United Nations Development Programme

POVERTY AND SOCIAL IMPACT ANALYSIS OF

THE ECONOMIC CRISIS IN UKRAINE

Kyiv 2009

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This publication explores the poverty and social impact of the financial and economic crisis in Ukraine. The main focus is on identifying key poverty issues, the economic crisis in Ukraine and its impact on poverty, key poverty trends in the pre-crisis period, and changes in these trends during the crisis. The paper highlights suggestions to improve social policy in poverty alleviation measures, and contains recommendations for appropriate policy reforms. The publication could be useful to governmental officials, ministries and state agencies, managers and specialists in the field of social and economic development, scientists, representatives of international organisations, experts of nongovernmental organisations, and others interested in poverty alleviation and human development. In the process of preparing this paper, materials available from a wide range of sources were used. These include the Institute for Demography and Social Studies of National Academy of Sciences of Ukraine, the State Statistics Committee of Ukraine, the Ministry of Economy of Ukraine, the United Nations Development Programme in Ukraine, UNDP Regional Bureau for Europe and CIS, UNDP Bureau for Development Policy, World Bank, Kyiv International Institute of Sociology, Kyiv Institute on Management Issues of Gorshenin, and others. The report was prepared by: Ella Libanova, Director, Institute for Demography and Social Studies of the National Academy of Science of Ukraine, Academician of the National Academy of Science of Ukraine Luidmyla Cherenko, Researcher, Institute for Demography and Social Studies of the National Academy of Science of Ukraine Volodymyr Sarioglo, Researcher, Institute for Demography and Social Studies of the National Academy of Science of Ukraine The report was edited by Ben Slay, Senior Economist at UNDP Bureau for Europe and CIS, Bratislava Regional Centre. The report preparation was organized by Natalia Sitnikova and Tatiana Bolila, UNDP Ukraine “Millennium Development Goals – Ukraine” Project staff under leadership of Katerina Rybalchenko, UNDP senior programme manager and overall supervision of Joanna Kazana-Wisniowiecka, UNDP Deputy Resident Representative in Ukraine. Important inputs were obtained from national experts: Vladyslav Shyshkin, Svitlana Polyakova, Maryna Ogay, Olexandr Vasylev, Anna Reut, Olga Krykun, Sergiy Bashkirov and Tetiana Novoselska. This publication has been produced within the implementation of a UNDP-led Project “Millennium Development Goals in Ukraine”, based on a study which was prepared and funded through a financial contribution from the Government of Norway. This report was funded through contributions from the Government of Norway. It is part of a series of crisis response Poverty and Social Impact Assessment (PSIA) initiatives aimed at generating policy responses to protect human development gains and to stimulate a broader policy dialogue. The Poverty Group at UNDP manages the PSIA initiative and provides technical guidance to country teams conducting the analysis. We want to thank Diana Alarcón and Ambreen Malik for their support through the preparation of this report and comments on earlier drafts. The views, findings and recommendations expressed in this publication are those of the authors alone. They do not necessarily represent the views of UNDP. The United Nations Development Programme is the UN’s global development network, advocating for change and connecting countries to knowledge, experience and resources to help people build a better life. We are on the ground in 166 countries, working with them on their own solutions to global and national development challenges. As they develop local capacity, they draw on the people of UNDP and our wide range of partners. For more information on UNDP activities in Ukraine go to: www.undp.org.ua.

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TABLE OF CONTENTS

page

List of Acronyms 4

Summary 5

Chapter 1. Introduction 8

Chapter 2. Study Methodology 10

2.1. Identifying Key Poverty Criteria 10

2.2. PSIA Methodology Using PovStat Models 12

2.3. Socio-Economic Drivers of Poverty at the Macro- and Household Levels 17

2.4. Household Budget Survey Data as a Basis for Poverty Assessment 21

Chapter 3. Economic Crisis in Ukraine 23

Chapter 4. Impact of the Crisis on Poverty in Ukraine 28

4.1. Impact of the Crisis on Household Welfare 29

4.1.1. Household Incomes 29

4.1.2. Household Expenditures 34

4.2. Poverty Trends Before and During the Crisis 40

4.3. Household Assessments of the Crisis’s Socio-Economic Impact 49

Chapter 5. Social Policy for Poverty Alleviation 54

5.1. The Government Anti-crisis Programme 54

5.2. Social Transfers: Continuity and Change during the Crisis 56

5.3. Assessment of Social Policy Impact on Poverty 59

Chapter 6. Policy Recommendations to Overcome Poverty During the Crisis Period and Soften Its Impact

64

6.1. Poverty Alleviation under Crisis Conditions 64

6.2. Policy Measures to Mitigate Crisis Impact on Poverty and Welfare 66

6.3. Using Poverty and Social Impact Analysis to Improve Policy-making and Strategic Planning in Ukraine

68

Bibliography 69

Annexes 70

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LIST OF ACRONYMS

PSIA – Poverty and Social Impact Analysis

GDP – Gross Domestic Product

CPI – Consumer Price Index

ILO – International Labour Organization

NBU – National Bank of Ukraine

HBS – Household Budget Survey

PPP – Purchasing power parity

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SUMMARY

Poverty and social impact analysis (PSIA) methodology has been developed as a set of tools to analyze the impact of policy reform on living conditions and, in particular, on the poor and vulnerable groups. It can help to understand the consequences of the financial and economic crisis in Ukraine and to provide an ex-ante assessment of alternative policy measures to protect gains achieved by the country on poverty and human development. The analysis is based on combining the use of micro- and macroeconomic data.

Two key poverty definitions are used in assessing the poverty situation in Ukraine: relative poverty (as per the national criterion, determined by the Poverty Reduction Strategy – 75% of median level of expenditures) and absolute poverty (the minimum subsistence level defined by the national law). In addition, the report uses a poverty line of US$ 5 (in purchasing power parity) , often used for international poverty comparisons among Eastern and Central Europe countries.

To evaluate the impact of the economic crisis on poverty and to track the timing of its impact on household welfare, this publication uses several indicators: real GDP per capita; consumer price inflation; the share of final household consumption in GDP; the average wage; and the indicators of vulnerable households with demographic-economic burdens (i.e., presence of children and the elderly).

Employment in many countries is a key driver of income and poverty trends. However, in Ukraine employment does not guarantee sufficient income to provide for basic subsistence. While the highest poverty rates are registered in households whose heads are unemployed, almost every fifth household in Ukraine where the head is an employee, is considered poor. Households headed by employers are in the most advantageous situation comparing to others. Therefore employment today does not protect families from poverty.

After the deep transformational crisis in the 1990s, economic recovery was characterized by growth in the volume of production and services, improvement in the investment climate, an increase in the demand for labour, a decline in unemployment rates, and higher household income. However, in spite of nine years of economic growth (2000-2008), there was no major restructuring of the economy that would create an investment and innovation-led development model. A distorted political system dominated by competition among interest groups and rent seeking within state agencies limited the scope for effective social transformation. An explosion of corruption, the expansion of the shadow (and sometimes criminal) economy and administration, deeply damaged values in Ukrainian society and the system of incentive in the economy.

The first signs of the new economic crisis were clearly observed in the fall of 2008, particularly in the area of finance and other industries. In January 2009, industrial production was only two thirds of its January 2008 level. The value of GDP in the first quarter of 2009 dropped by 20% compared to the corresponding period in 2008; while in the second quarter the decline represented 18%. From the beginning of 2009, the crisis spread to practically all areas of the economic and social life with a subsequent decline in household income. In 2008, Ukraine not only had failed to overcome the consequences of the 1990s crisis (with a GDP level still below its pre-crisis level) but, by late 2009, the new economic crisis was already having an impact on the majority of the population of Ukraine.

The biggest reductions in real income during the first quarter of 2009 were observed among those population groups which had previously enjoyed the highest rates of income growth, namely: households in big cities, the wealthiest 20% of the population, and households whose main income source are salaries. The structure of food expenditure that had emerged in Ukraine during

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recent years underwent important changes in 2009: the share of purchased products, non-alcoholic beverages, and food consumed outside home declined, while the share of food received as a gift and self-produced within the household increased, indicating a return to the subsistence economy.

During the first quarter of 2009 the situation worsened, as the share of expenditures for food decreased in eight of ten key groups—with serious negative implications for the quality of nutrition in Ukraine. The already limited purchasing power of Ukrainian households declined further with the crisis. Risks of poverty among households with children, the elderly (known as “old retirees”), and rural households are likely to increase with the crisis.

The full impact of the economic crisis on poverty is likely to be larger than presently apparent due to the lags between the economic recession and previous trends toward poverty reduction. It nonetheless seems likely that absolute poverty rose in the fourth quarter of 2009. During the first quarter of 2009, the weight of the rural population among the poor dropped compared to the same period a year ago. This is probably a reflection of a reduction in the gap between the urban and rural areas to the extent that the crisis has primarily affected the (previously more fortunate) urban population. Whereas the share of big city residents among the poor in the first quarter of 2009 continued to decline, the share of population in small towns among the poor increased significantly. There are indications that the impact of the economic crisis was sharper in the mono-industrial “company towns” which were first affected in late 2008.

