THE SILVER BULLET

Is a merchant middle class, a spectrum of society based on small and medium sized businesses, the answer to Georgia’s economic growth and stability? Investor.ge launches a year-long investigation into creation of Georgia’s economic middle class: does it exist? Should it exist? Who – or what – should drive it?

Molly Corso

“It is clear both the best partnership in a state is the one which operates through the middle people, and also that those states in which the middle element is large, and stronger if possible than the other two together, or at any rate stronger than either of them alone, have every chance of having a well-run constitution.” Aristotle, Politics

TAM provides employment to a wide range of specialists and professions, from engineers to cleaning staff - all people who potentially fit into the definition of a middle class.

Aristotle was writing about the creation of states, we are interested in the development of economies – specifically the development of the Georgian economy – but economists appear to largely agree with his premise.

In interviews with economists, consumer spending specialists, government officials and policy makers, the overriding opinion is that a strong middle class drives an economy by stimulating a cycle of development: more money equals more spending, which leads to more production, which means more jobs, which brings more money into the economy and into households.

But when crisis hits, those people are also some of the most vulnerable – businesses fail, loans and credit becomes unavailable and the fragile buffer between the middle class and those living along or below the poverty level begins to break.

According to a 2009 World Bank report on the effects of the financial crisis on the developing world’s middle class, Martin Ravallion stated that it is likely the fragile middle class that had just begun to take root in the years leading up to the global recession could be at greater risk than the entrenched poor.

“The vulnerability of this new middle class to aggregate economic contraction is obvious; one-in-six people in the developing world now live between $2 and $3 per day,” he wrote.

“As the developing world confronts the spillover effects of the global financial crisis, lower growth rates are expected, with forecasts being revised downwards rapidly ... Whether the overall pace of poverty reduction slows, or is even reversed, will depend crucially on the incidence of the impacts of the crisis across countries.”

Georgia: 2010

The economic outlook for Georgia this year is not bad: the government – and financial institutions like the World Bank – predict that the economy will grow after a year of contraction. Estimates for foreign direct investment are also up, although the employment rate is down – and not anticipated to improve.

What does that mean for the Georgian middle class – and does the country have a middle class to be concerned about?

Small and medium businesses like DG Investment’s diaper factory are the backbone of the middle class in many countries. The exact definition of a SME is hard to find although its impact on the economy is all too clear.

There is little concrete information about the Georgian middle class. According to a December 2008 households survey conducted by the Caucasus Resource Research Center, 38 percent of the Georgian participants reported monthly earnings between $ 51 and $250 – and under ten percent identified with the classic definition of the middle class: the ability to live comfortably and save for the future.

According to Kakha Kokhreidze, the executive secretary of the AmCham-EUGBC SME committee, there are not enough statistics to analyze the size or nature of Georgia’s middle class. But he stressed that the fact that 70 percent of taxes are paid by 600 large companies indicates an underdeveloped class of small and medium businesses -- the backbone of the middle class.

“The creation of the income, the creation of the so-called middle class, is possible only through the development of business. Business is the source of the creation of wealth, there is no other way,” he said.

Over the next five issues, Investor.ge will explore issues related to the creation of a middle class in Georgia. We will look at the government’s policy, but also at the entrepreneurs already working hard to achieve the goal of the middle class everywhere: becoming bigger, better and stronger. We will investigate the issue of education, accessing financing and utilizing assets.

In addition, our year-long report will look at how the mentality of Georgian business is changing as it develops and the role small and medium businesses play in the business climate as a whole.

[top]