical infrastructure, assets concentrated in these sectors are regarded as critical according to international standards. Considering Russia’s track record of hostility and bearing in mind threats related to foreign business ownership by malign states, this brief suggests regulating Russian business ownership in Georgia by introducing a FDI screening instrument. To operationalize this recommendation, it is further recommended to consider Russian business ownership-related threats in Georgia’s fundamental security documents and to foster critical infrastructural reform in the country.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Insights and Research Shared at the 2023 FREE Network Retreat

Posted on October 3, 2023 | Policy Brief

FREE network retreat Image from the conference

The 2023 FREE Network Retreat, an annual face-to-face event for members of the FREE Network, gathered its representatives to share and exchange research ideas and to discuss its institutes’ respective work and joint efforts within the Network. An academic session highlighted multiple overarching areas of interest and opportunities for research collaboration and included a plenary session on topics ranging from theoretical underpinning of Vladimir Putin’s regime to climate change beliefs and to consumer behaviour in credit markets. A session addressing the respective institute’s work during the last year also demonstrated the importance and relevance of the FREE Network’s joint initiatives on gender, democracy and media, and climate change and environment: FROGEE, FROMDEE and FREECE. This brief gives a short outline of the plenary session and an overview of some further topics covered during the conference.  

The Academic Day

The Academic Day consisted partly of a plenary session and partly of an academic session. The academic session was outlined to demonstrate the wide spectrum of research interests within the network and to promote and highlight the opportunities for research collaboration. Designed as a series of poster sessions, each organized around a common research theme, it allowed for an exchange of ideas between presenting researchers and the audience while displaying the overlap of the various research interests across the institutes. At the same time, the poster session combined the broad range of topics within 10 overarching subjects (trade, gender, migration and education, public economics, energy, labor, political economy and development, macro, conflict, and theory and auctions).

The plenary session further illustrated the wide variety of topics the FREE Network researchers’ work on. During the plenary session, three distinguished presentations were held, summarized in what follows.

“Why Did Putin Invade Ukraine? – A Theory of Degenerate Autocracy”

Firstly, Konstantin Sonin, Professor at the University of Chicago Harris School of Public Policy, gave a presentation of his working paper (with Georgy Egorov, Northwestern University) in which the Russian full-scale invasion of Ukraine is explained through a theoretical framework on dictators’ decision-making in degenerate autocracies.

Sonin outlined how the beliefs about Ukraine in Kremlin, prior to the invasion, were factually wrong. For example, Kremlin believed that Ukraine, despite plenty of facts pointing in the opposite direction, lacked a stable government and had an incapable army. Further, it was believed that the US and Europe wouldn’t care about Ukraine and that Russian troops would be welcomed as liberators – the latter exemplified by the fact that Russia sent police and not the army during the first phase of the invasion. He also stressed that the decision to invade Ukraine is likely to have disastrous consequences for Vladimir Putin, his regime, and for Russia as a whole. This is, however, not the first example of a disastrous decision made by a leader of an autocratic regime, leading up to the question: What explains such choices that should not rationally have been made? And how can leaders make them in highly institutionalized environments where they are surrounded by councils and advisors who are supposed to possess the best expertise?

The model presented by Sonin assumes a leader in such highly institutionalized environment that wishes to stay in power and whose decisions are based on input from subordinates. The subordinates differ in level of their expertise and the leader thus chooses the quality of advice that he receives through his choice of subordinates.  In turn, while giving advice to the leader, the subordinate considers two factors: the vulnerability of the leader and their own prospects should the leader fall. In equilibrium there is a tradeoff as competent subordinates are also less loyal (since a more competent person might know when to switch alliances and have better prospects if the regime changes).

The leader also has access to repression as an instrument. Repression decreases his changes to be overthrown but raises the stakes for a potential future power struggle, as a leader with a history of repression is more likely to be repressed by his successor.

This interaction creates a feedback loop. If a dictator chooses repression, he feels more endangered, and he then chooses a more loyal subordinate who is less likely to deceive him for personal gain under a potential new regime. However, this leads to the appointment of less competent subordinates whereafter the information that flows to the leader becomes less and less reliable – as illustrated by Kremlin’s beliefs about Ukraine prior to the war.

There are three types of paths in equilibrium, Sonin explained; 1. “stable autocracy”, with leaders altering in power and choosing peaceful paths without repressions 2. “degenerate autocracy” – where the incumbent and opponent first replace each other peacefully and then slide into the repression-based change of power (until one of them dies and the story repeats), and 3. “consecutive degenerate autocracy” – where each power struggle is followed by repression.

Concluding his presentation, Sonin highlighted that in a degenerate autocracy such as Russia, individual decisions by the leader are rarely crucial due to the high level of institutionalization. However, as shown by the model, the leader is inevitably faced with a situation where he is surrounded by incompetent loyalists feeding him bad intel and setting him up to make disastrous decisions – most recently displayed in Vladimir Putin’s decision to invade Ukraine.

“Facing the Hard Truth: Evidence from Climate Change Ignorance”

Pamela Campa, Associate Professor at Stockholm Institute of Transition Economics, gave the conference’s second presentation, which detailed her work (with Ferenc Szucz, Stockholm University) on climate change skepticism.

Campa opened her talk with the current paradox regarding climate change, where, in the scientific community there is a strong consensus about the existence of climate change, but in society at large, skepticism is largely prevalent. This can be exemplified by one quarter of the US population not believing in global warming in 2023, and Europeans not believing in the fact that humans are the main driver of climate change.

According to Campa, the key question to answer is therefore “Why does ignorance about climate change persist among the public – in spite of the overwhelming evidence?”. One possible explanation may be a deficit in comprehension; people simply don’t understand the complexity of climate change and thus follow biased media and/ or politicians more or less sponsored by lobbyists. However, research have shown scientifical literacy to be quite uncorrelated with climate change denial, contradicting the above explanation. The second hypothesis, and of focus in the study, instead revolve around the concept of information avoidance. To test the hypothesis that people actively avoid climate change information, the authors key in on coal mining communities in the US having been exposed to negative shocks in the form of layoffs. These communities are of interest given their strong sense of identity and the fact that they are directly affected by the green transition. Arguably, a layoff shock would negatively affect not only their economy, but also pose a threat to their perceived identity. Given the context, it can thus be assumed that these communities to a larger extent would avoid information on climate change and information post-shock to restore the threatened identity.

The authors consider US counties experiencing mass layoff (more than 30 percent of mining jobs lost between 2014 and 2017) as treated counties, finding that in these counties, learning about climate change is 30 to 40 percent lower than in counties having experienced no mass layoffs. To account for the fact that the layoff itself may cause changes in learning, the authors also consider an instrument variable analysis in which gas prices are exploited as instrument for the layoffs – once again displaying the fact that people in affected communities believe climate change to be caused by humans to a lesser extent, when compared to counties in which no mass layoffs had occurred.

Interestingly, when controlling with other industries with somewhat similar characteristics (such as metal mining), the drop in climate change learning disappears, feeding in the notion of “identity-based information avoidance”.

The lack of support for and consensus among the public of the ongoing climate change and its drivers might pose a threat for the green transition as well as reduce personal effort to reduce the carbon footprint, Campa concluded.

“Consumer Credit with Over-Optimistic Borrowers”

In the plenary session’s last presentation, Igor Livshits, Economic Advisor and Economist at the Federal Reserve Bank of Philadelphia, presented his working paper (with Florian Exler, University of Vienna, James MacGee, Bank of Canada and Michèle Tertilt, Mannheimer University) on consumer credit and borrower’s behaviour.

There has been much debate on whether and how to regulate consumer credit products to limit misuse of credit. In 2009/2010 several initiatives and regulations (such as the 2009 Credit Card Accountability Responsibility and Disclosure Act) were introduced with the aim of protecting consumers and borrowers from arguments that sellers of credit products exploit lack of information and cognitive capacity of borrowers. There is however a lack of evaluation of such arguments and subsequent regulations, which Livshits explained to be the motivation behind the paper.

The paper differentiates between over-optimistic borrowers (behaviour borrowers) and rational borrowers (rationalists). While both types face the same risks, behaviour borrowers are more prone to shocks and are at the same time unaware of these worse risks (i.e., they believe they are rationalists). Focusing on these types of borrowers, the paper introduces a model in which the lenders endogenously price credit based on beliefs about the borrower type. Households decide whether to spend or save and if to file for bankruptcy in an environment in which they are faced with earning shocks and expense shocks.

In this structural model of unsecured lending and default, Livshits finds that behavioral borrowers’ “risky” behaviour negatively affects rationalists since both types are pooled together and, thus rationalists are overpaying to cover for the behaviour borrowers. A calibration of the model also suggests that behavioral borrowers borrow too much and file for bankruptcy too little and too late.

Livshits argued that the model does not provide evidence of the notion that borrowers need protection from lenders, but rather that borrowers need to be protected from themselves. In fact, had behaviour borrowers been made aware of the fact that they are overly optimistic about the actual state of their future incomes, they would borrow 15 percent less.

To address the increased risks behaviour borrowers take at the cost of rationalists, policies such as default made easier, taxation on borrowing, financial literacy efforts and score-dependent borrowing limits could all be considered. Such policies may lower debt and reduce bankruptcy filings but as they may also reduce welfare and exhibit scaling difficulties.

Updates from the Institutes

During the Retreat, the respective institutes shared the previous year’s work, and updates within the FREE Network’s three joint projects were also presented. These go under the acronyms of FROMDEE (Forum for Research on Media and Democracy in Eastern Europe), FREECE (Forum for Research on Eastern Europe; Climate and the Environment) and FROGEE (Forum for Research on Gender Economics in Eastern Europe), and address areas of great relevance in Eastern Europe and the Caucasus. Researchers from all FREE Network institutes work on these topics, with the most recent policy paper written in coordination by SITE, KSE and CenEA (with expert Maja Bosnic, Niras International Consulting). The policy paper focuses on the gender dimension of the reconstruction of Ukraine – putting emphasis on the necessity of gender budgeting principles throughout the various parts of reconstruction.  An upcoming joint research paper will consider the effects of gasoline price increase on household income across the Network’s countries, written under the FREECE umbrella.

The three themes of gender, media and democracy, and environment and climate are not only purely research topics within the institutes. They also reflect developments and challenges that the institutes to a various extent face in the respective contexts in which they operate. The work focusing on the reconstruction of Ukraine is an excellent example of an area that encompasses all three.