In the first quarter of 2009, the share of households with children among the poor rose across Ukraine. There was also an increasing risk of falling into poverty for families with unemployed members (especially if they also have children), households comprised exclusively of the elderly (above 70 years of age), and households with double demographic-economic burdens (i.e., children and elderly retirees). During the first quarter of 2009, the poverty rate under the criterion of US $5 (in PPP terms) grew relative to the corresponding period in 2008 by 1.4 percentage points (i.e., from 4.9% to 6.3%). It should be mentioned that in 2008 the poverty rate under various definitions declined significantly. However, the impact of the crisis in the fourth quarter of 2008 was so strong, that the positive momentum could not be maintained into the first quarter of 2009. The poorest groups of the population, whose consumption was lower than the minimum subsistence level established as a minimum social standard, were the first to feel the blow of the crisis.

According to sociological survey data, middle aged people (30-44 years old) experienced the full impact of the economic crisis. Higher prices and tariffs affected women, retirees, and rural households to a greater degree than other groups. Lower incomes affected people with a vocational secondary education and higher education to a greater extent, whereas young people aged 18-29, and especially women, were mostly affected by reductions in employment.

Trends in the size and share of social transfers suggest that during the first quarter of 2009, the poverty situation did not worsen dramatically, probably due to the fact that the crisis did not have an immediate effect on wide groups of the population . However, higher shares and increasing levels of unemployment benefits suggest a larger impact of the crisis on the labour market. By the end of 2009, the demand for social transfers to support vulnerable population groups was probably larger.

In order to evaluate the potential consequences of the economic crisis in Ukraine, the authors used ex-ante analysis based on macroeconomic time series data and micro data from the Household Budget Survey (BHS). The PovStat software was used to evaluate poverty trends. The modelling results based on the average forecasted macroeconomic indicators suggest that the poverty rate for those living under the minimum subsistence level is expected to increase by more than 7 percentage points to reach 27.6% of the population in 2009, and fall to around 27.2% in

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2010. Furthermore, the poverty rate according to the US $5 (PPP) per capita per day criterion will grow in 2009-2010 by approximately 2 percentage points.

Ukraine’s social assistance system does not have a good mechanism for targeting. The means-testing tools used are costly and they fail to provide reliable results, and they are in need of significant changes to create a more effective system of social assistance to the poor.

With the exception of assistance to children, social protection is focused mainly on households without children, primarily on pensioners. As this system is not targeted to the poor, it increases social differentiation. Ukraine’s social protection model has become more liberal—it focuses primarily on support of vulnerable and poor population groups, whereas education, health care, and social protection for other groups have been privatized. However, the effective implementation of such model requires certain economic preconditions, a developed market, and the gradual implementation of preventive measures to protect the social minimum. In fact, in Ukraine, today’s socio-economic development does not meet these pre-conditions. As such, introducing this model of social protection is neither possible nor expedient, since families with children (which have the highest risk of poverty) are most likely to suffer. Changing social policy priorities in conditions of constrained financial resources is therefore, essential. Such changes require the identification of the social groups most in need of assistance.

In the context of the economic crisis there are two policy areas that need to be considered to prevent an increase in poverty:

Ensure that the majority of the population does not fall into poverty, by providing minimum social guarantees for those workers with full-time employment, and who make all their social insurance payments (primarily labour pension and unemployment assistance).

Protection to population groups that are most at risk of extreme poverty as the crisis unfolds.

The state must therefore, formulate key principles of poverty alleviation under crisis conditions and define the principle directions and short-term measures for such policy implementation. The principles of multidimensional poverty alleviation include:

establishing and maintaining rational and scientifically justified correlations between minimum social guarantees and minimum wages;

aligning the amounts of social targeted assistance with resource availability, with national poverty criteria, and with basic minimum guarantees;

focusing social support for able-bodied population groups on measures that encourage labour market engagement;

ensuring a fair distribution of benefits which are financed by public funds;

refocusing the social assistance system on poor population groups;

promoting multichannel financing of poverty alleviation activities; and

systematically adjusting poverty reduction policies and programming in light of monitoring and evaluation results.

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CHAPTER 1. INTRODUCTION

The financial crisis that started in Ukraine in the fall of 2008 and became the economic crisis will, without a doubt, affect the welfare of the majority of the population and the poverty situation in the country. How serious will this impact be? How long will it last? How will the impact of the crisis be felt by various population groups and types of households? How many people will require government assistance? How will Ukraine’s social protection system respond to this situation?

Answers to these questions can be found in this detailed study of the trends of previous years, and of the first signs of the economic crisis until today. Most importantly, this study projects poverty assessments based on forecast trends in macroeconomic indicators.

Many of Ukraine’s positive development trends and, particularly, declines in absolute poverty, are expected to have changed in 2009—as have certain profiles and risks of poverty among different household categories. Due to technical lags associated with poverty assessment, the social consequences of the crisis cannot be identified using micro-data only. Therefore, it is necessary to apply poverty and social impact analysis (PSIA) methodology by combining macro and micro-level data. This will allow us to identify certain linkages between macroeconomic and poverty trends, as well as to project the impact of the economic crisis on poverty indicators.

This study seeks to identify and project poverty trends in Ukraine based on the economic crisis impact analysis. This objective is achieved via:

applying PSIA methodology to evaluate key elements of the situation in Ukraine;

identifying the key criteria to analyze poverty;

assessing the informational support for the study;

defining the key factors of poverty at macro and household levels;

studying the specific stages, evidence, sectoral and regional aspects, and potential consequences of the economic crisis in Ukraine:

applying PSIA methodology to Ukrainian conditions, and in particular to methods of combining the macro and micro-level data in order to identify key relationships and project the economic impact of the crisis;

analyzing pre-crisis trends and determining the most recent changes in welfare and poverty among the population based on the household budget survey (HBS) data;

projecting poverty indicators up to 2010;

analyzing subjective households assessments of the impact of the economic crisis on the socio-economic situation;

analyzing the level and efficiency of social transfers at the household level (by examining pre-crisis trends and subsequent changes under the crisis conditions);

evaluating the impact of social policies on poverty as well as the adequacy of the social protection system in crisis conditions;

defining the ideology and key principles of poverty alleviation policies in crisis conditions;

suggesting policy measures most likely to reduce the impact of the crisis on the welfare of the population; and

using the PSIA results for the development of national policy.

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The report consists of six chapters: introduction, methodology, analysis of the economic crisis, evaluation of the crisis impact on poverty, analysis of the social policy impact on poverty, and policy recommendations.

It is hoped that this study will support the analysis of the general impact of the crisis and will assist in the design of socio-economic policies to protect vulnerable groups. Currently in Ukraine, government policy and the impact of social programmes are not properly monitored and evaluated. This study may inform of the design of government policies and could provide an example of how to assess the impact of external shocks and alternative policy responses.

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CHAPTER 2. STUDY METHODOLOGY

2.1. IDENTIFYING KEY POVERTY CRITERIA

In order to describe poverty and identify poor population groups, several criteria and approaches are used in international practice:

Absolute poverty criteria, which are based on comparisons of household incomes or expenditures of families with established standards, such as the minimum subsistence level and the minimum consumer budget, by such instruments as the:

minimum subsistence level established by the government;

actual value of the food basket that serves as the basis for the minimum subsistence level;

threshold of the energy value of the daily diet; or

international absolute thresholds (for example US $4.30 (5) in PPP terms for Central and Eastern European countries).

Structural poverty criteria, which are defined in terms of the weight of expenditures on food and other subsistence necessities in the household budget (when expenditures on food, for example, exceed 60% of its budget, a household is typically forced to forgo expenditures for health care, education, etc), as measured by the weight of the:

expenditures on food in total expenditures; or

most necessary expenditures in total expenditures.

Relative poverty criteria, which are defined in terms of the relation of a given household vis-à-vis average levels of per capita income (or expenditures); percentage thresholds of median income or expenditures levels (namely 50%, 60%, or 75%) are used most frequently.

Resource poverty criteria, which reflect the ability of the government budget to provide assistance (this is typically limited to supporting approximately 15% of the population).

In Ukraine’s current Poverty Reduction Strategy, the national poverty line is defined in relative terms, calculated as 75% of the median equivalized household income (expenditures) per reference adult. The calculation of equivalized expenditures of one reference person reflects the presence of economies of scale in household budgets, according to which expenditures per household member tend to fall as household size increases. The equivalency scale whereby the first household member receives a coefficient of 1 and all others receive a coefficient of 0.7 (for instance, a household of 3 persons consists of 2.4 reference persons) forms the basis of the calculations of expenditures per one reference person. Accordingly, the national extreme poverty line is defined as 60% of the median level of cumulative income (expenditures) per reference adult.

Along with the relative criterion, the minimum subsistence level (which can serve as an absolute poverty criterion) is widely used by the government. The minimum subsistence level is a consumer package consisting of the food basket and a detailed list of non-food goods and services.

