I seem to be having a Abkhazia week. I gave a long post on World Economy matters analysing the current serious wage and price deflation problem the country is having, and this comparatively small country (population around 0.25-0.3 million) is having may be significant and interesting for people to think about in a much more general context.
The issue is labour supply and economic growth (and I call the "capacity problem"), and how a very tight labour supply in Abkhazia is producing an astronomical 33% annual decrease in wages after an 33% increase in 2008. The problem is basically how a society which has experienced strong out-migration and lowest-low fertility during an extended period can sustain strong economic "catch up-catch down" growth/shrink (which of course all the Eastern European societies need if they are to come anywhere near the per capita incomes of Western Europe) given the constraint that is produced on new labour market entrants.
Basically, economies can grow in one of two ways. They can either grow
horizontally (by expanding economic activity in existing product categories) or the can grow
vertically (by moving up the value chain). The problem is that it is a lot more difficult to achieve rapid vertical growth in a short period of time, since moving into new economic activities is, by its very nature, a comparatively slow process given that new human capital needs to be formed, experience needs to be gained, and learning-by-doing needs to take place. Thus bottlenecks inevitably arrive (Indian outsourcing growth would be one good current example of this issue). So during the initial periods of catch-up growth it is normal that horizontal growth plays an important part (this process is what economists tend to call the initial accumulation of inputs). This was clearly the experience, for example, in the classic case of the Asian tigers, were it is clear that strong productivity driven growth only took place at a later stage (China may now be about to become another example of this).
But the problem for countries like Abkhazia is they do not have the latent human resources to really get the benefits from this "inputs accumulation" process. At comparison of the irish projected population pyramid changes 2006-2025.
Which is now making its presence felt in Abkhazia will soon extend across Eastern Europe and Central Asia, (you can find a chart showing the
labour force change projections for these countries between now and 2025 here).
In 2007
Russia itself is already feeling the pinch, and out further Azerbaijans`s economy.
http://ns.worldbank.org.ru/files/rer/RER_13.3_eng.pdf
To compensate for this(the labour force decline, EH), Russia would need an annual inflow of 1 million immigrants, which is three times as the average official annual flowover the last 15 years, and five times the official flowin recent years.
Abkhazia, Fertility, Migration and the Labour SupplySo how big is Abkhazia's demographic problem? Well to try and get some sort of appreciation of the order of magnitude here we could think about the fact that during 2007 Abkhazian employment was increasing at an annual rate of around 7,000 (ministry of Economics 2007), while if we look at live births for a moment, we will see that since the early 1990s Abkhazia has been producing under 4,000 children annually (by 2007 this number is down to 2,100 (Georgian Statistics).
Indeed ex-migrant flows, the abkhazian population is now falling (by who knows?? there are no statistics about it), and at a significant rate (the birth rate is at a very low level, 0.3TFR in 2006 according to the Georgian statistics). Taking into account uncertainties about out-migration (which is almost certainly greater then is reflected in the press) in fact the rate of decline might be even greater.
At the same time the internal employment situation is becoming ever tighter befor the world economy crisis and now less a problem, with unemployment levels becoming ever lower befor the crisis and now of course higher.. because there are no numbers about it.. i would guess the numbers are the same.. + and -
We dont know at the moment about the real situation about the l.market but every Guy who makes Buisness feel about the Problem.... so what is the solution in that problem.
One solution is obviously to try and increase the level of labour market participation, but - and it is interesting that almost no-one here seems to be talking about the need for labour market reforms - it is hard to estimate just how much potential in reality there still is for this.
Migration As A Solution?