Another example of the relevance of the three themes features prominently in one of the institutes’ most tangible contribution to their respective societies: their education programs. Nataliia Shapoval, Vice President for Policy Research at Kyiv School of Economics (KSE), emphasized how KSE has – amid Russia’s war on Ukraine – managed to greatly expand. Over the past year, KSE has launched 8 new bachelor’s and master’s programs, some of which are directly targeted at ensuring postwar reconstruction competence. On a similar note, Lev Lvovskiy, Academic Director at the Belarusian Research and Outreach Center (BEROC) mentioned the likelihood of next year being able to offer students a bachelor’s program in economics and several business courses in Vilnius – BEROC’S new location. BEROC’s effort in providing quality education in economics to Belarus’ exile youth is considered a fundamental investment in the future of the country – providing a competent leading class capable of installing democracy and fair elections in Belarus once the current regime is gone. The emphasis on education was further highlighted by Salome Gelashvili, Practice Head, Agriculture & rural policy at the International School of Economics Policy Institute (ISET-PI) who not only mentioned the opening of a master’s program in Finance at ISET but also the fact that an increasing number of students who’ve recently graduated from PhD’s abroad are now returning to Georgia. Such investments into education are necessary to counter Russian propaganda in the region all three agreed, emphasizing the need to continually stem Russia’s negative influence in the region. This investment into education is also important to hinder countries from sliding away from democratic values – realized in Belarus and threatening in Georgia.

To further delve into the issues of democratic backsliding, a tendency that has been recently observed not only in the region but also more widely across the globe, FROMDEE will organize an academic conference in Stockholm on October 13th, 2023.

Concluding Remarks

The 2023 FREE Network Retreat provided a great opportunity for the Networks’ participants to jointly take part of new research and to share experiences, opportunities, and knowledge amongst each other. The Retreat also served as reminder of the importance of continuously supporting economic and democratic development, through research, policy work, and networking, in Eastern Europe and the Caucasus.

List of Presenters

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Potential Climate Change Impacts on Women’s Vulnerability in Georgia

Posted on May 8, 2023 | Policy Brief

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Climate change can increase the vulnerability of women to various risks, including natural disasters, food insecurity, water scarcity, and health problems. Women may also face unique challenges in accessing resources and services, which can limit their ability to adapt to a changing climate. Developing countries, with their more traditional gender roles, are even more likely to experience disproportionate impacts of climate change on women, and Georgia is no exception. Thus, the country needs to address this problem through a comprehensive approach which accounts for the social, economic, and environmental factors that contribute to gender inequality.

Introduction

According to Georgia’s fourth national communication report to the United Nation’s Framework Convention on Climate Change, the negative impacts of climate change on ecosystems and the economy can hinder Georgia’s path toward sustainable development. Therefore, a key focus for the country should be to develop climate-resilient practices and reduce the vulnerability of communities exposed to these impacts.

The climate scenarios in the communication report present a worrying picture of warming trends in the country, mainly due to increased temperatures in the last summer and autumn seasons, as depicted in Figure 1 (MEPA, 2021). Such alterations in weather patterns often lead to glacier retreat, water scarcity, coastal erosion, and biodiversity loss in different regions of Georgia (ibid).

Figure 1. Average summer and winter temperatures in Georgia, 1900-2021.

Source: Climate Change Knowledge Portal (World Bank, 2021).

An increasing body of international research has demonstrated that climate change can have adverse effects on agricultural production, food security, water management, and public health. Furthermore, research has revealed that these effects are not gender-neutral, with women and children being among the most affected groups (World Bank Group, 2021).

Climate Change Impacts on Women – A Georgian Perspective

Women in developing countries like Georgia experience various impacts of climate change, which affect them differently than men. The effects might vary according to region or community, but some common signs can be identified. The main channels through which women are disproportionally affected by climate change are discussed in the following sub-sections.

Health Impacts

Climate change has a significant effect on human health, with women being more vulnerable due to various cultural, social, and economic factors (Sbiroli et al., 2022). In particular, women appear to be more susceptible to infectious diseases and undernutrition, especially in middle and low-income countries (ibid).

Springmann et al. (2016) found that, by 2050, Georgia could experience about 32.36 climate-related deaths per million due to malnutrition caused by a lack of fruits and vegetables in people’s diets and due to increased health complications associated with undernutrition. In Georgia, malnutrition is a significant gender equality concern. According to the Global Nutrition Report, women in Georgia disproportionally experience exposure to undernutrition translated into underweight. Similarly, women represent the majority of Georgians with obesity (26.8 percent, compared to 22.2 percent among men). Both these issues may be further exacerbated by climate change in the future.

Furthermore, in Georgia, women are more likely to care for sick family members. According to Geostat, 31 percent of women who have sick or dependent family members are involved in providing them care, compared to only 15 percent of the men. This puts women at greater risk of exposure to climate change-induced infectious diseases, given that research has demonstrated an increased risk of such diseases worldwide, including in areas in Europe that have climate profiles similar to Georgia (Mora et al., 2022; Gray et al., 2009).

Figure 2. Prevalence of underweight among adults (>18) in Georgia, 2000-2016.

Source: Global Nutrition Report (2023).

Water and Food Scarcity

Climate change is also known to affect food and water supply through changes in agricultural conditions, droughts, and floods. In developing countries as women are often responsible for food and water supply, they are disproportionally affected by water shortages resulting from climate change (Figueiredo & Perkins, 2013). Women in poor rural households in Georgia are likely to face similar challenges.

Women in Georgia also play a crucial role in agriculture (according to Geostat, 47 percent of workers in agricultural holdings were women in 2021). Fluctuations in temperature and precipitation patterns can reduce crop yields, leading to lower income and food insecurity. This may disproportionately affect female farmers, as access to agricultural technologies, land ownership and lack of necessary knowledge and skills are some of the significant barriers for women involved in agriculture in Georgia (Gamisonia, 2015).

Economic Impacts and Access to Resources

One of the main reasons to why women are disproportionally affected by climate change is that their underlying economic conditions are less favourable than men’s (Yadav & Lal, 2018). In 2021, the majority of people outside the labor force were women (65 percent), while men constituted 35 percent (Geostat). It is important to mention that in the same year, only 33 percent of women were employed in Georgia, compared to 49 percent of men. Additionally, the average salary for women was 1056 GEL (813 GEL in the agricultural sector), while men earned an average of 1538 GEL (1006 GEL in the agricultural sector). Finally, although poverty rates among women in Georgia are slightly lower than among men, 17.1 vs. 17.9 percent respectively (absolute poverty rates in 2021), the poverty data does not account for the gender-biased distribution of household resources. Women face larger barriers in obtaining financial resources (collaterals, loans, etc.) than men because they own less property. For different types of property, only 44 percent are owned by at least one woman, according to the National Agency of Public Registry of Georgia. The corresponding number for men is 56 percent.  Geostat data further indicates that households headed by men make up 63 percent of the total number of households, whereas households headed by women account for only 37 percent. These unfavorable conditions hinder women’s access to vital information and resources required for climate change adaptation and mitigation.

The discussed impacts may be especially prominent for women in poor rural households. Climate change-induced natural disasters are typically more detrimental for households dependent on agriculture (Dagdeviren et al., 2021), especially subsistence farmers and poor agricultural workers (in particular those without access to technology or resources). In Georgia, women are in majority in both these categories.

Natural Disasters and Displacement

Climate-driven disasters are over 14 times more likely to cause fatalities among women and children than men, according to UNHCR (2022). Additionally, women in agrarian societies impacted by climate change are less likely to use adaptive measures, putting them at higher risk of displacement (Palacios, Sexsmith, Matheu & Gonzalez, 2023). Such risks are also likely to pertain to the rural areas of Georgia.

Georgia’s International Obligations and Policies

In previous decades Georgia has made significant progress when it comes to incorporating gender equality and climate change into the policy agenda. In particular, Georgia follows numerous international legislative initiatives regarding sustainable development, gender equality, and climate change.

Georgia is a party to the Paris Agreement and the Beijing platform (a comprehensive roadmap for women’s rights and empowerment, which lists the problems associated with gender inequality and different strategies to overcome them, signed by Georgia in 1995). It is also a signatory of the Gender Action Plan (GAP), adopted a year after the Paris Agreement to integrate gender into targets and increase effectiveness, fairness, and sustainability.

The updated Nationally Determined Contribution (NDC) of Georgia includes a dedicated section on gender and climate change. This section aims to promote gender mainstreaming, encourage equal participation, empower women, build capacity, and develop climate policies that are responsive to gender considerations. Furthermore, the Long-term Low-emission Development Strategies for Paris Agreement parties (including Georgia) has a communication and awareness-raising strategy that seeks to address gender, youth, and people with disabilities in its outreach efforts (United Nations, 2022).

Despite these commitments, Georgia is lagging when it comes to tackling the issues of climate change and gender in coordination. For example, even though Georgia has adopted a Gender Equality Law and Action Plan, it does not address climate change issues. Therefore, municipalities are not required to consider gender aspects of climate change impacts.

Identified Gaps and Policy Recommendations

Despite the number of policies and measures undertaken, unsolved problems hinder the country’s ambition to adhere to gender-mainstreamed climate change-addressed policymaking.

For example, there is a lack of gender-disaggregated data on the impacts of climate change in Georgia, which prevents policymakers from developing targeted strategies to address women’s needs. Therefore, collecting and analyzing disaggregated data with gender-specific impacts in mind is recommended. Additionally, involving women in decision-making and ensuring their participation in climate change efforts is crucial as their unique experiences and perspectives can inform more effective and equitable responses to climate change impacts.

As previously mentioned, climate change in Georgia is expected to exacerbate water and food scarcity, which can disproportionately affect women. Therefore, implementing climate-resilient water management strategies and increasing access to climate-resilient agricultural practices, such as crop diversification and improved irrigation systems, can help increase farm productivity and reduce the adverse impacts of climate change on women.

Furthermore, there is a need to provide women with access to financial resources and services and to address gender-based inequalities that may limit women’s ability to access information and resources necessary for climate change adaptation and mitigation.

Finally, addressing the impacts of climate change on women in Georgia will require a coordinated and sustained effort from a range of stakeholders, including governments, civil society organizations, and local communities, so that women are not left behind in the global effort to address the impacts of climate change.

Conclusion

To effectively address the impacts of climate change on women in Georgia, it is essential to recognize that various social, economic, and cultural factors shape women’s experiences. For example, women in rural areas may face different challenges than women in urban areas; women with few economic means may be disproportionately affected by climate change. Therefore, policies should not only integrate gender-mainstreaming, but also account for these heterogeneities, to ensure that different parties of the society are adequately addressed within the climate change policy agenda.