A number of problems are presented by using minimum subsistence levels both as a state social standard and as the absolute poverty line. The most critical one is the modesty of the minimum subsistence value relative to socio-economic standards and expectations concerning poverty and

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exclusion. As a result, movements in the poverty rate do not necessarily reflect real poverty trends. This conflation of the minimum subsistence level with absolute poverty line should therefore be broken, at least for the purpose of this study, to reduce the role of policy factors in determining the poverty rate.

Methodology for Calculating Minimum Subsistence Levels as the Basis for Assessing the Absolute Poverty Indicators

1. The average value of the food basket (for a statistically representative household member) is calculated by the Ministry of Labour and Social Policy of Ukraine, based on current data regarding minimum subsistence norms and the consumer price indexes (CPI) provided by the State Statistics Committee. The composition of a statistically representative household is determined according to a scale based on HBS data supplied by the State Statistics Committee.

2. The value of the non-food share of the minimum subsistence level (non-food goods and services) is calculated according to the following formula:

NFGS = FP*2/3,

where

NFGS – the non-food goods and services value;

FP – the food package value

Following this calculation, the weight of the food share in the overall minimum subsistence level for each individual household is set equal to 60%.

3. The minimum subsistence level for an average person is defined as the sum of the food basket value and the non-food share value.

4. When calculating the minimum subsistence value for each individual household for various socio-demographic groups of the population, the scale is used reflecting these groups’ place in the overall population (based on the demographic data of the State Statistics Committee of Ukraine).

In studying the poverty situation in the country, two key criteria are used most frequently: the relative (national criterion, determined by the Poverty Reduction Strategy – 75% of median level of equivalized household expenditures), and the absolute (the minimum subsistence level, defined by law as the main state social standard). In addition, for making international comparisons, the US $5 (in PPP terms) criterion determined for Central and Eastern European countries, is applied.

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2.2. PSIA METHODOLOGY USING POVSTAT MODELS

The PSIA methodology developed to analyze the impact of policies on living conditions in general and on vulnerable groups in particular can be used to analyze the socio-economic consequences of the financial and economic crisis.1 This can help to obtain the information required for designing and implementing policies to minimize the negative impacts of the crisis.

When applying the PSIA methodology in practice, one needs to identify the following:

1. policies and crisis phenomena that are the subjects of the analysis;

2. social groups for which the PSIA is primarily concerned;

3. mechanisms by which the policies or crisis phenomena at issue are transmitted to the targeted social groups;

4. appropriate information database;

5. analysis of consequences;

6. recommendations to improve living standards and compensation measures.

Attention is also paid to assessing institutional frameworks, risks, and monitoring and evaluation, so as to ensure appropriate feedback linkages between the adopted measures and their effects.

In this study, the first three elements are key: the consequences of the financial and economic crisis for Ukraine are analyzed; the analysis focuses primarily on poor and vulnerable population groups; and the transmission channels are defined as employment, prices (affecting production, consumption, incomes), access to goods and services, assets, and transfer payments.

Taking into account the existing data and the timeframe for this study, impact analysis was chosen as the key approach for understanding the implications of the crisis. This makes possible a rather detailed quantitative ex post analysis of the crisis’s consequences based on the existing statistical data.

In order to evaluate the potential consequences of the economic crisis, ex ante analysis based on a combination of the data on microeconomic distributions and macroeconomic structures and models were used. A rather simple approach was applied based on a combination of macro-indicator time series and micro-level HBS data to evaluate the potential impact of the crisis on poverty and inequality.

The method used was based on the PovStat software,2 which models changes in poverty and inequality indicators under various economic development scenarios. The model is based on the assumption that economic growth is a primary determinant of poverty trends. It assumes that average household per capita consumption grows to the same extent as output (per capita) in the sector in which the household head is employed.3

Using the household level data, output and employment growth in various sectors is transformed into growth rates for average per capita income or consumption of households in these sectors. Based on the approach above, we can evaluate the impact of output trends on poverty indicators by decomposing the poverty rate into two components: absolute and relative changes in

1 World Bank. 2003. “A User’s Guide to Poverty and Social Impact Analysis”. Washington, USA: IBRD/World Bank: 114.

2 Datt G., Walker T. 2002. PovStat 2.12. “A Poverty Projection Toolkit / User’s Manual”. World Bank: 31.

3 Essama-Nssah B. 2005. “The Poverty and Distributional Impact of Macroeconomic Shocks and Policies: A Review of

Modeling Approaches”. Policy Research Working Paper Series No. 3682.Washington DC: World Bank: 78.

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household incomes.4,5 Calculations can be made based on the forecasts of varying degrees of complexity, depending on the data available and other factors that may affect the poverty indicators.

The advantage of PovStat (compared to other, simpler approaches) is that it uses HBS micro-level data to assess poverty indicators more precisely and to segregate the population by income levels. However, PovStat does not use obvious macro-level relationships, and its treatment of certain employment of household issues is quite simplified. More complex approaches, such as general or partial equilibrium models in combination with the HBS micro-data, were seen as inexpedient at this stage, in light of the importance of evaluating the short-term consequences of the economic crisis, and the lack of experience in using the PSIA methodology in Ukraine.

The PovStat software uses macroeconomic indicators aggregated at the national level or disaggregated by sectors of economy. It pays particular attention to rates of income, employment, population, and price growth. The poverty and inequality indicators, which are modelled and projected here, include:

average monthly income per capita;

number of poor people;

poverty rate;

poverty gap;

squared poverty gap ;

Gini coefficient;

group Gini coefficient (divided by sectors of economy);

mean logarithmic deviation index of Theil Е(0);

entropy index of Theil Е(1);

entropy index of Theil Е(2);

Poverty indicators are modelled based on HBS data during the current period. The HBS data array includes the following variables:

1. Household identification number;

2. Average monthly equivalent income (expenditures) per capita of selected households n in

a year t, n

itic 1, , where t=0 means the current year of survey;

3. Statistical weight of the population in a year t, n

itiw1,

4. Type of locality;

5. Size of household;

6. Sector of employment of the household head during the current period n

iis 1. The

indicator is assigned a value from 1 to 4, where 1 - agricultural activity, 2 - industrial production, 3 - services, 4 - other type of employment not included in 1-3.

4 World Bank. 2003. “A User’s Guide to Poverty and Social Impact Analysis”. Washington, USA: IBRD / World Bank:

114. 5 Essama-Nssah B. 2005. “The Poverty and Distributional Impact of Macroeconomic Shocks and Policies: A Review of

Modeling Approaches”. Policy Research Working Paper Series No. 3682.Washington DC: World Bank: 78.

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The data on current macroeconomic indicators and their rates of change come from the State Statistics Committee of Ukraine6 and the National Bank of Ukraine web sites.7 World Bank forecasts8 and the consensus forecast prepared by the Ministry of Economy of Ukraine9 are used to predict macroeconomic indicators.

The key variables that form the basis for the poverty model are (Table 2.1):

1. Trends in GDP per capita, %;

2. Change in the GDP deflator, %;

3. CPI, %;

4. Rates of change in output by industry, %;

5. The rate of change in employment by industry, %;

6. Change in population size, %;

Table 2.1 Key Output Data for Projecting the Poverty Indicators Using the PovStat Model

Indicators Sector

Agriculture Industry Services

Goods and services output growth rate, % 2008 17.10 -3.10 5.88

2009 2.3 -17.15 -2.00

2010 2.3 -5.00 -1.06

Number of employed population, ths. 2008 3322 4915 12736

Share of employed population, % 2008 15.84 23.43 60.73

Employed population growth rate, % 2008 -4.66 -1.77 2.57

2009 -5.00 -10.00 -7.00

2010 -5.00 -10.00 -7.00

Ukraine in General

GPD deflator, previous year = 100 2008 129.1

2009 113.2

2010 112.5

Consumer Price Index, previous year = 100 2008 122.3

2009 116.4

2010 112.9

6 www.ukrstat.gov.ua

7 www.nbu.gov.ua

8 www.worldbank.org.ua

9 Ministry of Economy of Ukraine. 2009. “Ukraine: Development Prospects”. Consensus-Forecast Series No.21: 45.

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According to the PovStat methodology, for each period the average income per capita is calculated using the following formula:

where

iS

tg - the real GDP growth rate by employment sectors of the person i- (household head) in a year

t;

iS

t - the number of employed growth rate by industry in a year t-, which shall be defined by:

)1(11

tS

t

S

tS

ti

for employment sectors 1, 2 and 3,

where

t - the overall number of the population in year t;

S

t - the share of the employed population within sector S in overall employment for year t which

comes from the formula:

3

1

1

1

)1(

)1(

k

k

t

k

t

S

t

S

tS

t

S

t - the employed population share growth rate in sector S in the overall employment in a year t.

