Georgia’s destiny will be shaped by its demography

An elderly woman counts money at a market in the town of Tkvarcheli, some 50 km (31 miles) southeast of Sukhumi, the capital of Georgia's breakaway region of Abkhazia December 27, 2013. The territory of Abkhazia is located several miles southwest of the border with Russia and the Olympic Park in the Adler district of the Black Sea resort city of Sochi which will host the 2014 Winter Olympic Games in February. Abkhaz separatists fought Georgian government forces in 1992-1993, after which the breakaway region declared independence. Russia, Nicaragua, Venezuela, Nauru, Vanuatu and Tuvalu recognized Abkhazia as an independent state while all other countries regard it as a Georgian province, according to local media. Picture taken December 27, 2013. REUTERS/Maxim Shemetov (GEORGIA  - Tags: SOCIETY POLITICS OLYMPICS SPORT) - GM1EA161B4D01

Post-Rose Revolution Georgia has been a poster child for reform. In the span of a few years, the country has established a solid track record for fighting corruption, hoisting itself into the top spots of the World Bank’s Doing Business ranking. Yet, although its growth performance has been solid, the country remains far from being a prosperous middle-class society. You could understand if Georgians wonder why reducing corruption and making things easier for enterprise have not yielded higher welfare dividends, such as those seen in the dynamic economies of East Asia.

This apparent puzzle illustrates the reality—familiar to any student of development—that while policies can be changed overnight, structural bottlenecks need years to overcome and development outcomes take even longer to materialize. Georgia faces several such problems: an education system that ensures broad access but still delivers low quality learning, a system of public administration that has been made cleaner but has also run into capacity constraints (especially at local levels), and a judicial system that is just but not quite as swift and efficient as it could be.

A challenging demography

Making things tougher for Georgia is its demography. As we argue in the Georgia Systematic Country Diagnostic, the country’s demographic trajectory will continue to drag down growth unless some remedy is found. Many rich countries have begun to experience demographic stagnation. Georgia is a rare example of a lower middle-income country—economies that have per capita incomes that are about a 10th of the average high-income country—which is experiencing a secular decline in population. Georgia’s population peaked in the early 1990s and has declined since then. The size of the working age cohort is shrinking as well. The driving forces behind these trends are low fertility and out-migration. On average, women in Georgia have 1.8 children, which is below replacement levels. And available estimates suggest that more than 10 percent of Georgians left the country between 2000 and 2010, and this trend continues today. Population projections indicate that Georgia’s population will continue to decline (Figure 1).

Figure 1. Georgia’s population is expected to keep declining
(Population and components of difference, 2000, 2012, and 2025)Global_figure 1_georgia population to decline

Georgia is a small country. At its peak, its population was a little less than 4.5 million. But the demographic change it is now experiencing—combined with its relatively isolated geography—threatens its economic future. As it erodes the size of Georgia’s already small working age population, it will further constrain the potential to reap what economists call agglomeration and scale effects.

A declining population can be harmful to the economy, since firms can be reluctant to invest in a small and shrinking market. It can also fray the social fabric by exacerbating the already stark rural-urban divide. In Georgia’s rural hinterland, where over 40 percent of the population still lives, a large section of the population is engaged in subsistence activities, dependent on transfers—both from the government and from other Georgians—and insufficiently productive.

To keep the working age population from declining, Georgia has to bring in some 40,000 additional workers every year. This implies a net migration equivalent of 2.5 percent of the total population per year. Without such inflows, the working age population is projected to decline from 67 percent in 2015 to 60 percent by 2050. As a result, the dependency ratio—a measure of the economic pressure on workers to support children and the elderly—will increase by 10 percentage points by 2025. Encouraging immigration at a rate of over 40,000 workers annually for the next 10 years would ease that pressure by keeping the dependency ratio at its 2012 level (figure 2).

Figure 2. Georgia will need immigration—to balance emigration
(Population by age group and dependency ratio, 2000, 2012, and 2015)Global_Figure 2_Georgia will need immigration

Bold, unconventional solutions

Students of development will also know that reversing the profile of migration flows in a short period of time is not common. But it is possible. For example, Kazakhstan entered the new century with large net emigration, but then became a net receiver of migrants. This happened because workers responded to an improving economy and declining unemployment relatively quickly—in about five years. Georgia will have to do two things to effect a similar turnaround: convince its youth to stay in the country and encourage some of the many skilled and successful Georgians abroad to come back home.

It will also have to make a third change: ensure that Georgia’s shrinking labor force is fully mobilized and optimally deployed. On this front, Georgia is not doing well. Its education system is not yet geared to help Georgian youth acquire the skills needed in a modernizing economy, nor to encourage women and older workers to fully participate in the labor force. Likewise, Georgia’s large rural population is not participating in the modern economy in a way that would give it access toproductive employment or social mobility.

But there is a silver lining. If growth can be maintained, a shrinking population means that increases in GDP translate into higher per capita gains. Georgia’s already robust growth rate of 5 percent yields the same benefits, on a per capita basis, as India’s stellar 7 percent performance. The priority for the country is to stay the course on core reforms that will pay off in the medium run, while tackling the specific issue of economic dualism that is undermining the inclusiveness of the growth process.

Georgia has already shown the world that it can make extraordinary changes. Fighting corruption and encouraging private enterprise in a small formerly communist country in a tough neighborhood were not easy accomplishments. Now it has to make two more changes: stem the decline in population and restructure the economy to ensure that Georgians participate fully and productively in economic activity. Given its track record, we would bet on Georgia winning this race as well.