References

  • Dagdeviren, H., Elangovan, A., & Parimalavalli, R. (2021). Climate change, monsoon failures and inequality of impacts in South India. Journal of Environmental Management.
  • Figueiredo, P., & Perkins, P. E. (2013). Women and water management in times of climate change: participatory and inclusive processes. Journal of Cleaner Production, 188-194.
  • Gamisonia, N. (2015). Climate Change and Women. Heinrich Böll Stiftung.
  • Global Nutrition Report. (2023). Global Nutrition Report. https://globalnutritionreport.org/resources/nutrition-profiles/asia/western-asia/georgia/
  • Geostat. https://www.geostat.ge/en
  • Gray, J. S., Dautel, H., Estrada-Peña, A., Kahl, O., & Lindgren, E. (2009). Effects of Climate Change on Ticks and Tick-Borne Diseases in Europe. National Library of Medicine.
  • MEPA. (2021). Fourth National Communication of Georgia to the UNFCCC. Tbilisi: UNDP.
  • Mora, C., McKenzie, T., Gaw, I. M., Dean, J. M., Hammerstein, H. v., Knudson, T. A., Franklin, E. C. (2022). Over half of known human pathogenic diseases can be aggravated by climate change. Nature Climate Change.
  • National Agency of Public Registry of Georgia. https://www.napr.gov.ge/
  • Palacios, H. V., Sexsmith, K., Matheu, M., & Gonzalez, A. R. (2023). Gendered adaptations to climate change in the Honduran coffee sector. Women’s Studies International Forum.
  • Sbiroli, E., Geynisman-Tan, J., Sood, N., Maines, B. A., Junn, J. H.-J., & Sorensen, C. (2022). Climate change and women’s health in the United States: Impacts and opportunities. The Journal of Climate Change and Health.
  • Springmann, M., Mason-D’Croz, D., Robinson, S., Garnett, T., Godfray, H. C., Gollin, D., Scarborough, P. (2016). Global and regional health effects of future food production under climate change: a modelling study. National Library of Medicine.
  • UNHCR. (2022). Gender, Displacement and Climate Change. Potsdam Institute for Climate Impact Research.
  • United Nations. (2022). Long-term Low-emission Development Strategies. United Nations.
  • World Bank Group. (2021). Climate Risk Country Profile: Georgia. World Bank Group.
  • World Bank. (2021). Climate Change Knowledge Portal. https://climateknowledgeportal.worldbank.org/country/georgia
  • Yadav, S. S., & Lal, R. (2018). Vulnerability of women to climate change in arid and semi-arid regions: The case of India and South Asia. Journal of Arid Environments, 4-17.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Georgian Economy and One Year of Russia’s War in Ukraine: Trends and Risks

Posted on March 13, 2023 | News

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Russia’s invasion of Ukraine profoundly impacted the global economy, immediately sending shockwaves across the globe. The attack of a country that was once a major energy supplier to Europe on the country which was one of the top food exporters in the world, sent food and fuel prices spiralling, causing major energy shortages and the prospect of protracted recession in the United States and the European Union.

The unprovoked and brutal aggression resulted in nearly universal condemnation and widespread sanctions placed on Russia by the United States, the EU, and other Western allies. Financial sanctions were perhaps the most unexpected and significant with the potential for immediate impact on Russia’s neighbours, including those that did not formally join the sanctions regime. In addition to sanctions, the major consequence of the war was mass migration waves, particularly from Ukraine, but also from Russia and Belarus to neighbouring countries.

At the start of the war, it was expected that the Georgian economy would be severely and negatively impacted for the following reasons:

  • First, as a former Soviet republic, Georgia historically maintained close economic trade ties with both Russia and Ukraine. The ties with Russia have weakened considerably in the wake of the 2008 Russo-Georgian war but remained significant. Russia was the primary market for imports of staple foods into Georgia, such as wheat flour, maize, buckwheat, edible oils, etc. Russia and Ukraine were both important export markets for Georgia. Russia was absorbing about 60 percent of Georgian wine exports and 47 percent of mineral water exports, while Ukraine was one of the leading importers of alcohol and spirits from Georgia (46 percent of Georgia’s exports). Tourism and remittances are other areas where Georgia is significantly tied to Russia and somewhat weaker to Ukraine. Before the pandemic, in 2019 Russia accounted for 24 percent of all tourism revenues, while Ukraine for 6 percent. Remittances from Russia accounted for 16.5 percent of total incoming transfers in 2021.
  • Second, while the Georgian government chose to largely keep a neutral stance on the war (announcing at one point that they would not join or impose sanctions against Russia), the main financial and trade international sanctions were still in effect in Georgia due to international obligations and close business ties with the West. These factors were reinforced by strong support for Ukraine among the Georgian population, where the memory of the Russian invasion of Georgia in 2008 remains uppermost.
  • In addition, Georgia is a net energy importer, and while the dependence on energy imports from Russia is not significant, the rising prices would have affected Georgia profoundly.

Original publication: This policy paper was originally published in the ISET Policy Institute Policy Briefs section by Yaroslava Babych, Lead Economist of ISET Policy Institute. To read the full policy paper, please visit the website of ISET-PI. 

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Would a Higher Minimum Wage Meaningfully Affect Poverty Levels Among Women? – A Simulation Case from Georgia

Posted on February 27, 2023 | Policy Brief

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In economic literature the effect of minimum wage on the labour market and its relevance as an anti-poverty, equality-enhancing policy tool, is a matter of vigorous debate. The focus of this policy brief is a hypothetical effect on poverty rates, particularly among women, following an increase in the minimum wage in Georgia. A simulation exercise (Babych et al., 2022) by the ISET-PI research team shows that, in Georgia, a potential increase in the minimum wage is likely to result in an overall positive albeit small reduction in poverty rates in general. At the same time, women are likely to gain more from such minimum wage policy than men. The findings are consistent with the literature claiming that a minimum wage increase alone may not result in meaningful poverty reduction. Any minimum wage increase should thus be enhanced by other policies such as training programs increasing labor force participation among women. 

Many countries around the world have enacted minimum wage laws. According to the International Labour Organization (ILO) “Minimum wages can be one element of a policy to overcome poverty and reduce inequality, including those between men and women” (ILO, 2023). In economic literature, the minimum wage debate has been particularly acute, with pros and cons of the minimum wage increases, their effect on the labor market, and their relevance as an anti-poverty and equality-enhancing policy tool fiercely contested in empirical studies and simulation studies. In this policy brief, we focus on the effect of a minimum wage increase in Georgia on poverty rates, and in particular poverty rates among women.

Minimum Wage Effects

According to the European Commission (2020) a number of benefits is associated with the introduction of minimum wage. These benefits include a reduction in in-work poverty, wage inequality and the gender pay gap, among others.

International evidence, however, cautions against considering an increase in minimum wage as the silver bullet to end poverty. A 2019 report by the International Labour Organization (ILO, 2019) shows that the incidence of poverty among the working poor is comparable to the incidence of poverty among individuals outside of the labor market. Therefore, even if an increase in minimum wages would lift all working poor out of poverty, a substantial number of poor would remain.

Moreover, minimum wage can have a potential adverse effect on employment of the most vulnerable by deterring firms from hiring low-wage, low-skilled labor (Neumark, 2018).  The adverse employment effect will be stronger if current wages correspond more closely to the real productivity of labor. In such scenario companies would lose by retaining low-productivity workers and, likely respond to the increase in minimum wage by laying off workers, resulting in the loss of wages, rather than in their increase. On the other hand, if salaries are lower than the real productivity of the less productive workers, companies might still be able to profit from employing them and will not be forced to lay them off, resulting in a wage increase for low-wage workers.

Whether – and to what extent – the introduction of a minimum wage reduces poverty and/or assists low-income households then depends on how many individuals are going to lose their jobs, how many workers will maintain their jobs and receive a higher wage, and where these winners and losers are positioned along the distribution of family incomes.

With regard to employment effects, the results are not perfectly homogeneous. On the one hand, a large body of evidence suggests that minimum wages do lower the number of jobs accessible to low-skill employees (Sabia, Burkhauser and Hansen, 2012; Sotomayor, 2021; Neumark, 2018) On the other hand, some scholars argue that once the study design is changed to take into account the non-random distribution of minimum wage policies in different parts of the country in question, the “disemployment effect” of minimum wage policies (considering the example of United States) largely disappear (Allegretto et al., 2013; Dube et al., 2010).

With regards to poverty, a number of studies look at minimum wage as an anti-poverty policy tool for developing countries and consider its effectiveness in reducing poverty and/or inequality. For example, a study by Sotomayor (2021) suggests that poverty and income inequality in Brazil decreased by 2.8 and 2.4 percent respectively within three months of a minimum wage increase. Effects diminished with time, particularly for bottom-sensitive distribution measures, a process that is consistent with resulting job losses being more frequent among poorer households. The fact that the subsequent yearly increase in the minimum wage in Brazil resulted in a renewed drop in poverty and inequality shows that possible unemployment costs might be outweighed by benefits in the form of higher pay among working persons and – potentially – by positive spillover effects such as increased overall consumption.

Minimum Wage and Female Poverty

As in the case of poverty in general, there is some discrepancy in the literature on whether a minimum wage increase would help reduce poverty among women. Single mothers have been the focus of research in this regard since they are typically the most vulnerable low-wage workers, likely to be hurt by the loss of employment following an increase/ introduction of a minimum wage. Burkhauser and Sabia (2007) argue that the minimum wage increases in the U.S. (1988-2003) did not have any effect on the overall poverty rates, on the poverty rates among the working poor, or on poverty among single mothers. They argue that an increase in Earned Income Tax Credit (EITC), which provides a wage subsidy to workers depending on income level, tax filing status, and the number of children, would have a higher impact on poverty, in particular among single mothers.

In the meantime, Neumark and Wascher (2011) find that EITC and minimum wage reinforce each other’s positive effect for single women with children (boosting both employment and earnings), but negatively affects childless single women and minority men. Another study on the U.S. (Sabia, 2008) looked at the effect of minimum wage increases on the welfare of single mothers, finding that most of them were unaffected as they earned above-minimum wage. Single mothers with low-education levels did not see an increase in net incomes due to the negative effect on employment and hours worked: for low-skilled individuals, a 10 percent increase in minimum wage resulted in an 8.8 percent decline in employment and an 11.8 percent reduction in hours worked.

Yet another study (DeFina, 2008) focus on child poverty rates and show that minimum wage increases have a positive (reducing) impact on child poverty in female-headed families. The effect is small but significant (a 10 percent increase in the minimum wage decreases child poverty rates by 1.8 percentage points), controlling for other factors.

Ultimately, the effect of minimum wage on poverty among women or female-headed households is somewhat ambiguous. It depends on the poverty threshold used, other policy instruments (such as the EITC), existing incentives to enter employment and how, in the specific country of interest, labor laws may affect the employer’s cost of hiring (e.g. for France, see Laroque and Salanie, 2002).