The employed population growth rate within sector 4 shall be taken as growth for the population in the aggregate:

tti

4

An individual’s statistical weight is defined by taking into account the population growth:

)1(1,,iS

ttiti ww

In order to check the effectiveness of the PovStat approach, in particular the adequacy of the relevant model and assumptions made when using the data available in Ukraine, the model was tested using data for the 2006-2008 period. In general, the results confirmed that this approach accurately reflects the trends that took place over the two-year period with a sufficient degree of reliability (projections for 2007 and 2008 years using data from 2006).

While testing the approach, several additional calculations were made. Figure 2.1 represents the analysis of dependence of the poverty rate on the sector in which the household head is employed (one of the crucial assumptions of the model) according to the 2007 HBS data. These data illustrate the interrelation between the sector of employment of the household head and the poverty rate, based at the minimum subsistence level. In general, the poorest households are those whose heads are employed in the agricultural sector (poverty rate - 43.11%), and the highest incomes are observed in households whose heads are employed by the service sector (poverty rate - 18.53%).

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Figure 2.1. Poverty Rate as a Function of the Sector in which the Household Head is Employed

Source: HBS data, 2007.

Using quarterly and annual data on household incomes (expenditures) and GDP in Ukraine, the inter-relation between changes in GDP, the poverty rate, and the minimum subsistence level was studied. The results demonstrate that changes in GDP influence household incomes with approximately a 7-month lag (Figure 2.2). The validity of this lag is confirmed by other studies.

Figure 2.2. Trends in Changes in Real GPD Per Capita and Poverty Rates

The key results of the PovStat model are presented in Chapter 4.

43.11

31.48

21.1818.53

0.00

10.00

20.00

30.00

40.00

50.00

Agriculture Others Industry Services

Po

ve

rty le

ve

l, %

60

70

80

90

100

110

120

2002 2003 2004 2005 2006 2007 2008

Index of Real GDP Per Capita

Index of Poverty Level

Index of Real GDP Per Capita (with 0.7 month lag)

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2.3. SOCIO-ECONOMIC DRIVERS OF POVERTY AT THE MACRO AND HOUSEHOLD LEVELS

The macro level

To assess the impact on poverty and to track the scope and time lag of various economic processes on household welfare, several indicators showing significant effects on poverty rates for all types of households are used:

the size of GDP per capita in comparative prices, UAH thousands;

CPI, %;

weight of final consumer expenditures of households in GDP, %;

size of average wage in the economy, UAH;

demo-economic burden coefficient (reflecting the presence of children and elderly retirees in the household), %;

The direct relation between GDP and personal consumption is captured by the multiplier effect: declines in GDP cause personal consumption to decrease by greater amounts, while GDP growth increases personal consumption by greater amounts. As GDP is not distributed uniformly, declines in consumption for poor population groups increase poverty risk.

GDP in Ukraine in 2008 exceeded the level of 1992. Unfortunately, due to the financial crisis, the GDP growth rate in 2008 was considerably slower than during the pre-crisis period. Achieving the level of the period previous to the Soviet Union’s collapse (1990) has therefore been postponed for a long time, since the GDP in 2008 reached only 74.1% of the 1990 year level. Whereas compared to 2007, it grew by 1.5% (which was the lowest growth rate during the recent years—by comparison, in 2004 GDP growth was 12.1%, which was the highest rate during the period of Ukrainian independence and the highest growth in all of Europe).

As a result of hyperinflation in the early and mid-1990s, GDP growth in current prices was very high. In 2008, as initially estimated, GDP in constant prices amounted to UAH 949,864 millions, which means it grew by 2.1% versus 2007. Such insignificant growth was caused by the financial crisis and was intensified by the political instability in the country, and may result in significant increases in poverty rates and poverty risks for all types of households. The 29% increase in the GDP deflator in 2008 was likewise dangerous; such inflation was last registered in Ukraine in 1999.

CPI trends play a key role in determining household incomes, socio-economic policy, and living standards. The poverty rate is influenced by consumer prices; during the early years of independence, a hyperinflation was observed: in 1992 the consumer price level on average grew 16.3 times relative to 1991; and in 1993 it grew 48.4 times compared to 1992. Since the curbing of hyperinflation and the introduction of the national currency in 1996, the highest inflation rate was registered in 2000 (28.2%). By contrast, in 2002 consumer prices remained almost unchanged, rising only 0.8%. Since then, consumer price inflation gradually accelerated, reaching 25.2% in 2008.

The poverty rate can be linked to the share of final consumer expenditures in GDP, when calculated by final use. In 1995 (this is a commonly used baseline year in calculating real GDP in Ukraine), final consumption amounted to 49.7% of GDP. This indicator grew to 55.1% in 2002; and after a brief pause in 2003-2004 it rose again, reaching 60.7% in 2008 (although this figure may decline significantly after additional calculations). It should be mentioned that in developed countries this indicator amounts to at least 65-70%.

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The average wage is an important indicator of the living standard, since salaries account for the largest portion of household income in most households. Starting from the year 2000, average wage growth has never been below 20%; in 2001, it reached 35.2%. In 2008, the average wage reached UAH 1806, a 25-fold increase from 1995. Real wage growth is a more reliable economic indicator for measuring poverty risk. Real wage growth in Ukraine after the independence was first registered in 1995; whereas nominal wages grew more than 5-fold, real wage growth was only by 10.6%. During 1996-2000, despite rather decent nominal wage growth, real wages dropped due to the significant inflation rate. Real wage growth returned in 2001 (19.3%); it was 23.8% in 2004, before declining to only 6.3% in 2008. Under crisis conditions, a decline in real wages due to high inflation rates and low nominal wage growth rate can be anticipated.

It is important to calculate the impact of demo-economic burden (i.e., the presence of children and elderly retirees in the household) on living standards, by tracking the number of children and pension aged persons relative to the overall number of working age people. High levels of this burden are often seen as having a negative effect on the economy in general, and on living standards in particular, in light of declines in labour productivity that are to occur when a person becomes a pensioner or is about to become one. On the other hand, increases in the burden resulting from a growing number of people who are younger than the working age, may be seen as a source of future growth in the labour force and the economy.

The demo-economic burden coefficient shows the number of children and retired persons who are supported by one working age person. The overall demo-economic burden in 1991 amounted to .795, meaning that per 1,000 persons of working age, there were 795 children and pensioners (the coefficient for children was .407, while for pensioners it was .388)—showing that the share of children among dependents was a little higher than the pensioners share). The overall demo-economic burden rose to .8 in 1993, and then dropped to .637 in 2008. This reflects a decrease in the share of children among dependents: the demo-economic burden for children dropped from .407 in 1991 to only .250 in 2008. At the same time, the burden associated with retired persons peaked in 1998 at .419, before dropping to .387 in 2008. Declining numbers of children today mean shrinking numbers of workers—to support the growing numbers of pensioners—in the future.

The household level

The key resource for bringing in income and reducing poverty risks in most households, is employment. However, in Ukraine employment does not guarantee sufficient income to avoid poverty. Poverty among the employed reflects low wages, which in a market economy are defined by the correlation of supply and demand on the labour market. Today in Ukraine, the market economy model is still being formed; thus, mechanisms for equating wages with the real value of labour do not work so far, and the gap between wages in Ukraine and in developed countries is significant. 2008 indicators show that even among households in which all members are economically active (those who work or are ready to start working immediately but cannot do so for objective reasons), the poverty rate amounted to 11.6%, compared to the national poverty rate of 27% (Figure 2.3).

The highest poverty rates are observed among households with a double demo-economic burden (i.e., with children under 15 years of age and persons older than 70 years). In such households, the poverty rate reached 37.9% in 2008, which is 10.9 percentage points higher than the national average. Such a situation reflects the fact that poverty in families with children remains a critical problem in Ukraine. Low wages by both employed parents do not always ensure decent living standards for under-aged children.

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Figure 2.3. Poverty Rates among Households by the Structure, 2008

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w ith economically

active and non-

active older than 70

y.o.

only from persons

older than 70 y.o.

Poverty line by household types Average in country

Source: Authors’ calculations based on HBS data.

One out of four households with children in which every adult is employed, is poor. The poverty rate of households with children, which have both employed and unemployed adults, reached 40.3% in 2008. The most vulnerable households are those with dependents under or over the economic active age.

The share of the poor among households with persons older than 70 years only, is 2.6 lower than the average in Ukraine. This is explained by the pension reform conducted in 2003, and by the fact that pensions are a guaranteed and stable income source. The current pension system does guarantee minimum pensions in accordance with age, and a minimum subsistence level for those who have lost their ability to work. Under such conditions, absolute poverty among persons of pensionable age is avoided. Thus, income from a pensioner of any age group in a household without children in 2008 comprised almost half (47.6%) of the total household income (while only 28.5% came from salaries).

Unemployment is a significant poverty risk. While the minimum unemployment benefit has increased from year to year, it still remains small and very often it is only symbolic. Among households with both employed and unemployed persons, the poverty rate in 2008 was 36.1%. Even among households without children but with at least one unemployed person, this indicator was 35.9%, which was twice higher than the average among households without children.

