Transcript Income Inequality and Poverty in Ukraine in the Course of

Income Inequality and Poverty in
Ukraine and Transition to the
Market Economy
Yevgeny Orel, C.Sc.(Econ.), Docent
Faculty of Economic Science
National University “Kyiv-Mohyla Academy”
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Outline of the presentation
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Introduction
Deprivation and poverty
Basic definitions
Selected statistics
Selected literature review
National and international efforts
Conclusive remarks
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The Government of Ukraine and people of this
country are in the process of transition to
democratic governance, market economy and
integration into the global system. This means
the transition towards prosperity for all
Ukrainian citizens. Prosperity for Ukrainians
is the ultimate and permanent objective and the
most desired result. To this end, the process of
poverty alleviation is a must.
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The human deprivation in
Ukraine is multidimensional:
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Regional dimension
Rural dimension
Gender dimension
Environmental dimension
HIV/AIDS dimension
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Regional dimension
• HDI of Kiev oblast is 0.738 (Income index
0.603)
• Kyiv city 0.811 (0.687)
• Transcarpathian oblast 0.661 (0.475)
• Ukraine overall 0.736 (0.579)
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Rural dimension
• Agricultural sector provides for 30% of GDP
and 30% of total employment;
• Economic growth in Ukraine owes the most of it
to agricultural growth.
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Rural dimension (cont.)
• HOWEVER,
– Per UNDP, most of the poverty exists in rural areas.
– Per WB, in urban (33%-27%, per Survey: WB/SCS)
– Both agreed: The incidence of income poverty does not
vary much between rural and urban areas. Poorer
access to social services – health facilities, education,
safe water, basic sanitation, provision of productive
resources, etc – that’s an issue!
• Economic growth has not translated into increase
in employment or income.
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Gender dimension
• It concerns both sharing income and
participation in the decision-making process:
– the ratio of women’s wages in non-agricultural
sector amounts to 71% of that of men;
– the female representation at the legislative bodies
amounts to 8%.
• WB/SCS: female poverty exceeds that of male
by 4-5 pp
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Environmental dimension
• People (%) considering environmental problems
critical for Ukraine (UNDP/DFID data):
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Air pollution (86%)
Unsafe drinking water (83%)
Nuclear safety, lack of (83%)
Deforestation (81%)
• Poor people become victims of the above problems
more than any other group.
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HIV/AIDS dimension
• Ukraine: The largest HIV/AIDS infection
incidence, 1-1.5% infected (as estimated
compared to formal statistics)
• High correlation between poverty and HIV/AIDS
incidence (?)
• Poor are more vulnerable (?) in terms of:
– Greater chances of getting infected (poorer prevention
and lack of information)
– Lower capability to combat infection and disease
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Income inequality, its simple
definition
• It results from unequal distribution of
income
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Income inequality, its causes
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difference in the inborn abilities
difference in education
difference in the efforts
difference in inheritance
difference in relations with Lady Luck
other causes
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Income inequality results in…
• POVERTY (?)
– Is that a fact?
– Does poverty always follow inequality?
– Is poverty always a result of inequality?
– Is poverty possible in the conditions of
complete equality?
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POVERTY
general definition
• Poverty is the lack of basic necessities
that all human beings must have: food
and water, shelter, education, medical
care, security, etc.
• Poverty:
– Absolute
– Relative
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POVERTY
per USDA
• Poverty is equal to or less than
three times an average family’s
minimum food expenditures
– is this definition applicable to
Ukraine?
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POVERTY
per Ukrainian Poverty Prevention Strategy
• Poverty is impossibility, due to lack
of funds, to maintain the way of life
peculiar to a specific society within
a specified period of time
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Other terms used in the Ukrainian
Poverty Prevention Strategy
• poverty line – income level below
which it is impossible to satisfy basic
needs. At present, in Ukraine, the
poverty line is established as a monthly
per capita subsistence minimum.
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Other terms used in the Ukrainian
Poverty Prevention Strategy
• poverty depth – deviation of the
amounts of incomes and expenditures
in poor households from the
established poverty line;
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Poverty line
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2000 – 171 hr.
2002 – 186 hr.
2005 – 284 hr.