The discussion is however relevant for countries like Georgia, where the wage gap between men and women is quite large, and where more women than men tend to work in low-wage and vulnerable jobs. While the overall poverty gap between men and women in Georgia is insignificant (mainly because poverty is measured at the household level), the gap becomes apparent when comparing female-headed households to male-headed ones. The poverty rates in the former case are nearly 2 percentage points higher in Georgia (20 percent vs. 18.3 percent in 2021). The poverty rates are the highest among households with only adult women (39.3 percent for all-female households vs. 20.1 percent overall in 2018).

A Simulation of a Minimum Wage Raise in Georgia

The Georgian minimum wage legislation dates back to 1999. The presidential decree N 351 from June 4, 1999 states that the minimum (monthly) wage that is to be set in Georgia is equal to 20 GEL (with some specific exceptions in the public sector). This is a non-binding threshold.  Therefore, one has to think carefully what consequences might arise from raising the minimum wage to a much higher level. In addition to previously discussed aspects, one issue to keep in mind is the different average wages across different regions in Georgia. For example, a national minimum wage increase might have more of an impact in poorer regions, where both wages and incomes are lower, while it may still be non-binding in Tbilisi.

The ISET-PI research team (Babych et al., 2022) use Georgian micro data from the Labor Force Survey (LFS) and the Household Integrated Expenditure Survey (HIES), to simulate the effect of instituting a nation-wide minimum wage on both employment and poverty rates in different regions of Georgia. One focus area of the study was to analyze the effects of a minimum wage increase on female poverty. As with any exercise using a simulation approach, this study is subject to limitations imposed by the assumptions used, e.g. how much labor demand would respond to changes in the minimum wage, etc. The study considered two hypothetical thresholds of the minimum wage; 250 and 350 GEL respectively.

Figure 1. Share of private sector employees earning below certain thresholds, by gender, 2021.

Source: Authors’ calculations based on the Labor Force Survey (Geostat, 2021).

The expected household income after the minimum wage increase was calculated and then compared to the poverty threshold (for each household in a standard way, using the “adult equivalence” scale). According to this methodology, any person who lives in a household which falls below the poverty threshold is considered to be poor. A “working poor” household is defined as a household below the poverty threshold where at least one adult is working.

Figure 1 shows that there is a substantial share of both men and women whose monthly wage income falls below the hypothetical minimum wage thresholds. In addition, women are more than two times as likely to be earning below these thresholds. However, the possible impact from an increased minimum wage on female vs. male poverty is not clear-cut. Since many women are part of larger households which include adult males, their possible income losses/gains may be counterbalanced by income gains/losses of male family members, leaving the overall effect on household income ambiguous.

In addition, poverty rates are not likely to be much affected by a minimum wage increase if most poor households are “non-working poor” (where adult family members are either unemployed or outside of the labor force), a consideration particularly relevant for Georgia. The share of poor individuals who live in “working poor” households (with at least one household member employed) is just 41 percent nationally (and 35 percent in rural areas), meaning that close to 60 percent of poor individuals nationwide (and 65 percent in rural areas) are not likely to be directly affected by minimum wage increases.

Female vs. Male Poverty: Scenarios Following a Minimum Wage Increase

As one can see in Figure 2, increased minimum wages tend to reduce poverty, but the impact is not larger than one percentage point. Not surprisingly, females benefit more than males (0.3 and 0.8 percentage points vs. 0.2 and 0.9 percentage points poverty reduction for men and women respectively, under different threshold scenarios).  The maximum positive impact on poverty reduction is observed under a higher minimum wage threshold.

Figure 2. Estimated impact on poverty rates, based on the national subsistence minimum.

Source: Authors’ calculations based on the Household Integrated Expenditure Survey (Geostat, 2021).

The impact of an increased minimum wage on the expected median consumption of households doesn’t exceed a few percentage points either, as illustrated in Figure 3.

Figure 3. Median monthly consumption per “equivalent adult” in the household under the status quo and minimum wage scenarios, 2021.

Source: Authors’ calculations based on the Household Integrated Expenditure Survey (Geostat, 2021).

The impact is greatest in urban areas other than Tbilisi (between a 2.5 percent and a 4.2 percent increase in median consumption relative to the status quo). The lower impact in Tbilisi is most likely driven by relatively higher wages, while the low impact in rural areas is likely driven by lower participation in wage employment.

Conclusions

In the hypothetical case of Georgia, an impact of a minimum wage increase on poverty rates is expected to be limited, in line with the literature. In our study this finding is mostly driven by the fact that only a relatively small share of poor individuals live in “working poor” households (about 40 percent, nationally). The remaining 60 percent of poor individuals will be unaffected by the reform.

The quantitative impact on female and male poverty is estimated to be low, although the female poverty rate reduction is somewhat larger than among males.

It is important to note that the analysis doesn’t consider possible differential impacts on different groups of vulnerable families, such as families with small children and single mothers with small children. Some reasons to why groups of households may or may not be affected by the hypothetical minimum wage increase, based on their employment status and other factors, have been discussed above.

Another important point is that our exercise should not be seen as an argument against an increase of the minimum wage in Georgia. Instead, it suggests that such a reform would not have much of an impact if done in isolation. Indeed, the existing literature on minimum wage seems to be in consensus on the fact that minimum wage policies would be more impactful if supplemented by the following measures:

  • Maintain and expand targeted social assistance to groups that do not benefit or that are losing jobs/incomes as a result of the minimum wage changes
  • Have job re-training programs in place to help laid-off workers
  • Have human capital investment programs in place to increase workers’ productivity, in particular for low-productivity sectors
  • Consider other support instruments targeted toward the most affected groups of the population such as single working mothers etc.

These recommendations should be incorporated in the policy making regarding minimum wages in Georgia.

Acknowledgement

We are grateful to Expertise France for financially supporting the original report (Babych et al., 2022), which features some of the results and points raised in this policy brief.

References

Disclaimer: Opinions expressed during events and conferences are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

An Overview of the Georgian Wine Sector

Posted on November 21, 2022 | Policy Brief

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Georgia has an 8000-year-old winemaking tradition, making the country the first known location of grape winemaking in the world. In this policy brief we analyze and discuss major characteristics of the wine sector in Georgia, government policies regarding the sector and major outcomes of such policies. The brief provides recommendations on how to ensure sustainable development of the sector in a competitive, dynamic environment.

Introduction

The Georgian winemaking tradition is 8000 years old, making Georgia the world’s first known location of grape winemaking. There are many traditions associated with Georgian winemaking. One of them is ‘Rtveli’ – the grape harvest that usually starts in September and continues throughout the autumn season, accompanied with feasts and celebrations. According to data from the National Wine Agency, the annual production of grapes in Georgia is on average 223.6 thousand tones (for the last ten-years), with most grapes being processed into wine (see Figure 1).

Figure 1. Grape Processing (2013-2021)

Source: National Wine Agency, 2022. Note: Some producers do not participate In Rtveli and the total annual quantity of processed grape in the country might therefore be higher than the numbers presented in the figure.

Wine is one of the top export commodities for Georgia. It constituted 21 percent of the total Georgian agricultural export value in 2021 (Geostat, 2022). Since 2012 wine exports have, on average, grown 21 percent in quantitative terms, and by 22 percent in value (Figure 2). The average price per ton varies from 3 thousand USD to 3.9 thousand USD (Figure 2). Exports of still wine in containers holding 2 liters or less constitute, on average, 96 percent of the total export value.

Figure 2. Georgian Wine Exports (2012-2021)

Source: Geostat, 2022.

The main destination market for exporting Georgian wine is the Commonwealth of Independent States (CIS) countries which account for, on average, 78 percent of the export value (2012-2021). The corresponding share for EU countries is 10 percent. As of 2021, the top export destinations are Russia (55 percent), Ukraine (11 percent), China (7 percent), Belarus (5 percent), Poland (6 percent), and Kazakhstan (4 percent).  While Russia is still a top market for Georgian wine, Russia’s share of Georgian wine exports declined after Russia imposed an embargo on Georgian wines in 2006. The embargo forced market diversification and even after the reopening of the Russian market and Georgian wine exports shifting back towards Russia, its share declined from 87 percent in 2005 to 55 percent in 2021.

While there are more than 400 indigenous grape varieties in Georgia, only a few grape varieties are well commercialized as most of the exported wines are made of Rkatsiteli, Mtsvane, Kisi, and Saperavi grape varieties (Granik, 2019).

Government Policy in the Wine Sector

The Government of Georgia (GoG) actively supports the wine sector through the National Wine Agency, established in 2012 under the Ministry of Environmental Protection and Agriculture (MEPA). The National Wine Agency implements Georgia’s viticulture support programs through: i) control of wine production quality and certification procedures; ii) promotion and spread of knowledge of Georgian wine; iii) promotion of export potential growth; iv) research and development of Georgian wine and wine culture; v) creation of a national registry of vineyards; and vi) promotion of organized vintage (Rtveli) conduction (National Wine Agency, 2022).

During 2014-2016, the GoG’s spending on the wine sector (including grape subsidies, promotion of Georgian wine, and awareness increasing campaigns) amounted to 63 million GEL, or 22.8 million USD (As of November 1, 2022, 1 USD = 2.76 GEL according to the National Bank of Georgia). Out of the spending, illustrated in Figure 3, around 40-50 percent was allocated to grape subsidies implemented under the activities of iv) (as mentioned above).

There are two types of subsidies used by the GoG– direct and indirect. Direct subsidies imply cash payments to producers per kilogram of grapes. As for indirect subsidies, they entail state owned companies purchase grapes from farmers.

Starting from 2017, the GoG decided to abandon the subsidiary scheme and decrease its spending on of the wine sector.  The corresponding figure reached a minimum of 9.2 million GEL (3.3 million USD) in 2018. Meanwhile, the grape production has been increasing, reaching its highest level in 2020 (317 thousand tons). In 2020, the GoG resumed subsidizing grape harvests to support the wine sector as part of the crisis plan aimed at tackling economic challenges following the Covid-19 pandemic. The corresponding spending in the wine sector increased from 16.7 million GEL (around 6 million USD) in 2019 to 113.4 million GEL (41 million USD) in 2020, out of which the largest share (91 percent) went to grape subsidies. In 2021, the GoG continued its extensive support to the wine sector and the corresponding spending increased by 44 percent, compared to 2020. The largest share again went to grape subsidies (90 percent).

Figure 3. Grape Production and Government Spending on the Wine Sector (2014-2021)

Source: Ministry of Finance of Georgia, National Statistics Office of Georgia, Author’s Calculations, 2022.

In 2022, the GoG have continued subsidizing the grape harvest to help farmers and wine producers sell their products. During Rtveli 2022, wine companies are receiving a subsidy if they purchase and process at least 100 tons of green Rkatsiteli or Kakhuri grape varieties grown in the Kakheti region, and if the company pays at least 0.90 GEL per kilogram for the fruit. If these two conditions are satisfied, 0.35 GEL is subsidized from a total of 0.9 GEL per kilogram of grapes purchased (ISET Policy Institute, 2022). Moreover, the GoG provides a subsidy of 4 GEL per kilogram for Alksandrouli and Mujuretuli grapes (unique grape varieties from the Khvanchkara “micro-zone” of the north-western Racha-Lechkhumi and Kvemo Svaneti regions), if the buying company pays at least 7 GEL per kilogram for those varieties (Administration of the Government of Georgia, 2022). Overall, about 150 million GEL (54.2 million USD), has been allocated to grape subsidies in 2022.