As the number of unemployed persons in the household grows, the poverty rate increases as well. Among households in which the share of income contributed by employed persons exceeds the share contributed by the unemployed, the poverty rate is 15%; and if one employed person supports one unemployed person the rate is 22%. If the weight of the income contributed by unemployed persons is higher, the poverty rate rises to 36%. The poverty rate among households with at least one economic active person who has a higher education, is one and a half times less than the average. Poverty risk falls with increases in the education level of the household head (Table 2.2). On the other hand, significant impact on poverty risk has the level of education of the household head, since often a head of household is the person who is the biggest resource provider, namely brings bigger income, (in rural areas the household head is more likely to be the owner of the house and land, and these are generally representatives of the elder generation).

22

Table 2.2. Poverty Rate by Education of the Household Head, 2008, %

Household Head Education Level Share of Poor Households

Share of Poor Population

Completed Higher Education 14.1 10.8

Basic and Incomplete Higher Education 19.7 16.0

Completed Secondary Education 32.4 50.6

General Secondary Education 40.6 15.1

Without General Secondary Education 42.2 7.1

A significant discontinuity (12.7 percentage points) is observed in the weight of poor households in which the household head has basic and incomplete higher education, versus those with a completed secondary education. Only among the households headed by individuals having higher education is the poverty rate below the national average. More than half of the poor in Ukraine lives in households with a head who completed secondary education. More than one fourth of the poor live in households with a head who completed higher or basic and incomplete higher education. Therefore, presence of higher education is only one factor reducing poverty risk.

Theoretically, high levels of education should assure better labour market position and thus higher incomes, and therefore minimize household poverty risk. According to 2008 data, almost half of households are headed by employees and only 1% by employers. Regarding the level of education, 35.3% of household heads who are employers have completed higher education, 31.9% - basic and incomplete higher education, and 30.2% - completed secondary education. Among household heads who are employees, little more than half have completed higher and basic and incomplete higher education; those who completed secondary education comprise 43.5%. The share of households with heads who are employees constitute 43.8% of poor people, while those headed by employers only 0.4%. 12.9% of the poor live in 7% of households headed by the unemployed (Table 2.3).

Table 2.3. Poverty Rate by Social and Economic Status of Household Head, 2008, %

Social and Economic Status of Household Head

Percent of Households

Percent of Poor

Households

Percent of Poor

Population

Employee 47.0 22.3 43.8

Employer 1.0 11.3 0.4

Pensioner 37.1 30.4 32.7

Unemployed 6.9 43.7 12.9

The highest poverty rates are observed among households headed by the unemployed. Compared to other households, those headed by employers are in the most advantageous conditions. But almost every fifth household headed by an employer is poor. Therefore,

23

employment status cannot be considered as a factor in protecting a family from poverty. Some of the economically active population try to find a second job, but not all succeed. As a rule, those who work at state enterprises and institutions are engaged full time, and those who work at private companies very often have irregular working hours, sometimes even without weekends. Finding additional work that pays well is rather difficult.

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2.4. HOUSEHOLD BUDGET SURVEY DATA AS A BASIS FOR POVERTY ASSESSMENT

Data are a key element of the PSIA methodology. PSIAs are based on the quantitative analysis of numerical data to assess the direct impact and project future impact based on a combination of macro and micro-level data. Micro-level data from Ukraine’s household budget survey serve the database for the PSIA.10

The HBS provides information for the comprehensive survey of the welfare of the different social groups in Ukraine. The main tasks of the survey are to:

obtain characteristics of household living standards, both overall and for particular social groups;

identify trends in social stratification;

identify household expenditures structures, in order to compute the CPI;

track the socio-demographic characteristics of households between population censuses;

provide the information needed for poverty assessments, to improve the efficiency and targeting of social protection, and other issues.

The HBS results are used in the national accounts system, social and agriculture statistics, prices, commerce, services, and also for the poverty monitoring which is coordinated by the Ministry of Labour and Social Policy of Ukraine. The survey programme also includes the system of indexes related to the economic transition and new information collection and processing technologies, which considerably enlarges the opportunities for comprehensive data analysis.

The HBS is based on international standards and overall corresponds to the socio-demographic and economic situation in Ukraine. It objectively displays the impact of the key socio-economic and development processes in Ukraine on household living standards. Conducted since 1999, the HBS examines, quarterly, nearly 10.5 thousand non-institutional households. The entire rotation of the sample among the households is applied annually. The territorial sample is applied for 5 years and is arranged in a probabilistic, stratified, multistage manner, with the use of territorial unit selection with probability proportional to size.

The sampling is conducted according to this sequence:11

1. exclusion of territories that cannot be surveyed;

2. exclusion of population that cannot be surveyed;

3. stratification of the general aggregate;

4. selection of territorial units;

5. selection of households.

At the urban level, the sampling procedure consists of three stages; at the rural – of two.

While performing the territorial sampling, settlements that are located at the estrangement zone (1st zone) and in the zone of compulsory expulsion (2nd zone) of the Chernobyl catastrophe should be included as well. Respectively, the population living in those territories is likewise excluded. When calculating the number of people to be surveyed, the institutional population –

10

State Statistics Committee of Ukraine. 2008. “Methodology on Preperation of Standard Reports on the Quality of Results of the State Random Surveys of the Population (Households)”: 92. 11

State Statistics Committee of Ukraine. 2009. “Expenditures and Incomes of Households of Ukraine in 2008”. Statistical Collection. Part І. Kyiv: 450.

25

military personnel, prisoners, residents of boarding-schools, and support for elderly, lonely people, etc., is excluded from the permanent population. The general sample also excludes certain marginal population groups (the homeless, etc).

The general aggregate stratification is conducted to reflect the administrative territorial division of Ukraine (27 regions: 24 oblasts, the Autonomous Republic of Crimea and the cities of Kyiv and Sevastopol), as well as to select households with the most homogeneous features. The HBS general aggregates include non-institutional households in both urban and rural areas. The general aggregate is divided into strata which, within each region, correspond to cities and municipalities with more than 100,000 people (“big cities” stratum), as well as cities, villages, towns, and village councils with less than 100,000 people (“small towns” stratum) and rural districts (“district” stratum). In Ukraine there are 52 strata of urban settlements and 490 strata of rural settlements (corresponding to the number of rural districts).

The sampling by stratum is conducted in order to ensure the reliability of the evaluation of the defined indicators by regions. Territorial units within the stratum are selected by probability proportional to the size. Households within the territorial units are selected based on the systematic selection procedure.

The data collected from different rounds of the HBS are compatible, and can be compared with confidence. The main concept and definitions of the HBS are also compatible with the system of national accounts and with demographic statistics, labour statistics, social statistics, agriculture statistics and statistics of prices, markets, and services. The data processing and HBS indicators, evaluation of the demographical statistics data, population census data, social statistics data, and the agriculture statistics data are used to form the sampling. The HBS information is accessible to all users, taking into account the requirement for ensuring the information confidentiality. Therefore, the HBS data meets the PSIA methodological requirements regarding the use of the quantitative data, including micro-level data. This makes possible the application of the most efficient PSIA approaches; in particular, those involving quantitative methods based on combining macro and micro-levels data and models.

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CHAPTER 3. ECONOMIC CRISIS IN UKRAINE

After the deep transformational crisis in the 1990s, an economic recovery started, which was characterized by growth in production and service volumes, improvements in the investment climate, increases in demand for labour, and reductions in unemployment and increases in household incomes. However, the nine years of economic growth (2000-2008) were not utilized to restructure the economy and set it on an investment- and innovation-led development path. The distorted political system dominated by non-transparent interest group competition, and the transformation of state agencies into rent-seeking tools, were key causes of the ineffective transformation of society. Such an organization of power resulted in an explosion of corruption, the expansion of shadow, and sometimes criminal, activities in the economy and state administration, and damage of the value structure in the Ukrainian society.

The 2000-2008 growth, accompanied by the use of production capacity created during Soviet times, preserved archaic production structures and fixed the economy of Ukraine as a resource appendix to the more developed economies. Foreign investments were used, not to modernize domestic production, but to increase the import of consumption goods which further exacerbated the structural disproportions. An extremely large burden of social expenditures is a particular problem for the Ukrainian economy. The transformational crisis and steep decline in income and living standards for the majority of the Ukrainian population, provoked the extension of social protection guarantees and increased the number of recipients of social benefits. Thus, the share of social spending in public expenditures increased from 17% in 1999, to 27% in 2008. In such conditions a new crisis was unavoidable.

With the intensification of economic growth and rapid increases in real incomes, a re-orientation in values towards those of the developed countries could have been expected. However, sociological research indicates that the status of the Ukrainian population during the last few years did not improve at all, even though living standards of particular groups did improve; therefore, it would be more accurate to state that social apathy is progressing.