Poverty line’s established value:
– depends on definition of poverty and
– gives the basis for relating households to the
category of poor.
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Other terms used in the Ukrainian
Poverty Prevention Strategy
• abject poverty – poverty verging on survival.
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Reservations concerning povertyrelated numbers
• The US poverty numbers “do not include inkind transfers or underreporting of income”
(underreported or unreported income), which
means that “economic statistics should be used
with care”
cited after David C. Colander
The same relates to other countries, Ukraine with its 55% of GDP
in the “shadow” (the second economy) is not an exception.
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Examples of statistics failures [1]
• 5 to 7 million Ukrainians work abroad.
– Legally or not?
– Are their incomes counted or not?
– Are they actually poor or not?
• 2/3 of Ukrainians live by less than $2 a day.
– Are they actually poor?
– Are they formally considered poor?
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Examples of statistics failures [2]
• Per ILO:
– 85% of Ukrainians consider their incomes
insufficient to cover health care expenditures;
– 80% expect poor or very poor life in older age.
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Income inequality in Eastern Europe
before and after transition
Regions (and countries)
Gini coefficients for
income per capita
1987-90
1996-99
Central Eastern Europe (Cz, Hu, Slo, Pl)
0.19-0.28
0.25-0.33
South Eastern Europe (Alb, Bulg, Cro, Mc, Ro)
0.23-0.36
0.27-0.41
Baltic States (Lith, Lat, Est)
0.23-0.24
0.32-0.37
CIS and Western FSU (RF, UA, Mld, Blr), incl.:
0.23-0.27
0.28-0.47
Russian Federation
0.26
0.47
Ukraine
0.24
0.33
Moldova
0.27
0.42
Belarus
0.23
0.28
0.27-0.31
0.35-0.59
Caucasus and Central Asia (Ar, Gr, Krg, Kaz, Tdj, Trkm)
Source: World Bank (2000), Making Transition Work for Everyone: Poverty and
Inequality in Europe and Central Asia, Washington DC: The World Bank. - Table 4.1.
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Ukraine: Gini coefficient
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1987-90 – 0.24
1996-99 – 0.33
2000 – 0.363
2004 – 0.359
Note: Gini coefficients in this and previous slide were
calculated for income (not earnings) distribution.
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Causes of income inequality and
poverty in Ukraine
• Deterioration of the demographic situation
(on the other hand, it’s a result of poverty increase);
• Poorly functioning governing bodies;
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Poverty, inequality and social assistance
(Dimitri A. Sotiropoulos)
• “Poverty in post-communist Eastern Europe was
the result not only of the transition to the market
system, but also of the new social class
domination, the political priorities of incoming
governments, and the incoherent social assistance
policies.
• “The average citizen has become a poor person.
(Absolute poverty. – EO)
• “In terms of cross-national variation, the worst
cases of income inequality and poverty are the CIS
and the South East European countries, while the
Central East European countries have fared better.
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Poverty, inequality and social assistance (cont.)
(Dimitri A. Sotiropoulos)
• “Poverty alleviation measures were often meanstested and targeted. They have proven to be
ineffective and inefficient. Despite the acuteness
of such problems, most welfare reform has
concentrated around the reform of pensions.
• “A main prerequisite for any welfare reform is to
proceed with the reform of state institutions.
Possible collective actors initiating reform may
include civil society associations and daring
policy-makers and intellectuals.”
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Ukraine: Rate of poverty
• 1988 – 2%
“Poverty as a social problem was either unknown or well-dressed
up in Eastern Europe before the disintegration of socialist
regimes.” (Dimitri A. Sotiropoulos)
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1998 – 21%
2000 – 26.7%
2002 – 26%
2003 – 26.6%
2004 – 25%
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Abject poverty
• 2000 – 14.7%
• 2001 – 16.4%
• 2002 – 15.7%
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The main factors contributing to
poverty in Ukraine are as follows
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- low wages,
- low pensions,
- poor social aid due to lack of funds
- high rate of actual unemployment
(especially in Western and Eastern parts of
Ukraine – ???)