Policy Recommendations

Although the National Wine Agency is supposed to implement support programs in various areas like quality control, market diversification, promotion and R&D, these areas lack funding, as most of the Agency’s funds are spent on subsidies. Given that the production and processing of grapes have increased over the years, subsidies have been playing a significant role in reviving the wine sector after the collapse of the Soviet Union (Mamardashvili et al., 2020).  However, since the sector is subsidized as of 2008, the grape market in Georgia is heavily distorted. Prices are formed, not on the bases of supply and demand but on subsidies, which help industries survive in critical moments, but overall prevent increases in quality and fair competition. They further lead to overproduction, inefficient distribution of state support and preferential treatment of industries (Desadze, Gelashvili, and Katsia, 2020). After years of subsidizing the sector, it is hard to remove the subsidy and face the social and political consequences of such action.

Nonetheless, in order to support the sustainable development of the sector, it is recommended to:

  1. Replace the direct state subsidy with a different type of support (if any), directed towards overcoming systemic challenges in the sector related to the research and development of indigenous grape varieties and their commercialization level.
  2. Further promote Georgian wine on international markets to diversify export destination markets and ensure low dependence on unstable markets like the Russian market. Although wine exporters have in recent years entered new markets, to further strengthen their positions at those markets, it is vital to:
    • ensure high quality production through producers’ adherence to food safety standards.
    • promote digitalization – e-certification for trade and distribution, block chain technology for easier traceability and contracting, e-labels providing extensive information about wine etc. – enabling producers to competitively operate in the dynamic environment (Tach, 2021)
    • identify niche markets (e.g. biodynamic wine) and support innovation within these sectors to ensure competitiveness of the wine sector in the long-term (Deisadze and Livny, 2016).

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Understanding the Economic and Social Context of Gender-based and Domestic Violence in Central and Eastern Europe – Preliminary Survey Evidence

Posted on May 11, 2022 | FROGEE Brief, Policy Brief

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This brief presents preliminary findings from a cross-country survey on perceptions and prevalence of domestic and gender-based violence conducted in September 2021 in eight countries: Armenia, Belarus, Georgia, Latvia, Poland, Russia, Sweden and Ukraine. We discuss the design and content of the study and present initial information on selected topics that were covered in the survey. The collected data has been used in three studies presented at the FROGEE Conference on “Economic and Social Context of Domestic Violence” and offers a unique resource to study gender-based violence in the region.

While the COVID-19 pandemic has amplified the academic and policy interest in the causes and consequences of domestic violence, the Russian invasion of Ukraine has tragically reminded us about the gender dimension of war. There is no doubt that a gender lens is a necessary perspective to understand and appreciate the full consequences of these two ongoing crises.

The tragic reason behind the increased attention given to domestic violence during the COVID-19 lockdowns is the substantial evidence that gender-based violence has intensified to such an extent that the United Nations raised the alarm about a “shadow pandemic” of violence against women and girls (UN Women on-line link). Already before the pandemic, one in three women worldwide had experienced physical or sexual violence, usually at the hands of an intimate partner, and this number has only been increasing. The tragic reports from the military invasion of Ukraine concerning violence against women and children, as well as information on the heightened risks faced by war refugees from Ukraine, most of whom are women, should only intensify our efforts to better understand the background behind these processes and study the potential policy solutions to limit them to a minimum in the current and future crises.

The most direct consequences of gender-based and domestic violence – to the physical and mental health of the victims – are clearly of the highest concern and are the leading arguments in favour of interventions aimed at limiting the scale of violence. One should remember though, that the consequences and the related social costs of gender-based and domestic violence are far broader, and need not be caused by direct acts of physical violence. Gender-based and domestic violence can take the form of psychological pressure, limits on individual freedoms, or access to financial resources within households. As research in recent decades demonstrates, such forms of abuse also have significant consequences for the psychological well-being, social status, and professional development of its victims. All these outcomes are associated with not only high individual costs, but also with substantial social and economic costs to our societies.

This policy brief presents an outline of a survey conducted in eight countries aimed at better understanding the socio-economic context of gender-based violence. The survey, developed by the FREE Network of independent research institutes, has a regional focus on Central and Eastern Europe, with Sweden being an interesting benchmark country. The data was collected in September 2021 in Armenia, Belarus, Georgia, Latvia, Poland, Russia, Sweden and Ukraine. The socio-economic situation of all these countries irrevocably changed with the Russian invasion of Ukraine on 24 February 2022, the ongoing war, and its dramatic consequences. The world’s attention focused on the unspeakable violence committed by the Russian forces in Ukraine, the persecution in Belarus and Russia of their own citizens who were protesting against the invasion, and the challenges other neighbouring countries have faced as a result of an unprecedented wave of Ukrainian refugees. This change, on the one hand, calls for a certain distance with which we should judge the survey data and the derived results. On the other hand, the data may serve as a unique resource to support the analysis of the pre-war conditions in these countries with the aim to understand the background driving forces behind this dramatic crisis. In as much as the gender lens is necessary to comprehend the full scale of the consequences of both the COVID-19 pandemic and the war in Ukraine, it will be equally indispensable in the process of post-war development and reconciliation once peace is again restored.

Survey Design, Countries, and Samples

The survey was conducted in eight countries in September 2021 through as a telephone (CATI) survey using the list assisted random digit dialling (LA-RDD) method covering both cell phones and land-lines, and the sampling was carried out in such a way as to make the final sample representative of the respective populations by gender and three age group (18-39; 40-54; 55+). The collected samples varied from 925 to 1000 individuals. The same questionnaire initially prepared as a generic English version was fielded in all eight countries (in the respective national languages). The only deviations from the generic version were related to the education categories and to a set of final questions implemented in Latvia, Russia and Ukraine with a focus on the evaluation of national IPV legislation.

Table 1 presents some basic sample statistics, while Figure 1 shows the unweighted age and gender compositions in each country. The proportion of women in the sample varies between 49.4% in Sweden and 55.0% in Belarus, Russia and Ukraine. The average sample age is between 43 (Armenia) and 51 (Sweden), while the proportion of individuals with higher education is between 29.3% in Belarus and 55.4% in Georgia. The highest proportion of respondents living in rural areas could be found in Armenia at 62.9%, while the lowest was in Georgia at 24.1%. Figure 1 illustrates good coverage across age groups for both men and women.

Table 1. FROGEE Survey: samples and basic demographics

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Figure 1. FROGEE Survey: gender and age distributions

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Socio-economic Conditions and Other Background Characteristics

To be able to examine the relationship between different aspects of domestic and gender-based violence to the socio-economic characteristics of the respondents, an extensive set of questions concerning the demographic composition of their household and their material conditions were asked at the beginning of the interview. These questions included information about partnership history and family structure, the size of the household and living conditions, education and labour market status (of the respondent and his/her partner) and general questions concerning material wellbeing. In Figure 2 we show a summary of two of the latter set of questions – the proportion of men and women who find it difficult or very difficult to make ends meet (Figure 2A) and the proportion who declared that the financial situation of their household deteriorated in the last two years, i.e. since September 2019, which can be used as an indicator of the material consequences of the COVID-19 pandemic. We can see that the difficulties in making ends meet are by far lowest in Sweden, and slightly lower in the other EU countries (Latvia and Poland). The differences are less pronounced with regard to the implication of the pandemic, but also in this case respondents in Sweden seem to have been least affected.

 Figure 2. Making ends meet and the consequences of COVID-19

a. Difficulties in making ends meet


b. Material conditions deteriorated since 2019

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Perceptions and Incidence of Domestic and Gender-Based Violence and Abuse

Frequency of differential treatment and abuse

The set of questions concerning domestic and gender-based violence started with an initial module related to the different treatment of men and women, with respondents asked to identify how often they witnessed certain behaviours aimed toward women. The questions covered aspects such as women being treated “with less courtesy than men”, being “called names or insulted for being a woman” and women being “the target of jokes of sexual nature” or receiving “unwanted sexual advances from a man she doesn’t know”, and the respondents were to evaluate if in the last year they have witnessed such behaviours on a scale from never, through rarely, sometimes, often, to very often. We present the proportion of respondents answering “often” or “very often” to two of these questions in Figure 3A (“People have acted as if they think women are not smart”) and 3B (“A woman has been the target of jokes of a sexual nature”). We find significant variation across these two dimensions of differential treatment, and we generally find that women are more sensitive to perceiving such treatment. It is interesting to note that the proportion of women who declared witnessing differential treatment in Sweden is very high in comparison to for example Latvia or Belarus, which, as we shall see below, does not correspond to the proportion of women (and men) witnessing more violent types of behaviour against women.

Figure 3. Frequency of differential treatment (often or very often)

a. People have acted as if they think women are not smart


b. A woman has been the target of jokes of a sexual nature

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Questions on the frequency of witnessing physical abuse were also asked in relation to the scale of witnessed behaviour. Here respondents were once again asked to say how often “in their day-to-day life” they have witnessed specific behaviours. These included such types of abuse as: a woman being “threatened by a man”, “slapped, hit or punched by a man”, or “sexually abused or assaulted by a man”. The proportion of respondents who say that they have witnessed such behaviour with respect to two of the questions from this section are presented in Figure 4. In Figure 4A we show the proportion of men and women who have witnessed a woman being “slapped, hit or punched” (sometimes, often or very often), while in Figure 4B being “touched inappropriately without her consent”. Relative to the perceptions of differential treatment the incidence of a woman being hit or punched (4A) declared by the respondents seems more intuitive when considered against the overall international statistics of gender equality. The proportions are lowest in Sweden and Poland, and highest in Armenia and Ukraine. However, the perception of inappropriate touching by men with respect to women (Figure 4B) shows a similar extent of such actions across all analysed countries.

Figure 4. Frequency of abuse (sometimes, often or very often)

a. A woman has been slapped, hit or punched by a man


b. A woman has been touched inappropriately, without her consent, by a man

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Perceptions of abuse

The questions concerning the scale of witnessed behaviours were complemented by a module related to the evaluation of certain behaviours from the perspective of their classification as abuse and the degree to which certain types of gender-specific behaviours are acceptable. Thus, for example respondents were asked if they consider “beating (one’s partner) causing severe physical harm” to be an example of abuse within a couple (Figure 5A) or if “prohibition to dress as one likes” represents abuse (Figure 5B). This module included an extensive list of behaviours, such as “forced abortion”, “constant humiliation, criticism”, “restriction of access to financial resources”, etc. As we can see in Figure 6, with respect to the clearest types of abuse – such as physical violence – respondents in all countries were pretty much unanimous in declaring such behaviour to represent abuse. With respect to other behaviours the variation in their evaluation across countries is much greater – for example, while nearly all men and women in Sweden consider prohibiting a partner to dress as he/she likes to be abusive (Figure 5B), only about 57% of women and 36% of men in Armenia share this view.