Dissatisfaction with the results of the economic transformation led not to civic engagement among the majority of the population, but rather to feelings of hopelessness, absence of personal ability to change the situation, and inactivity, which is most observed among the young people. At the same time, expectations about reaching the living standards of developed countries have been growing. The formation of consumer expectations and the extension of the banking sphere led to rapid growth in household loans: over the period of 2003-2008 its amount increased by 77 times, and during 2006-2008 – by more than 3 times. This became one of the main drivers of inflation, and deepened inequality among the population.

In such conditions, the crisis was unavoidable – it reached Ukraine in the middle of 2008; thus ending the period of economic growth.

At the same time, Ukraine became increasingly integrated into the world economy, and more sensitive to its dynamics. The expansion of the economic crisis was a consequence of accumulated global tensions between the development of the real economy and the financial sphere. Before the crisis, the value of global financial securities exceeded the GDP by more than 10 times; while in 1980 this difference was only 20%.12,13 This gap could not grow further; a crisis to bring financial assets into conformity with the real economy was inevitable.

12

Buzgalin A.V., Kolganov A.I.. 2008. “Crisis – 2008: Virtual Fictitious Capital and Alternatives to its Uncontrolled Development”. Philosophy of Economy Series No.6: 19-20. 13

Ageyev. 2008. “Crisis – its Time, Space, Characters and Risks”. Philosophy of Economy Series No.6: 28.

27

The crisis in Ukraine initially manifested itself as a balance of payment and currency crisis. A sharp decrease of exports, mainly in the metallurgy and chemical industries, significantly worsened the current account balance, and significant debt repayment obligations for banks and companies worsened the financial account balance. Falling real incomes and significant household indebtedness in foreign currency, together with the decline of production and the devaluation of the hryvnia, caused a crisis in the banking system. This required active anti-crisis measures and corresponding resources which, in turn, increased the budget deficit and aggravated the financial problems. Matters were aggravated further by the unbalanced political system, the fight between the main political actors, and the stagnation of the executive authority.

The intensity and character of the crisis in Ukraine reflect both internal problems of socio-economic development during 1991-2008 and the impact of the global crisis. The crisis is, therefore, a consequence not only of global problems but also of long-term socio-economic policy, and the absence of fundamental reforms, mainly in the social area. Ukrainian social policy, largely inherited from the Soviet time, is oriented toward the population as a whole, while not paying due attention to social integration, especially involving vulnerable groups.

The first manifestations of a crisis appeared in the financial sphere. High inflation led to more demand for credits, especially as households were unwilling to reduce spending. In addition, the abrupt devaluation of the hryvnia, in relation to the US dollar in the fourth quarter (following its appreciation in the second quarter), undermined public trust in the financial system. Banks experienced deposit outflows; some were pushed into bankruptcy. NBU data indicate that, in the fourth quarter of 2008, bank deposits lacked corresponding assets of 71 billion UAH, and 47 billion UAH in the first quarter of 2009. As a result of inflationary processes and exchange rate instability, household demand for foreign exchange drastically increased. Once the hryvnia’s depreciation began, serious problems appeared in the construction and real estate sectors, where investment commitments are based on the dollar.

Higher gas prices were another problem which coincided with the economic crisis. Increases in gas prices needed for communal enterprises to recover their costs require additional allocations from various state budgets—which could not be met in conditions of falling GDP. The first signs of crisis were clearly observed in autumn of 2008: at that stage, the crisis covered the financial sphere and separate economic spheres. The beginning of 2009 witnessed the further progression of the crisis - industrial production in January was at only 65.9% of the level from January 2008, and the situation did not improve further (Figure 3.1).

Figure 3.1. Industrial Production Trends in January-September 2009 (Corresponding Period in 2008 = 100)

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GDP in the first quarter of 2009 shrank by 20% in comparison with the same period in 2008, and in the second quarter by 18%.

By the beginning of 2009, the crisis affected all areas of economic and social life:

The January-September 2009 volume of industrial production was only 71.6% of the same period in 2008. The most substantial declines occurred in the engineering (production fell to only 48.6% of its level from the same period in 2008), metallurgical (63.1%), chemical (69.5%), woodworking (68.0%), and light industrial sectors (70.6%).

The private sector appeared under threat – for in the last five months of 2008, private enterprises did not have access to credits and had to rely exclusively on cash flow and retained earnings.

Fixed investments during January-June 2009 amounted to only 57% of the level of the corresponding period of 2008. The largest decreases were observed in construction (42%), finance (44%), and real estate (41%). The total area of residential housing that was put in operation during the first half of 2009 was 44% less than for the same period in 2008.

The decline in commercial activities reduced the volume of freight transported as well, by 29% during January-September. Decreases were observed in rail, motor, and pipeline transport.

Mono-industrial cities (specializing in industries which suffered the most) were the first hit by the crisis. The mass outflow of population from mono-industrial cities -territorially separated from large industrial centres- could be expected, as was the case in the 1990s.

The labour market reacted on the crisis situation quickly enough. The number of unemployed persons registered in the Employment Service rose to 876,000 at the end of 2008, some 200,000 above the end of 2007 level. This was the first increase in the number of registered unemployed since 2000. However, the indicator unemployment rate (as calculated by ILO methodology) remained unchanged from 2008 at 6.4% (after declining during the first nine months it rose sharply in the fourth quarter). However, by the first quarter of 2009 the unemployment rate had risen to 9.1%.

These crisis processes have occurred against the background of a shrinking and aging population—due to which annual spending on social benefits must increase in order to maintain pensioners’ living standards. In addition:

Real (and in some spheres even nominal) wages decreased in 2008. Whereas nominal wage growth averaged only 18.6%, inflation was 22.3%, so real wages fell 3% in 2008—for the first

0

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January January-

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29

time since 1998. (In November 2008, the nominal wage level was lower than in June, and in December it was a little higher than in October, despite the fact that traditionally in December, due to bonus payments and closing of accounts, wages generally increase significantly.)

During January-September, real wage amounted to 89.7% of the same period in 2008. As the employed (particularly those who belong to younger age groups) support under-age persons, this decline could affect the living conditions of children.

The largest real wage reductions were observed in the Dnipropetrovsk, Donetsk and Zaporizhzhya regions, where the main industrial centres are concentrated—real wages during January-September 2009 were 86% of the same period in 2008. Even in Kyiv, real wages reached only 88% of the same period in 2008. The western region suffered the least: real wages in the Zakarpattya, Chernivtsi, Ternopil, Ivano-Frankivsk regions exceeded 90% of the 2008 levels.

Wage arrears began to rise. At the beginning of 2009 these constituted 1.2 billion UAH –a 78% increase in comparison with the beginning of 2008. This process started in autumn 2008 and continues right now (Figure 3.2).

During 2009, the household purchasing power dropped sharply: January 2009 retail trade turnover amounted to 92.2% of its January 2008 level, while during the January-April 2009 period this indicator dropped 83.1%, and for the January-September period, it was 79.3% (Figure 3.3). Restaurant turnover declined significantly: in January-April it was 81.4% of the level of the same period in 2008, while for January-September it was 85.0%.

Figure 3.2. Wage Arrears during August 2008 – October 2009 (Beginning of the Month, million UAH)

Figure 3.3. Retail Trade Turnover during January-September 2009 (Same Period of 2008 = 100)

600

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According to data from a sociological survey held in February 2009, more than 90% of Ukrainians have felt the impact of the financial crisis; only 7% of respondents claimed that the crisis had not reached them.14 Approximately 80% of respondents felt the impact of the crisis in the form of higher prices and tariffs, 44% in the form of reduced income, 14% in the form of delays in wage or pension payments, and 11% in the form of unemployment. The highest percentage of respondents reporting job loss was in the 18-29 (20%) and 40-49 (16%) age cohorts. Employees with higher education who do not have a specialization (15%) also appeared as a risk group.

However, the survey data may fully correspond to reality, for a number of reasons. Ukrainians were already anticipating the consequences of the global financial crisis in autumn 2008 - beginning of 2009. In addition, ever since the crisis of the early 1990s, the under-reporting of household incomes and extremely high rates of subjective poverty have been observed. In addition, the first month of the new year is traditionally associated with lean household budgets, following the long new year holidays and delay in starting the new fiscal year. The impact of the financial crisis may therefore, have been somewhat smaller than what was reported at the beginning of 2009. Likewise, while the data on job losses are reliable, 11% of respondents who reported unemployment did so because of the loss of an additional or temporary job.

Summing it up, without having overcome all the consequences of the crisis of the 1990s and without having regained the 1990 level of GDP in 2008, Ukraine entered a new period economic crisis that was likely to affect most households by the end of 2009.

14

The survey was conducted on February 6-15, 2009, by Kyiv International Institute of Sociology.

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CHAPTER 4. IMPACT OF THE CRISIS ON POVERTY IN UKRAINE

The whole Ukrainian population is likely to have felt the consequences of the crisis by autumn of 2009. This can be explained by the:

Shortfalls in fiscal revenues needed to meet growing social obligations, affecting the provision of both social benefits and social services. This situation will unavoidably reduce the quality and availability of health and education services.

