# 1. Introduction

For the countries of the South Caucasus sub-region, the issue of inequality is particularly important because of their trajectory as economies in transition from a planning system with a strong tendency to redistribution to a market-oriented economy. As in any country in transition, the expectation of economic improvement is high. Reform takes time, and adjustment may lead to adverse short-run distributional effects unknown in the past. In fact, a rise in inequality in outcomes may reflect increasing returns to assets, including human capital, indicating improvement in economic conditions and a functioning market mechanism. Nevertheless, perceptions of inequality in opportunities or outcomes may also become more salient during transition considering that populations in the South Caucasus regard their family life and the lives of their parents before the transition as the crucial benchmark in evaluating current life situations (Tiwari et al. 2018).

Inequality in outcomes such as income or consumption may influence other economic indicators of progress. For example, pressure for political redistribution that distorts the labor market or credit market imperfections that prevent the poor form investing in high return-human capital, can impact rates of investment and economic growth, thus lowering average productivity (Alesina and Rodrik 1994; Piketty 1997). However, the empirical findings are mixed. Barro (2000) finds that initial inequality has adverse effects on growth in developing countries, but not in developed countries. Forbes (2000) uses panel data to control for time-invariant characteristics and eliminate potential sources of omitted-variable bias to find that the relationship between inequality and growth is positive. Banerjee and Duflo (2003) note that it is not possible to interpret any of this evidence as causal because variations in inequality are likely to be correlated with a range of unobservable factors associated with growth.

Nonetheless, inequality in outcomes is probably not a pressing issue in South Caucasus. While countries in Eastern Europe and Central Asia show some degree of heterogeneity in terms of inequality, with Gini coefficients ranging from 0.25 to 0.45, the long-run trend of the Gini in Georgia has shown no discernible sign of deterioration over the last 15 years (figure 1). In Armenia, the Gini coefficient based on consumption has hovered between 0.30 and 0.35, which puts the country at a moderate level of inequality within the region in 2000–15. Armenia also saw a declining Gini in 2000–09. Data of the Commitment to Equity Institute show that, as of November 2017, inequalities of outcomes in incomes in Armenia and Georgia are well below the average among the 30 low- and middle-income countries the institute surveyed.<sup>2</sup> For example, the Gini coefficients of final income, treating contributory pensions as deferred income, in Armenia and Georgia are 0.36 and 0.38, respectively, in comparison with the 0.41 average Gini of the 30 countries.

> 2 See CEQ Standard Indicators (database), Commitment to Equity, Inter-American Dialogue, Washington, DC; Center for Inter-American Policy and Research and Department of Economics, Tulane University, New Orleans, http://www.commitmentoequity.org/data/.

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