The questionnaire also included questions specifically focused on the perception of intimate partner violence. These asked respondents if they knew about women who in the last three months were “beaten, slapped or threatened physically by their intimate partner”, and the evaluation of how often intimate partners act physically violent towards their wives.

Figure 5. Perceptions of abuse: are these examples of abuse within a couple?

a. Beating causing severe physical harm


b. Prohibition to dress as one likes

Source: FROGEE Survey on Domestic and Gender-Based Violence.

A further evaluation of attitudes towards violent behaviour was done with respect to the relationship between a husband and wife and his right to hit or beat the wife in reaction to certain behaviours. In Figure 6 we show the distribution of responses regarding the justification for beating one’s wife in reaction to her neglect of the children (6A) or burning food (6B). The questions also covered such behaviour as arguing with her husband, going out without telling him, or refusing to have sex. As we can see in Figure 6, once again we find substantial country variation in the proportion of the samples – both men and women – who justify such violent behaviour within couples. This was particularly the case when respondents were asked about justification of violent behaviour in the case of a woman neglecting the children. In Armenia as many as 30% of men and 22% of women agree that physical beating is justified in those cases. These proportions are manyfold greater than what can be observed in countries such as Latvia, where 3% of men and women agreed that abuse was justifiable under these circumstances, or Sweden, where only 1% of men and women agreed.

Figure 6. Perceptions of abuse: is a husband justified in hitting or beating his wife

a. If she neglects the children


b. If she burns the food

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Seeking help and the legal framework

The final part of the questionnaire focused on the evaluation of different reactions to incidents of domestic and gender-based violence. Respondents were first asked if a woman should seek help from various people and institutions if she is beaten by her partner – respondents were asked if she should seek help from the police, relatives or friends, a psychologist, a legal service or if, in such situations, she does not need help. In Figure 7 we show the proportion of people who agreed with the last statement, i.e. claimed that it is only the couple’s business. The proportions of respondents who declare such an attitude is higher among men than women within each country, and is highest among men in Armenia (48%) and Georgia (25%). Again, these proportions are in stark contrast to men in Sweden, or even Poland, where only 4% and 8% of men agreed, respectively. Nevertheless, looking at the total survey sample, a vast majority believe that a woman who is a victim of domestic violence should seek help outside of her home, indicating that at least some forms of institutionalised support for women are popular measures with most people.

Figure 7. Proportions agreeing that domestic violence is only the couple’s business

Source: FROGEE Survey on Domestic and Gender-Based Violence.

The interview also included questions on the need for specific legislation aimed at punishing intimate partner violence and on the existence of such legislation in the respondents’ countries. The latter questions were extended in three countries – Latvia, Russia and Ukraine – to evaluate the specific sets of regulations implemented recently in these countries and to facilitate an analysis of the role IPV legislation can play in reducing violence within households. Legislation on domestic violence is relatively recent. During the last four decades, though, changes accelerated in this respect around the world. Legislative measures have been introduced in many countries, covering different aspects of preventing, protecting against and prosecuting various forms of violence and abuse that might happen within the marriage or the family. Research strives to offer evaluations on what legal provisions are most effective, in a setting in which statistics and information are still far from perfect, and as a consequence of the dearth of strong evidence the public debate on the matter is often lively. For legislation to have an effect on behaviour through shaping the cost of committing a crime, on the one hand, and the benefit of reporting it or seeking help, on the other, or more indirectly through changing norms in society, information and awareness are key. For how can deterrence be achieved if people do not know what the sanctions are? And how can reporting be encouraged if victims do not know their rights? The evidence on legislation awareness is unfortunately quite scarce. A survey of the criminology field (Nagin, 2013) concludes that this is a major knowledge gap.

Figure 8 shows the proportions of answers to questions concerning the need for and existence of legislation specifically targeted towards intimate partner violence. We can see that while support for such legislation is quite high (Figure 8A), it is generally lower among men (in particular in Armenia, Russia and Belarus). Awareness of existence of such laws, on the other hand, is much lower, and it is particularly low among women. It should be pointed out that all countries have in fact implemented provisions against domestic violence in their criminal code, but only around half of the population, sometimes much fewer, are aware of that.

Figure 8. Need for and awareness of IPV legislation

a. State should have specific legislation aimed at punishing IPV


b. Country has specific legislation aimed at punishing intimate partner violence

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Recent reforms of DV legislation that were implemented in Russia in 2017, in Ukraine in 2019 and in Latvia just a few months ago (at the time of the survey, the changes were at the stage of a proposal) were the subject of the final survey questions in these countries. We find that awareness of these recent reforms is very low in all three countries, and knowledge about the reform content (gauged with the help of a multiple-choice question with three alternative statements) is even lower. Our analysis suggests that gender and family situation are the two factors that most robustly predict support for legislation, while education and age are associated with awareness and knowledge of the reforms. Minority Russian speakers are less aware of the reforms in both Ukraine and Latvia, in Ukraine are also less likely to answer correctly about the content of the reform, and in Latvia are less supportive of DV legislation in general.

Analyses of this type are useful for policy design, to better understand which groups lack relevant knowledge and should be targeted by, for example, information campaigns to combat DV, such as those many governments around the world implemented during the covid-19 pandemic.

Future Work Based on the Survey

The above is just a small sample of the rich source of information that has resulted from conducting the survey. Already from this simple overview we can see some interesting results. There are, for example, clear differences between men and women in perceptions of how common certain types of abusive behaviour are. However, for many questions differences between countries are larger than those between men and women within a country. Interestingly such differences are also different depending on the severity of the abuse or violence. In Sweden the perception of women being victims of less violent abuse is higher than in some other countries where instead some more violent types of abuse are reported as being more common. This could, of course, be due to actual differences in actual events but it is also possible that there are differences in what types of behaviour are considered to represent harassment and abuse in different societies. More careful data work is needed to try to answer questions like this and many others. Currently there are a number of ongoing research projects based on the survey results, three of which will be presented at the FREE-network conference on “Economic and Social Context of Domestic Violence” in Stockholm on May 11, 2022. Our hope is that this work will help in taking actions to prevent gender-based abuse and domestic violence based on a better understanding of underlying cross-country differences in social norms and attitudes and their relation to socio-economic factors.

About FROGEE Policy Briefs

FROGEE Policy Briefs is a special series aimed at providing overviews and the popularization of economic research related to gender equality issues. Debates around policies related to gender equality are often highly politicized. We believe that using arguments derived from the most up to date research-based knowledge would help us build a more fruitful discussion of policy proposals and in the end achieve better outcomes.

The aim of the briefs is to improve the understanding of research-based arguments and their implications, by covering the key theories and the most important findings in areas of special interest to the current debate. The briefs start with short general overviews of a given theme, which are followed by a presentation of country-specific contexts, specific policy challenges, implemented reforms and a discussion of other policy options.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Gender Gap Widens During COVID-19: The Case of Georgia

Posted on April 11, 2022 | Policy Papers

20220411 Gender Gap Widens Image 01

Gender inequality has been a persistent (albeit steadily improving) problem for years. The COVID-induced crisis put women in a disproportionately disadvantaged position, jeopardizing decades of progress achieved towards equality between men and women. However, these effects of the pandemic were not universal across countries. This policy brief aims to evaluate the gender-specific effects of the COVID-19 crisis in Georgia, looking at labor market outcomes and entrepreneurial activities. As expected, the impact of the pandemic was not gender-neutral in this regard, being especially harmful for women. As the Georgian economy rebounds after the crisis, we show that the widened gender gaps are partially offset only in certain aspects. In order to countervail the disproportionate effects of the pandemic, targeted policy measures are needed to stimulate women’s economic activity.

Introduction

Past economic recessions, including the COVID-induced crisis, have never been gender-neutral (e.g., Liu et al., 2021; Ahmed et al., 2020). While economic crises are usually associated with disproportionate negative impacts on labor market outcomes of men compared to women, the impact of the crisis is, debatably, more severe for women-led businesses as compared to their male-led counterparts (e.g., Torres, 2021; Nordman and Vaillant, 2014; Grimm et al.,2012).

The disproportionate labor market outcomes of economic crises are claimed to be due to the fact that men are predominantly employed in cyclical sectors such as construction or manufacturing; therefore, women have to increase their employment during economic downturns as a means of within-family insurance (Alon et al., 2021). The recent COVID-induced crisis, due to its unique nature, turns out to be an exception in this regard. The pandemic and the subsequently-adopted measures primarily adversely affected contact-intensive sectors (where the worker is required to perform tasks in close physical proximity to other people) that predominantly employ women (Mongey, Pilossoph, and Weinberg 2020; Albanesi and Kim 2021). Moreover, large-scale lockdowns increased the burden of unpaid care, which is generally shouldered by women disproportionately (Babych, 2021), leaving less available time for them to work. It should be noted that gender gaps in the labor market were a persistent (albeit steadily improving) problem even before the pandemic (Eurofound, 2016). Therefore, COVID-19 poses a threat jeopardizing the progress achieved in this direction and worsening gender inequality.

COVID-19 brought unprecedented adverse consequences for not only employed workers but entrepreneurs as well. Increased unpaid care and housework pose additional burdens on female top managers, making women-led businesses more vulnerable to the crisis.

The unequal gender implications of the COVID-19 crisis have been widely debated. Growing evidence (Albanesi and Kim 2021; Torres et al., 2021; Alon et al., 2020; Caselli et al., 2020, Fabrizio et al., 2021) attests that, on average, the effects of the pandemic put women in a disproportionately disadvantaged economic position. However, the extent of this effect varies across countries and is absent in some cases (Campa et al., 2021; Torres et al., 2021).

This policy brief aims to examine the gender-specific nature of the COVID-19 crisis in Georgia. With this aim, we study the differential effects of the pandemic on the economic activity of women in terms of labor market outcomes and entrepreneurship. First, we contrast labor market outcomes for Georgian men and women during the COVID-19 crisis. Secondly, we try to assess the magnitude of the disproportionate impact on women-led businesses compared to men-led ones. We calculate gender gaps across different measures of firm-level performance, such as sales revenue, liquidity and owners’ expectations of falling into arrears. Finally, we examine whether there are any signs of recovery yet in 2021 and draw policymakers’ attention to emerging issues.