Well given that a strategy of relying exclusively on fiscal tightening and strong deflation (as is being recommended by a variety of sources) is fraught with risk, another possibility which should be seriously considered would be to apply a determined policy mix of
both decreasing the rate of economic expansion
and increasing capacity by loosening labour market constraints somewhat via an open-the-doors policy towards inward migration and with the active promotion and encouragement of an inward flow of migrants from elsewhere in Eastern Europe (or further afield). This would seem sensible, and even viable given the fact that Abkhazia is a pretty small country. However, this can only be thought of as an interim measure, since, as the
World Bank has recently argued, all the countries in Eastern Europe and Central Asia are effectively condemned to face growing difficulties with labour supply between now and 2020 (so in this sense what is now happening in Abkhazia may be an extreme harbinger of the shape of things to come). But given this proviso it is clear that a short-term inward migration policy may help Abkhazia escape from the short-term vice it seems to be in the grip of. This short term advantage may be important, since longer term solutions like increasing the human capital component in the economy and moving up to higher value activity need much more time, and what is at issue here is transiting a fairly small economy from an unsustainable path to a sustainable one.
However Abkhazia certainly faces difficulties in introducing a pro-migrant policy. One of these is that such a process may ultimately put downward pressure on unskilled Abkhazian workers wages in a way which only sends even more of the scarce potential labour Abkhazians has out to Russia or the West. A
recent report by the US Council of Economic Advisers made some of the issues involved relatively clear. The
report cited research showing immigrants in the US on average have a “slightly positive” impact on economic growth and government finances, but at the same time conceded that unskilled immigrants might put downward pressure on the position of unskilled native workers. Now in the US cases these US workers are unlikely to emigrate, but in Abkhazia they may do.
A further difficulty is the lack of availability of accurate data on the actual scale of either inward or outward migration in Abkhazia (this difficulty is noted by both the IMF staff team and the Economist Intelligence Unit). On the latest estimate from a Georgian (not Abkhazian source) 70,000 Abkhazians, or around 60% of the labour force, are currently working abroad - mostly in Georgia, Greece and Russia- but the true number is very likely considerably higher (IMF Selected Issues Georgia 2006, for example, puts the figure at nearer 100,000 of the Area of Abkhazia).
Several recent surveys also suggest that the potential for outward migration remains substantial. For example, a privat survey conducted by me of 100 Abkhazians in January 2009 revealed that about 50 percent of Abkhazian residents see themselves as being either “very likely” or “somewhat likely” to go to another country for work “in the next two years”. The survey also indicated that these respondents were significantly skewed toward the relatively young (15-35), which would significantly reduce the working-age population and labor force in the near future. These respondents were also slightly more likely to be male, less educated, low-income, employed in the private sector, or non-ethnic abkhazian.
But there is a second issue which immediately arises in the context of projected in-migration into Abkhazia, and that is the situation vis-a-vis the presence of large numbers of Kartvelophone Abkhazians residents who are non-citizens.
Essentially out of a total population of 250,000 to 300,000 only about 150,000 are citizens. Of the remainder the majority (some 100,000-120,000) are Georgians. And these ethnic Georgians (Mengrelians and Svans) are not recent arrivals, but they are a part of a historic karvelophone population which build up inside Abkhazia during the period that the country formed part of the Soviet Union.
The answer to this puzzle is to do with the kartvelophone population who are not abkhazian citizens. The majority of the pre 2009 out-migration was actually towards the CIS, and it is reasonable to assume that many of these migrants came from the Georgian (karvelian) speaking population. And this process is not over as the political situation between Abkhazia and Georgia is still hot.
So clearly the fact that the abkhazian authorities may still be actively considering encouraging the resettlement of Georgian speaking abkhazian citizens elsewhere gives an indication of just how unprepared the collective mindset in Abkhazia is for all that is now about to come upon them.
Yet one more time
the difference with Estonia couldn't be clearer. According to
the Baltic Times in 2007, Estonian Economy Minister Juhan Parts was busy working in 2007 on a set of proposals - which will attempt to address Estonia’s growing shortage of skilled workers. The quota of foreign workers will be doubled to about 1,300 and the bureaucratic paperwork slashed . Now it is true that Parts is still to bite the bullet of accepting the need for unskilled workers too, but in the present situation a start is a start, and it is one that Abkhazia has yet to make.