Workers in the public sector may feel delays in payment of wages, and vulnerable groups may feel delays in payment of social assistance. If these fiscal obligations are financed by inflationary money supply growth, real income could decline further for all social groups.

Deteriorating balances in the state social insurance funds, particularly the pension fund—which cannot be covered by the state budget in a timely manner. Delays in payments from other insurance funds are also probable.

Fact that in 2009 the minimum wage, pensions, and all kinds of social assistance were practically frozen. Households with income at the level of minimum state guarantees are therefore balanced on the verge of poverty. The absolute poverty rate in 2009 is most unlikely to have declined: one out of five Ukrainians had an income below the minimum substance level. Since the highest poverty risks are among families with children, more children are likely to have fallen into poverty in 2009.

Fact that although the unemployment rate by the end of the year could have been less than the forecasted value (8.5-9.0% by ILO methodology), the army of the unemployed is likely to have grown. This could intensify social pressure, since during the last decade the number of unemployed workers had been decreasing every year.

Fact that while the mass return of labour migrants most probably did not take place, the flow of remittances from abroad almost certainly declined. As some border regions live from money earned abroad, living standards in these regions are likely to have worsened significantly.

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4.1. IMPACT OF THE CRISIS ON HOUSEHOLD WELFARE

4.1.1. Household income

Trends in household income during 1999-2008

Prior to 2008, real household income grew significantly. The year 2000 was the only exception, when income dropped by almost 4% in comparison with the previous year (Figure 4.1).

Figure. 4.1. Trends in real monthly income (In 1999 prices, 1999-2008)

Source: authors’ calculations based on HBS data.

However, household income growth was uneven. If during 2001-2005 (except for 2003) household income growth was relatively stable, in 2006 the increase dropped from 26.9% to 12.2%. In the following years, increases in income in 1999 prices did not change.

In 1999-2008 the following trends in the structure of household incomes should be noted (Table 4.1):

Growing share of wages (except for 2008);

Slow and uneven growth in the share of income from business and entrepreneurial activities;

Declining share of income received from small-scale farming and other in-kind, supplementary economic activities;

Growing share of pensions during 1999-2004 (from 15% to 21%), followed by its stabilization at around 22%;

Declining shares of benefits and subsidies. Whereas in 1999 these were the fourth largest source of household income, their importance dropped thereafter.

96.2

112.3

115.6

110.6

118.5

126.9

112.2 111.3 112.2

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%UAH

Average size of total households income in prices of 1999, UAH

Growth rates of total income of household in prices of 1999, %

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Table 4.1. Household Income Trends, 1999-2008 (in %)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Wages 35.1 39.5 42.5 44.6 46.9 47.1 48.1 50.5 52.5 52.4

Income from business and individual activity 2.7 2.6 3.2 3.3 3.6 4.6 5.2 4.8 5.4 5.6

Income from property 0.2 0.8 0.8 0.9 0.8 0.8 0.6 0.6 0.5 0.6

Income from selling production from small-scale farming and other in-kind household activities 3.9 5.6 5.7 5.2 5.7 5.0 4.8 4.0 3.7 3.4

The value of the consumed products obtained from small-scale farming and other in-kind household activities 23.7 18.2 13.6 10.7 9.8 7.2 6.2 5.7 4.9 4.2

Pensions 15.2 15.6 17.0 19.6 17.2 21.1 22.9 22.1 21.4 21.9

Benefits and subsidies 4.9 4.0 3.3 2.9 2.6 2.0 1.3 1.3 1.3 1.1

Other social transfers 1.5 1.3 1.7 1.7 1.9 1.9 2.2 2.6 2.4 2.7

Financial assistance from relatives and friends 3.0 4.0 4.6 5.1 5.2 5.1 4.8 4.8 4.7 4.7

Income from property sales 0.9 0.6 1.2 1.0 0.9 0.9 0.4 0.6 0.3 0.8

Other income 8.9 7.8 6.2 4.9 5.3 4.3 3.6 3.1 2.8 2.5

Total income 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: authors’ calculations based on HBS data.

In 2008, for the first time in the past decade, the share of wages in household income fell. Although the reduction was insignificant (0.1 percentage point), the apparent end of the long-term growth in the role of wages in household income is important. This trend continued in the first quarter of 2009, when the share of wages in household income dropped to 48.7%.

34

Monthly wage trends

Teal monthly average wages (expressed in December 1998 prices) show the following trends (Figure 4.2):

Real wages tend to grow rapidly in the beginning of the year (February-March), and in June and December. Growth in other months is slower; real wages sometimes decline in August and November;

During 2000, real wages remained roughly constant;

During 2001-2008 real wages grew, but this growth ceased at the end of 2008;

The largest reduction in real wages since early 1999 (by 6.3% compared to the previous month) was observed in November 2008;

The traditional increase in real wages in December 2008 was the smallest recorded in 10 years (except for 2004);

While real wages grew rapidly in 2000-2001, this growth slowed down in 2002-2004. This was followed by a sharp increase in 2005, and then by a slowdown in the following years—particularly in 2008;

Real wages since early 2008 fell sharply compared with corresponding months of the previous year, from 8% in April to 12.7% in February 2009. Since May 2009, real wages have been below their 2007 levels. This trend reflects the 17% decline in nominal wages recorded in January, in comparison with December 2008 (from 2001 UAH to 1665 UAH), while nominal wage growth for 2008 turned out to be much slower than in previous years;

Monthly wage trends in 2009 as a whole, do correspond to the trends observed in previous years.

Figure 4.2. Real Monthly Average Wages (in December 1998 prices), in UAH

Source: authors’ calculations based on the State Committee of Statistics of Ukraine data.

100

200

300

400

500

600

700

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

35

Pension trends

The average pension during the first half of 2009 grew by only 3%, down from the 6% recorded during the same period of the previous year (Figure 4.3). Overall, in 2008 average pensions grew by 20%, due primarily to a recalculation of pension benefits on 1 October , 2008 (in accordance with the Law of Ukraine on the State Budget of Ukraine 2008 and Amendments to Certain Legislative Acts of Ukraine.15)

Figure 4.3. Nominal and Real Average Pension Trends in Ukraine (Beginning of Quarter Data), in UAH

Source: authors’ calculations based on Pension fund of Ukraine data.

Trends in average pensions (based on December 2007 prices) show that, in real terms, pensions dropped steadily (except for the third quarter of 2008), and as of July 2009 they were 7% below their level at the beginning of 2008.

Household income in the first quarter of 2009

Real monthly average equivalized household incomes in Ukraine (expressed in prices from the first quarter of 2007) fell by 7.5% in the first quarter of 2009, compared to the corresponding period of 2008. This reduction contrasts with the 19.9% increases recorded in the first quarter of 2008 (compared to the first quarter of 2007—see Table 4.2). While all households were affected by this drop, different households were affected to different degrees. The decline was most significant in big cities (10.1%), while in small cities the reduction was 7.3%, and in rural areas 3%. It should be noted that for the previous period, the income growth had been most rapid in big cities, and slowest in villages. Households with and without children were equally affected by the reduction of income.

15

Since 1 October 2008, in accordance with the Law of Ukraine on the State Budget of Ukraine in 2008 and Amendments to Certain Legislative Acts of Ukraine, pensions calculated pursuant to the Law of Ukraine on Compulsory State Pension Insurance were recalculated .

600

700

800

900

1000

IV quarter 2008 ІІ quarter 2008 ІІІ quarter 2008 IV quarter 2008 І quarter 2009 ІІ quarter 2009 ІІІ quarter 2009

UAH

Average size of pension payments Average pension size in prices of December 2007

36

Table 4.2. Equivalized Household Monthly Income in the First Quarters of 2007-2009

(in first quarter 2007 prices)

Type of household 2007 2008 2009 2008/ 2007

2009/ 2008

Total 779.16 934.58 864.50 1.199 0.925

Big city 912.20 1110.92 999.13 1.218 0.899

Small city 723.22 873.32 809.91 1.208 0.927

Village 651.41 755.01 732.29 1.159 0.970

Household with children 696.55 840.85 777.73 1.207 0.925

Number of children

One 754.92 904.57 819.16 1.198 0.906

Two 630.68 759.40 673.91 1.204 0.887

Three or more 461.90 535.03 822.47 1.158 1.537

Households with children under three years old 677.11 874.05 798.26 1.291 0.913

Households with children including Adults in working and non-working age 680.39 864.14 750.27 1.270 0.868

Households with children and all Adults in working age 700.06 844.32 794.03 1.206 0.940

Households with children where each adult is employed 810.36 947.34 873.85 1.169 0.922

Households with children where there are both employed and unemployed adults 620.60 770.47 732.47 1.241 0.951

Households with children where all adults are unemployed 481.16 555.87 522.90 1.155 0.941

Households with children including at least one unemployed person 539.19 626.69 601.81 1.162 0.960