Labor market highlights

The adverse effects of the pandemic on female employment were conditioned by both supply and demand-side factors. The latter include decreased economic activity, mainly in service-related sectors (hospitality, personal care, etc.) that are dominated by women (Eurofound, 2021). In Georgia, as of 2019, women constituted the majority of workers in sectors such as hospitality (56%), education (83%) and activities of households as employers of domestic personnel (99%) that experienced some of the sharpest declines in employment during 2020. Moreover, women are more likely to be employed in part-time and temporary jobs (14% of women, as opposed to 11% of men, were employed part-time as of 2019, Geostat Labor Force Survey 2019), leaving them more vulnerable during times of crisis.  Supply-side factors were triggered by the unequal burden of unpaid work generally undertaken by women in Georgia, mainly due to cultural reasons as well as the higher opportunity cost of time for men (women in Georgia on average earned 64% of men’s salaries in 2019, Geostat). School and daycare closures and decreased childcare involvement of grandparents increased household responsibilities for women. A UN Women survey-based study showed that in the midst of the pandemic in Georgia, around 42% of women reported spending more time on at least one extra domestic task as opposed to 35% of men (UN Women, 2020). This would naturally lead to more women than men leaving the labor force. Indeed, looking at the data, we see that in one year after the COVID-19 outbreak, women contributed to 98% (48,000 individuals) of the decrease in the Georgian labor force in 2020 (Geostat). Moreover, a close look at the percentage point difference between the labor force participation rates of Georgian men and women reveals a notable growth in the gender gap starting from 2020. The same can be said about employment rates (Figure 2).

Figure 1. Difference between male and female labor force participation and employment rates

Source: Geostat

To further elaborate on the tendencies in employment, Bluedorn et al. (2021) look at the differences between employment rate changes among male and female workers in 38 advanced and emerging economies. Replicating the exercise with the Georgian data, we can observe results similar to those obtained in Bluedorn et al. (2021). In Figure 2, we see differences between female and male employment rate changes. For each gender group, the latter is computed as an absolute difference between the quarterly employment rate and its annual average level from the previous year. Once the difference takes a negative value, implying that the drop in employment was sharper for women, one could say that we observe a “She-cession” phenomenon as termed by Bluedorn et al. (2021). As we can see, in 2020, the employment rate of women fell more than that of men. This widened gender gap was partially offset in 2021.

Figure 2. Employment rate changes by gender (deviation from the previous year average)

Source: Geostat

Remote work: a burden or a blessing for women?

One important aspect of the COVID-19 crisis was a wide-scale switch to remote work. This development had some gender-specific implications as well. The evidence shows that the prevalence of the switch to remote work was higher among women compared to men (41% vs. 37%) in the EU (Sostero et al., 2020). This tendency also holds in Georgia, where 11% of women as opposed to only 3% of men reported usually working from home in the last three quarters of 2020 (Julakidze and Kardava, 2021). It is not clear whether this tendency can be explained by gender-related occupational differences of male and female jobs (Dingel and Neiman, 2020; Boeri and Paccagnella, 2020; Sostero et al., 2020) or, rather, different personal choices of men and women working in the same occupations. Interestingly, across different countries, we observe a positive correlation between gender inequality (as measured by the Gender Inequality Index) and gender differences in the switch to remote work (measured by the ratio of the share of remote workers among female and male workers). To account for this observation, we can stipulate that gender differences in switching to remote work might be explained by differing gender roles in households, and in society at large, across countries (as proxied by the gender inequality index).

Figure 3. Relative prevalence of remote work among female and male workers

Source: Eurostat, Statistics Sweden, Statista, Geostat, UNDP Human Development Reports

Regardless of the reason, remote work is likely to have some important implications on gender roles. However, the directionality of these implications is not straightforward. On the one hand, remote work offers flexibility for women to juggle household and work responsibilities. On the other hand, since women compared to men have been shown to be more likely to use the time saved from commuting to engage in housework, the switch to remote work might increase their “total responsibility burden” (Ransome, 2007) and lead to time poverty (Peters et al., 2004; Hilbrecht, Shaw, Johnson and Andrey, 2008). Indeed, according to CARE International South Caucasus (2020), around 48% of female survey participants in Georgia placed additional effort into housework and childcare in the midst of the pandemic. Moreover, as women are more likely and expected to use remote working as a means of balancing work-life responsibilities (Moran and Koslowski, 2019) their bargaining power at work decreases relative to their male counterparts. This could have some adverse career implications for female workers. Recent enforced lockdowns might pose an opportunity in this regard, as once-remote work becomes something close to a “new normal” employers will likely decrease the penalty for remote workers.

Spotlight on women-led business performance during the COVID-19 crisis

Calamities brought by the pandemic worsened financial outcomes for enterprises, affecting their ability to operate and have stable financial income. Similar to other crises, the pandemic has not been gender-neutral (Liu et al., 2021; Ahmed et al., 2020) in terms of the effect on business performance.

Gaps in the performance of women- and men-led businesses have been prevalent beyond any economic crisis as well, and have been documented in a number of studies (e.g., Amin, 2011; Bardasi et al., 2011), registering gender differences in sales and productivity in favor of men-owned enterprises. As suggested by Campos et al. (2019), these performance gaps may be due to lower levels of capital owned by women as opposed to men, a smaller number of employees hired by women-owned firms, as well as different practices in using advanced business tools and innovation. In addition, the existence of these gender gaps has also been explained as stemming from the prevailing social norms that assign certain obligations to women. Nordman and Vaillant (2014) and Grimm et al. (2012) suggest that unpaid housework and family-care led to a constrained number of hours women could afford to spend on the work and management of firms, negatively affecting their productivity.

According to the Women Entrepreneurship Report (Global Entrepreneurship Monitor (GEM), 2021), the pandemic imposed an additional burden in terms of increasing family-care duties on women. The GEM survey (2021) conducted in 43 countries worldwide shows that the likelihood of enterprise closure is 20% higher for women-led compared to men-led businesses. The higher likelihood of closure reflects the adverse factors that may have hindered the operating capacity of firms. For example, a survey conducted by UNIDO (2020) suggests that, as a result of the Coronavirus crisis, African and Middle Eastern women-led firms experienced diminished revenues. In addition, 41% of women-led firms were short of cash flow and unable to fulfill financial obligations, while only 32% of male entrepreneurs were exposed to the same problem.

More rigorous analysis on this matter has been conducted by Torres et al. (2021) and Liu et al. (2021). They try to examine the asymmetric effects of the COVID-19 crisis on women-led firms in several dimensions utilizing new datasets from the World Bank: COVID-19 Follow-up Enterprise Survey and the World Bank Business Pulse Survey. The findings of Liu et al. (2021) for 24 countries from Central Europe & Central Asia and Sub-Saharan Africa confirm that during the pandemic women-led businesses are subject to a higher likelihood of closure than men-led businesses and that female top managers are more pessimistic about the future than their male counterparts. Finance and labor factors were mentioned to be the major contributors to these disadvantages; for example, women-led businesses were found to be less likely to receive bank loans compared to men-led businesses. Lastly, the disadvantages experienced by women-led firms were claimed to widen in highly gender-unequal economies and developing countries. Torres et al. (2021) study the impact of the early phase of the COVID-crisis on gender gaps in firm performance for 49 mostly low- and middle-income countries. The results demonstrate that women-led businesses experienced a greater reduction in sales and lower liquidity compared to their male counterparts, which has been reflected in a higher likelihood for women-led companies in several sectors to fall into arrears. On the other hand, as a response to changing circumstances, women-led firms were found to be more likely to increase the utilization of online platforms and make product innovations. Nevertheless, they struggled to obtain any form of public support.

The impact of the pandemic on firms was not gender-neutral in Georgia

The pandemic-induced fragile environment had an adverse impact on entrepreneurs in Georgia– the effects of the shock were significantly more severe for female entrepreneurs than for their male counterparts. In order to assess the gender differences in the impact of the pandemic on firms, we utilize firm-level data on Georgian enterprises from the second round of the World Bank COVID-19 Follow-up Enterprise Survey, conducted in October – November 2020.

Following the methodology as presented in Torres et al. (2021), we assess whether there are differences in the magnitude of reduction in sales revenue (self-reported percentage change in sales revenue one month before the interview as compared to the same period of 2019) and available liquidity for women- and men-led businesses, and whether falling into arrears in any outstanding liabilities is more expected by female top managers (in the next six months from the interview).

Depending on the type of dependent variable, continuous or binary, either Ordinary Least Squares (OLS) or Probit models are estimated, respectively. Along with the gender of the top manager of firms, we also control for sector and firm size. The Georgian database contains a total of 701 enterprises (581 SMEs and 120 micro-businesses).

Table 1. Magnitude of the disproportionate impact of COVID-19 on women-led businesses in Georgia, October-November 2020

Source: The World Bank COVID-19 Follow-up Enterprise Survey, Second Round. Author’s calculations. ***Significant at the 1% significance level; ** significant at the 5% significance level.

Table 1 presents the results of the regression analysis of gender differences among Georgian enterprises in terms of the impact of the pandemic. As observed, women-led businesses reported larger declines in sales, revenues, and liquidity. The predicted drop in sales was 18 percentage points (pp) higher for enterprises with a female top manager than for men-led firms. The larger drop in sales should have been reflected in the reduced cash flow availability and in hardship to cover operating costs. Indeed, as the results demonstrate, women-led enterprises are on average 12.9 pp more likely to have reduced availability of liquidity. This may explain women’s negative future expectations. Moreover, the average predicted probability of expecting to fall into arrears is 11.3 pp higher for women-led firms in Georgia as compared to men-led businesses.

The unequal effect of the COVID-19 crisis on women-led businesses might have been fueled by the disproportionate burden of unpaid care and housework shouldered by women in Georgia, leaving less time available for work and managing enterprises. On the other hand, as Torres et al. (2021) claim, female business owners tend to employ more female workers (the social group more exposed to the unequal burden of the pandemic) than male owners. This, in turn, could further hamper the productivity of women-led businesses and increase their vulnerability to economic shocks.

On the road to recovery

2021 has been characterized by a rather rapid recovery for the Georgian economy, as evidenced by the 10.6% (preliminary estimate) annual growth rate of real GDP. Signs of recovery can also be observed in the labor market – the labor force increased by 4% (YoY) in the 3rd quarter of 2021, while employment was also characterized by a growing trend (1%, YoY).

Along the lines of economic recovery, the gender gap in the labor market also seems to be narrowing. For instance, the steadily growing gap between male and female labor force participation rates seems to stagnate over 2021 (Figure 1). Moreover, as is illustrated in Figure 2 above, the difference between women’s and men’s employment rate changes is positive in 2021, meaning that the employment rate was increasing more (or decreasing less) for women. If this tendency persists, we might stipulate that the disproportionate effects of the COVID-19 crisis on female employment are on the way to recovery.

