Georgia Country Economic Memorandum Chapter 2 - Spatial Transformation

Jul 19, 2026

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This chapter examines the spatial dimension of Georgia’s economic transformation, explaining how economic activity naturally concentrates while also generating widening territorial disparities. It highlights benefits of agglomeration—such as productivity gains—and EU evidence that taxes and transfers can narrow the gap between output and living standards. It also warns that persistent unevenness can deepen poverty, weaken national growth potential, and threaten social and political cohesion. The chapter then reviews Georgia’s urbanization trends and policy concerns about low-productivity rural agriculture and regional inequality.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages41

Reading Time1 h 43 min

AccessFree to download

Key Messages

Concentration and agglomeration benefits

Risks of growing spatial disparities

Georgia’s spatial adjustment and structural transformation

Urbanization trends since the 1990s

Policy concerns and transformation paths

Public Disclosure Authorized Public Disclosure Authorized Georgia Country Economic Memorandum Chapter 2: Spatial Transformation Spatial Transformation Key Messages 1. Economic activity is never evenly distributed – this is normal and economically efficient. While disparities in economic output have been large across countries in the past, national incomes have been converging over the last 20–30 years, driven in part by global trade and investment integration (Lakner & Milanovic, 2013) . Within many countries, however, there has been increasing concentration in output and wealth in core metropolitan regions, while rural and peripheral regions increasingly lag. Geographic concentration of economic activity at all spatial scales reflects healthy processes of development (World Bank, 2009) and is positively associated with economic growth (Bourguignon & Morrisson, 2002) due to agglomeration-induced gains in productivity (Duranton & Puga, 2004) and mutual reinforcement of agglomeration and innovation (Feldman, 1994) (Verspagen, 1997) . Moreover, regional disparities in output do not have to necessarily result in major disparities in living standards – in many EU countries, for example, taxes and transfers dramatically reduce the gap between output and disposable income. 2. But large and growing spatial disparities can also have negative consequences. First, when output and wealth are highly uneven territorially, poor people are more likely to face multiple factors of deprivation and thus a more difficult path to escaping poverty. Second, if lagging regions are failing to make productive use of the resources that are available to them, they can act as a drag on national growth potential (Farole, Rodríguez‐Pose, & Storper, 2011) . Political economy factors can further dampen growth, as regional inequalities tend to increase demand for redistributive (versus productive) policies (Aghion, Alesina, & Trebbi, 2004) . Finally, increasing disparities across locations can threaten social and political cohesion, as reflected in the voting patterns of “places that don’t matter”(Rodrígez-Pose, Dijkstra, & Poelman, 2018) (RodríguezPose, Dijkstra, and Poelman 2018) . Georgia’s spatial adjustment is proceeding in parallel to the structural transformation, but can be accelerated 3. Georgia’s economy is structurally and spatially transforming and becoming more efficient. The structural transformation of labor away from agriculture into more productive activities (services and, to a lesser extent, manufacturing) and the associated efficiency gains were presented in Chapter 1. This chapter analyses the spatial angle of this transformation and shows that, as in other countries, growth has resulted in a greater concentration of people in the largest cities, while the population of rural and smaller cities has declined. Following a period of de-urbanization in the 1990s, a consequence of the civil strife and the difficult economic transition, Georgia started to urbanize from the 2000s onwards. Initially, the process was confined to just a few larger cities, but over the last decade, a few additional smaller cities have started to re-gain scale. As a result, by 2020, around 60 percent of the population lived in urban areas, similar to the average for the transition ECA countries. Still, most secondary cities remain below their scale from the start of the century, while a relatively large share of the population remains in rural areas with limited economic opportunities. 4. This economic geography has given rise to two related, but distinct, concerns among policymakers over the past decade. The first is that a significant share of Georgia’s population, and most of its rural population, continue to be engaged in low productivity agricultural activities, which translates into continued high levels of poverty in rural areas. And so, the question is what can be done to shift more of the rural population into higher productivity jobs, either w

FAQs

Why is uneven distribution of economic activity considered economically efficient?

Economic activity concentration is described as a normal outcome of development. It is positively associated with growth through agglomeration-driven productivity gains and innovation feedback loops.

What negative consequences can arise from large and growing spatial disparities?

They can increase poverty risks for disadvantaged populations, reduce national growth potential when lagging regions cannot use resources productively, and undermine social and political cohesion.

How has Georgia’s urbanization evolved and what is the current spatial pattern by 2020?

After de-urbanization in the 1990s due to civil strife and difficult transition, Georgia began urbanizing in the 2000s. By 2020, about 60% of the population lived in urban areas, though many secondary cities remain below earlier scale and a sizable share still lives in rural areas.

Jul 19, 2026

Upload by Liam