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Income inequality [1]:
Causes peculiar to Ukraine (per Olga Mikrukova)
• The share of primary income was smaller in
socialist Ukraine than in market economies or
developing countries. This is a reflection of three
phenomena:
– virtual absence of property incomes;
– absence of occupational pensions; and
– greater importance of income redistribution. (social
transfers in socialist countries represented 19% of gross income as
compared with 14% in market economies)
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Income inequality [2]:
Causes peculiar to Ukraine (per Olga Mikrukova)
• Much lower direct taxation under socialism
(personal income taxes plus employee-paid
payroll tax): 10% of gross income as
compared with 25% for market economies.
– Direct taxes are usually progressive, whereas
indirect taxes mostly act in regressive way.
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Income inequality [3]:
Causes peculiar to Ukraine (per Olga Mikrukova)
• “Child benefits were more important in socialist
countries than in market economies” (4% of gross
income cf 1%)
• “Overall income distribution was more egalitarian
than in most market economies.” “Cash social
transfers were distributed almost equally per
head”, whereas in market economies such
transfers were focused on poor.
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Transitional Changes
(per Olha Mikrukova)
• Two categories of social costs of transition:
– costs associated with decreases in output due to
systemic changes (i.e., the transition to market
economy) and to macroeconomic stabilization. These
costs are expressed in lower incomes, higher inequality,
and greater poverty.
– job-loss costs associated with the transition. Job-loss is
sometimes accompanied by poverty, but not always.
Unemployment is a distinct issue from poverty.
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Specific(?) to Ukraine
• Hereditary poverty (if they are born to a poor
family, they are condemned to be poor) (nepotism)
• Huge discrepancy between formal and
actual incomes
Are these two really peculiar only to Ukraine?
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Ukrainian Longitudinal
Monitoring Survey (ULMS) [1]
• Performed by researchers from NaUKMA
and University of Michigan;
• Examined were: Changes in wage
inequality during 17 years, from 1986 to
2003.
• Overall findings: The income inequality did
increase during the period under study.
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ULMS – [2]
• What drove this inequality increase:
– Changes in the labor force composition?
– Changes in the wage structure?
• To what extent did wage inequality rise?
• Can we explain the extent to which the rise in
inequality was due to
– changes in the composition of the labor force versus
– changes in the structure of wages (returns to human capital
and various job characteristics) brought about by the
transition to the market economy?
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ULMS – [3]
• “Would changes in the demand for labor
resulting from market forces and the
introduction of private ownership result in
compositional changes that would increase
or decrease women’s inequality more than
men’s?”
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ULMS – [4] – Basic facts established
• “…no official unemployment and wages
were determined by a centralized tariff or
wage grid, so there was little room for
employers to determine wages.”
» (the Criminal Code penalized for sponging. – EO)
• The wage system during perestroika was
loosened and decentralized in order to spur
growth. This led to larger differences in
wages, and hence in incomes.
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ULMS – [5] – Findings
• “The rise in wage inequality in Ukraine
from 1986 to 2003 was significant.”
• “…the Gini […] coefficients rose by 1.5
[…] percentage points...”
• “Men’s wage inequality rose more than
women’s… Gini … rose by 1.9…”
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ULMS – [5] – Findings [2]
• Wage inequality in Ukraine rose moderately
relative to other FSU countries and
• men’s overall wage inequality rose faster
than that of women.
The latter finding is consistent with findings for Poland (Keane and
Prasad, 2002), and Russia (Brainerd, 1998)
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ULMS – [5] – Findings [3]
• Overall inequality in 2003 would have been higher
if men and women working at that time had the
same demographic and job characteristics as
workers in 1986.”
– “…employed individuals in 1986 (as compared to those
employed in 2003) were younger (for women), less
educated ….working in the agricultural or industrial
sectors, state sector and large or very large firms.”
• the large movement of men into the small-scale
sector helps explain the increase in inequality.
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ULMS – [5] – Findings [4]
• Overall inequality in 2003 would have been
significantly lower if men and women had been paid
according to the 1986 wage structure…
– For both men and women, wages rose more for the more
educated, for non-agricultural jobs relative to agriculture and
for the larger firms relative to the smaller firms. These
findings have been confirmed for other transition countries:
Czech Republic, Estonia, Hungary, Poland, and Slovenia
• The minimum wage did indeed play a role in lowering
inequality from what it might have been, but only for
women.