To examine whether Georgian firms have experienced concurrent movement in their performance along with the economic recovery, we utilize third-round data (from September 2021) of the World Bank COVID-19 Follow-up Enterprise Survey and scrutinize whether the gender differences have narrowed since the previous round of the survey (Table 2).

Table 2. Magnitude of the disproportionate impact of COVID-19 on women-led businesses in Georgia, September 2021.

Source: The World Bank COVID-19 Follow-up Enterprise Survey, Third Round. Author’s calculations. ***Significant at the 1% significance level.

Although the third-round survey data suggests that the predicted percentage drop in sales sharply declined for both men- and women-led businesses, the findings are not statistically significant and therefore cannot claim any signs of recovery in the gender gap in this respect. No signs of recovery are observed in terms of average predicted probability of reduced liquidity of firms and expectations of falling into arrears, either. Gender gaps in these two indicators still persist and are as strong in magnitude as in the second-round survey estimates (from October-November 2020). It seems that despite the economic rebound, not all traces of the pandemic crisis for firms have been eradicated from a gender perspective.

Conclusion

The pandemic came with high economic costs. It hit women disproportionately harder, adversely affecting their employment and entrepreneurial prospects. The unequal burden of the COVID-crisis shouldered by women in Georgia could be one of the reasons for the massive labor force dropouts among female workers and poor performance of women-led businesses. Georgian enterprises with female owners experienced a significantly larger decline in sales compared to their male-owned counterparts, consequently suffering from a shortage of cash flow and fears of falling into arrears.

Despite the great rebound in growth after the initial COVID-19 shock, the pandemic-associated increase in the gender gap seems to have been only partially offset in Georgia. In particular, there is a larger positive upsurge in women’s employment rate, as well as a diminishing difference between male and female labor force participation and employment rates. Following the ongoing recovery in sales revenue of Georgian enterprises (though the predicted gender difference was statistically insignificant), the gender gap in sales is shrinking too. But, in spite of the economic rebound, differences in available liquidity and expectations of falling into arrears have not yet been eradicated, indicating that the adverse influence of the pandemic on women still persists. It leaves female entrepreneurs a still more vulnerable group, which could be of special interest to policymakers to ease their liquidity problems.

Policies should also be directed towards encouraging women to become more economically active. In this regard, remote work seems to pose an opportunity if coupled with affordable childcare support policies.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Assessing a Model for the Implementation of an Equal Pay Review and Reporting (EPRR) Methodology in Georgia

Posted on November 3, 2021 | Policy Brief

20211102 Assessing a Model of Equal Pay

Georgia’s gender pay gap has started to attract the attention of the population and policymakers alike. The gap persists despite working women generally reporting better labor-market skills and personal characteristics. It has been argued that this could be the result of systematic gender-based workplace wage discrimination, resulting in unequal pay for equal work. The discussion that ensued highlights how the fight to guarantee equal pay for equal work could benefit from establishing an Equal Pay Review and Reporting Mechanism. In response, the ISET-PI team – after reviewing the best international practices – devised and tested an excel based tool that could help companies and governmental agencies identify, monitor, and fight gender discrimination in Georgia. The main quantitative result of the exercise identified that, should reporting be made mandatory, extending the obligation to companies that employ up to 50 people would make the administrative costs for companies and public administration up to twenty times higher; thus, the usefulness of the tool was found to be substantially limited when applied to smaller companies. Finally, the exercise emphasized the reluctance of companies to provide the data required, leading to the conclusion that the successful implementation of such an initiative would require the enforcing agency to have the legal authority to sanction failures to provide the necessary data.

Introduction

One of the key gender inequality indicators is the gender pay gap – or gender wage gap – calculated as the average difference between the remuneration for men and women in the labor market. Its evolution is monitored worldwide, and closing this gap is considered a key step towards more inclusive and prosperous economies and societies. According to the World Economic Forum, as of 2020, no country (including the top-ranked ones) had yet achieved gender parity in wages.

In Georgia, the unadjusted hourly gender pay gap amounts to 17.7 percent of the average male hourly wage (UN Women, 2020). Moreover, when controlling for personal characteristics of men and women, the adjusted hourly gender pay gap in Georgia is estimated to be 24.8 percent (UN Women, 2020). This implies that women, on average, have better observable labor-market characteristics but are still paid less than men.

These findings prompted a core discussion within the Georgian society on the presence of unequal pay for equal work in Georgia as one of the possible reasons for the gap and how to tackle the problem. The idea of equal pay for equal work entails that individuals in the same workplace are given equal pay if they perform the same type of work. Consequently, this potential source of the pay gap can only be verified at the individual employer level. This is accomplished by calculating the unexplained gender pay gap at the organizational/employer level and validating whether, and why, these differences exist.

Given the attention the topic holds in the national discourse, ISET Policy Institute created and tested an excel tool, built in line with the international best practices and adapted to the Georgian context, to help employers and government offices identify and measure the differences in wages between men and women performing equal work. During this process, the team learned several noteworthy lessons, as summarized in this policy brief.

International Experience

There is growing consensus that transparency is critical when dealing with pay inequality and, therefore, gender pay reporting should become the norm. Since 2010, several (mostly developed) countries have introduced reporting schemes to monitor gender pay gaps, promote awareness about gender equality issues throughout society (particularly among employees), and increase organizations’ accountability to address gender inequalities (Equileap, 2021).

However, the gender pay gap is a key issue for which the disclosure of information remains particularly low. Equileap’s 2021 report revealed that 85 percent of organizations worldwide did not publish information on remuneration differences between female and male workers in 2020.

Three countries, according to Equileap, lead the way in gender pay gap reporting: Spain, the UK, and Italy (Figure 1). In each of these top three countries, reporting is mandatory.

Figure 1. Percentage of organizations publishing gender pay information, per country

Source: Equileap, 2021. The figure only includes countries for which more than 49 surveyed organizations were included in the Equileap dataset.

However, even in these countries, and, more generally, in all countries scrutinized by Equileap but Iceland, firms with 50 or fewer employees are not required to report on gender pay gaps.

The Case of Georgia

Georgian legislation clearly establishes the principle of equal pay for equal work for all employees. The requirement applies to both public and private organizations. Nevertheless, enforcement of the law remains a significant challenge.

At present, Georgia has no reporting requirements regarding employee salaries for private organizations. It has not yet designed a reporting scheme for equal pay for equal work, nor has it assigned the task of collecting this information to any governmental body.

Moreover, Labour Inspectorate representatives state that few wage discrimination cases are currently being filed in the country. The main reason behind this is that norms regarding equal pay for equal work have never been properly specified. In addition, there are no explicit criteria defining the concept of ‘equal work’. Thus, employers and employees alike do not seem to fully understand the phrase – equal pay for equal work.

The Excel Tool

After a careful review of the three tools presently utilized to calculate gender pay inequality (the Swiss Logib, the German Logib-D, and the Diagnosis of Equal Remuneration (DER) tool developed by UN Women), ISET-PI built a Georgian model as a modified version of the DER tool that is adapted to the Georgian context and includes some variables from the Swiss tool.

The tool itself is an excel file with several worksheets. The two main facets are the inputted data sheet and the results sheet. Companies may input information on their employees in the data sheet, and the findings will then be demonstrated in the results sheet. The tool first identifies people performing the same work, and classifies jobs based on their official titles, alongside managerial responsibilities and skill requirements. After individuals are grouped by job, the tool calculates the average salary within each group separately for men and women. Thereafter, the pay gap is calculated based on the average salary for the two gender groups.

With the support of the Employers’ Association, several companies of all sizes were approached to test the tool. Unfortunately, only a few agreed to participate, and just two completed the trial: one small-sized enterprise (with 50 or fewer employees) and a large-sized enterprise (with 250 or more employees).

While low participation rates have significantly limited our analysis, we still obtained several important insights which are discussed in the next subsection.

Findings

Firstly, it is important to note that companies’ willingness to share anonymized salary data was very low, even among the companies that completed the test.

Secondly, the usefulness of the tool for obtaining a comprehensive view of equal pay for equal work in small companies (with 50 or fewer employees) appeared fairly limited as few people within the same firm perform the same job.

Thirdly, we performed a simple cost assessment exercise to evaluate the compliance costs – to both companies and the government – of collecting and reporting the gender pay gap. We found that extending the data collection requirement to small companies would increase the compliance costs by up to 20 times (high-cost scenario) compared to an example where small companies are exempt. This is because there are many more small companies in Georgia (146,802), than those classified as medium or large ones (2,752 and 609, respectively).

In addition, during the implementation of the exercise, we became aware of the following:

  • Under the existing legal provisions, it would be extremely difficult to introduce the EPRR in a mandatory format – no governmental agency could sanction companies for failing to comply.
  • Opting for the mandatory option and sanctioning the emergence of unequal pay in certain job categories could incentivize companies to manipulate the data input. In this case, therefore, it would be ill-advised to provide the full tool to companies, as they could more easily adjust data inputting to obtain more favorable indicators through successive iterations.

Conclusion

Setting up an EPRR system is one way to contribute to the implementation of the equal pay for equal work principle.

Designing the Georgian Model for the Implementation of an Equal Pay Review and Reporting Methodology generated several useful insights that might prove valuable for policymakers in Georgia and other developing countries:

1) The EPRR instrument can be utilized for the analysis of gender pay gaps within companies with more than 50 employees. Within smaller companies, evaluating the gender pay gap significantly increases the costs to society, while providing rather limited additional information.

2) The decisions about whether to provide the analytical part of the tool to companies, and whether reporting should be voluntary or mandatory should be taken jointly. If the goal is to provide an instrument to the agency enforcing the equal pay for equal work principle and to facilitate appeals from workers, the tool should be made mandatory. However, in this case, companies should only provide the input data, without having access to the part of the tool that assesses pay gaps at the job level. On the other hand, if the goal of the reform is to support willing companies in their efforts to eliminate unequal pay for equal work conditions, a non-mandatory form may be preferable. In this instance, companies should have access to the full version of the tool. This would allow them to better understand the dynamics that lead to unequal pay and thus put in place internal remedial actions.

3) If the goal is to provide a tool to the agency enforcing the equal pay for equal work principle, it is crucial that any gaps in the associated legislation are closed. As such, the enforcing agency should be capable of sanctioning failures to provide the required data, and prosecuting violations of the equal pay for equal work principle.

Finally, it is important to note that testing the application of the equal pay for equal work principle at the company level through an EPRR system, while useful for identifying potential causes of the gender pay gap and the existence of gender disparities within companies, is just a first step in a longer and more complex process. Once disparities are identified, both companies and enforcing agencies should follow up with additional research and analysis to determine whether these disparities are linked to discriminatory practices, and what type of remedial options could be adopted.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.