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ULMS – end notes
• On the one hand, the transition to the
market economy leads to an increase in the
income differentiation, because of the
market forces.
• On the other hand, since the composition of
labor force is changing in the course of
transition to a market economy, this
inequality could have been larger, had the
labor force composition been preserved.
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Poverty Overcoming Strategy
approved 15-Aug-2001
• The Strategy summarized that:
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GDP down by 60% from 1990 to 1999;
Real wages down 3.8 times;
Pensions down 4 times;
First year of economic growth has not told on real
incomes of people;
– By-income and by-wealth stratification of the
population continued.
“You can’t feed people with macroeconomic
indicators” (Anatoly Kinakh, 1st Vice-Premiere)
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Poverty Overcoming Strategy
• Established criterion of relation of people to
the poverty category: 75% of median total
expenditures per capita (per a hypothetical
adult). The aims were as follows:
– Keep to international statistics standards;
– Cover (indirectly) all types of activity,
including those in the “second” economy.
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Poverty Overcoming Strategy
“to-do list”
• Focusing on the most striking manifestations of
poverty;
• Ensuring a stable increase in real incomes of
people;
• Ensuring of employment opportunities;
• Middle class (?)
• Self-employment, secondary employment.
• Establishing business relationships in agriculture
for new owners. (!)
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Donor support, UNDP
• (1) Agriculture Policy Project;
• (2) Small and Medium Enterprise Development
Program;
• (3) Vocational Training Program;
• All three programs have a direct linkage to
poverty alleviation.
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Donor support, others
• DFID: rural development and entrepreneurship
development programs and projects;
• TACIS: Private Farm Support Centres project;
• World Bank: Country Assistance Strategy (CAS) for
Ukraine, poverty and human development at the core;
• USAID: rural development as well as small and
medium enterprise development;
• Others.
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What is more important:
• To feed poor?
• To train them how to feed themselves?
A fish or a fishing-rod?
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Political significance
“Combating poverty remains my top goal.”
(Viktor Yushchenko, President of Ukraine)
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Poverty is one of the causes of the
so called “flower revolutions”
• “Kazakhstan does not suffer from the ethnic
divisions and poverty that conspired to make
Georgia and Ukraine so volatile. Oil revenues
have produced five years of significant economic
growth and soothed discontent.”
Source: Waiting for the next dominoes. Economist;
1/15/2005, Vol. 374 Issue 8409, p40, 1/3p
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Citation 1
• “The war on poverty is not a struggle
simply to support people, to make them
dependent on the generosity of others. It is
a struggle to give people a chance. It is an
effort to allow them to develop and use their
capacities, as we have been allowed to
develop and use ours, so that they can share,
as others share, in the promise of this
nation”
Lindon Johnson
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Citation 2
• [Welfare is] “a cancer that is destroying
those it should succor and threatening
society itself.”
Ronald Reagan
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Conclusive remarks [1]
• Ukraine is in transition towards a market
economy;
• Poverty reduction is an essential condition
for establishing an efficient and equitable
market economy that can bring maximum
possible benefits to all members of society;
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Conclusive remarks [2]
• The government is not to stand by and passively
watch, nor is to manually rule the economy, but is
expected to correct market failures (poverty in
particular) in the most civilized way without
abolishing the principles of market economy;
• Overcoming poverty in Ukraine is an essential
condition to complete transition to a market
economy, as well as enter regional and global
organizations;
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Conclusive remarks [3]
• An efficient market system enhances human
ingenuity and creativity and an equitable market
brings the maximum possible benefits to all the
participants in the market economy. Only people
whose capabilities have been built, who have
access to social services and productive resources,
who is free from hunger and material
impoverishment can effectively participate in the
market economy and reap maximum benefits from
the process.
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Conclusive remarks [4]
• The notion of the market is now rapidly expanding
from national to global markets and the concept of
national integration is stretching to regional
integration. Prosperity of a nation critically hinges
on how it can be part of these processes and
optimize the relevant benefits. Overcoming
poverty is an essential condition to achieve the
goal of transition to market economy and also for
regional and global integration. Needless to say,
that these are also contributing factors to sustained
reduction of poverty as well.
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Thank you for attention!
Дякую за увагу!
Спасибо за внимание!
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