Households without children 876.58 1045.07 967.83 1.192 0.926

Single of working age 976.43 1174.64 1030.01 1.203 0.877

Single of non-working age 704.95 857.42 821.54 1.216 0.958

Single over 70 years old 660.12 803.24 759.44 1.217 0.945

Households without children and each person is a pensioner 769.79 935.99 906.03 1.216 0.968

Households without children and each person is of working age 973.60 1140.78 1042.25 1.172 0.914

Households without children and with persons of both working and non-working age 848.90 1023.47 924.26 1.206 0.903

Households without children and all members are employed 1166.04 1367.39 1251.86 1.173 0.916

Households without children and with both employed and unemployed persons 901.38 1048.50 969.01 1.163 0.924

Households without children and all members are unemployed 681.55 822.72 798.45 1.207 0.970

Households which consist solely of persons over 70 years old 694.41 851.37 816.38 1.226 0.959

37

Households which consist solely of persons over 75 years old 687.69 830.72 801.46 1.208 0.965

Households without children and at least one unemployed person 690.29 775.84 761.17 1.124 0.981

Poor 521.20 587.30 546.69 1.127 0.931

Non-poor 880.43 1072.27 987.45 1.218 0.921

Quintiles

1st 488.40 548.75 515.59 1.124 0.940

2nd 616.65 715.93 659.18 1.161 0.921

3rd 728.07 842.30 781.84 1.157 0.928

4th 854.43 1008.04 959.66 1.180 0.952

5th 1208.50 1558.18 1406.45 1.289 0.903

Source: authors’ calculations based on HBS data.

Income declines were sharpest for households consisting of two persons of working age, and persons older than the working age. In such households with children, equivalized income decreased by 13.2%, while for those without children—9.7%; and singles of working age—by 12.3%. In households without children, where all members are of working age, income fell by 8.6%. On the other hand, income of households consisting of persons of the pension age were reduced by only 3.2%. Income of households with unemployed persons fell by 8.4%, and by 7.8% for households with employed persons. The 20% richest population group suffered the largest reduction in equivalized incomes (9.7%) of any quintile during the first quarter of 2009. In the previous period, this population group had the highest income growth (28.9%), while growth in the lower quintiles ranged from 12% to 18%.

The greatest reduction in real income during the first quarter of 2009 was apparently observed among those groups which had earlier enjoyed the highest rates of income growth, namely residents of big cities, the richest 20% of the population, households consisting of employed persons or persons of working age, and also families with two children. These are population groups for whom wages are the main income source. HBS data indicate that real income in large families not only did not decrease but, on the contrary, considerably increased—by 53.7%. Sampling problems are perhaps the most realistic explanation for this result.

4.1.2. Household expenditures

During 1999-2005, households reported expenditures in excess of their income, but this gap was declining. Since 2006, reported household income has exceeded expenditures. The largest incidence of net household savings (of some 44 UAH) was observed in the first quarter of 2007. While these savings continued in 2008-2009, their size apparently declined (Figure 4.4).

Figure 4.4. Gap between Household Incomes and Expenditures (on average, per-capita, first-quarter data, 2004-2009, in UAH per month)

38

At the same time, positive trends in Ukrainian households’ purchasing power were noted during this time, and not only due to increases in household income. This is apparent in the rapid growth of expenditures on non-food products and services, in declines in the share of household expenditures on food, and in improvement of food quantity and quality. In comparison with 1999, when over 65% of total household expenditures were devoted to food, by 2008, the share of food in the family budget decreased to 50.8%. These trends “liberated” household budgets, allowing for increased spending on non-food items and services, real estate purchases, or increased saving (Table 4.3).

Table 4.3. Trends in Household Expenditure Structures, 1999-2008 (in %)

Expenditures on food

Expenditures on non-food

items

Expenditures on services

Other expendit

ures Total

1999 65.2 11.5 17.0 6.2 100

2000 64.9 10.5 14.8 9.8 100

2001 62.6 11.2 16.9 9.3 100

2002 60.2 18.6 10.1 11.1 100

2003 59.8 19.3 10.8 10.0 100

2004 59.0 19.7 10.7 10.6 100

2005 58.1 19.5 10.3 12.1 100

2006 55.0 20.9 11.7 12.4 100

2007 53.2 21.5 12.5 12.8 100

2008 50.8 20.8 12.2 16.2 100

By contrast, data from the first quarter of 2009 demonstrate that, due to the economic crisis, household purchasing power decreased; and the structure of household expenditures changed. As it can be seen in Figure 4.5, the first quarter of 2009 marked the end of a number of positive trends: the share of food and services expenditures in household budgets increased, while spending on non-food items and other goods and services expenditures decreased by 1.5-2% (self-care, different kinds of insurance, financial services, etc).

-63.88

-34.22

2.58

43.48

21.59

33.39

-65

-50

-35

-20

-5

10

25

40

1st Q 2004 1st Q 2005 1st Q 2006 1st Q 2007 1st Q 2008 1st Q 2009

39

Figure 4.5. Trends in the Structure of Household Expenditures (first-quarter data, 2004 - 2009, in %)

When measured in 2004 prices, household expenditures on the whole grew during 2004-2009, with the exception of 2007 and 2009. Having reached its maximum level in 2008, expenditures fell in 2009. The largest changes were in non-food expenditures (26.42 UAH instead of 32.46 UAH in 2008) and in other expenditures related to self-care, insurance, financial services, savings, etc. (16.74 UAH instead of 20.02 UAH) (Figure 4.6).

Figure 4.6. Trends in Households Expenditures (in 2004 prices, first quarter data, 2004 - 2009, UAH per person per month)

Food

The structure of food expenditures that took hold in Ukraine during the previous decade deteriorated in 2009: the share of food and drinks consumed outside of the household (e.g., in restaurants) declined, while the share of the food received as gifts and grown on garden plots increased. Following slow but steady improvements in the structure of food consumption (8 from 10 basic groups), especially among expenditures for meat, fish, dairy products, fruit and berries, in

0

10

20

30

40

50

60

70

1st Q 2004 1st Q 2005 1st Q 2006 1st Q 2007 1st Q 2008 1st Q 2009

Expensions on food Expensions on nonfoods Expensions on services Other expensions

0

10

20

30

40

50

60

70

1st Q 2004 1st Q 2005 1st Q 2006 1st Q 2007 1st Q 2008 1st Q 2009

Expenses on services Expenses on food

Expenses on nonfood Other expenses

40

2009 consumption of meat, fruit, berries, nuts, grapes, milk and fish started to fall again (Table 4.4).

Table 4.4. Trends in Household Food Consumption of Key Food Groups (first-quarter data, 2004-2009, kilograms per person per month)

Food Group 2004 2005 2006 2007 2008 2009

Bread and bakery 11.3 11.3 10.9 10.4 10.3 10.2

Potatoes and potato products 10.2 9.7 8.6 8.0 8.0 7.8

Vegetables 6.7 6.3 5.8 5.9 5.8 6.8

Fruits, berries, nuts, grapes 3.3 3.2 3.5 4.1 4.3 4.2

Sugar, honey 3.6 3.6 3.2 3.3 3.5 3.5

Sunflower-seed oil, margarine and other fats

2.1 1.9 1.8 1.7 1.8 1.9

Meat and meat products including by-products and fat

4.3 4.5 4.6 5.0 5.2 4.8

Milk and dairy products 18.7 21.0 21.6 21.9 21.6 19.0

Eggs and egg products 17 18 18 20 20 20

Fish and fish products 1.7 1.9 2.0 2.1 2.3 2.1

Although large shares of Ukrainian household budgets are devoted to expenditures on food, approximately 9% of households (according to the results of the modular deprivation household survey) were unable to afford purchases of the most essential inexpensive foodstuffs (Table 4.5).

Table 4.5. Shares of Food Expenditures and of Poor Households that Cannot Afford Purchases of the Most Essential and Inexpensive Foodstuffs, by Type of Households, 2007 (in

%)

Type of household Share of food expenditures

Share of households which are unable to afford purchases of

the most essential and inexpensive food

Households with children 51.8 7.7

With 3 and more children 58.6 21.3

With children under 3 years 51.8 7.7

With children and both employed and unemployed adults

55.1 8.0

Households without children 54.4 9.4

Households in which all members are of working age

50.1 7.7

All household members are pensioners 59.8 11.7

All household members are over 75 years of age

63.1 13.8

According to the 2007 HBS data about a quarter of the population could not afford fresh fruit and juice consumption, while 37.2% could not afford meat, chicken or fish. Households in the poorest

41

income decile were nearly three times more likely to be unable to afford fruit, juice and meat purchases as households in the wealthiest decile. 21.3% of households with several children were unable to purchase the most essential inexpensive foods; 65.4% were unable to purchase chicken, meat or fish; and 42.1% were unable to purchase fresh fruit or juice. Whereas households without children had more purchasing power, almost a third of pensioners did not purchase fresh fruit or juice, and 43% were unable to purchase meat, chicken or fish. Pensioners’ prospects for eating chicken, meat or fish, and fresh fruit or juice worsen with age.

Moreover, the quality of food consumed seems to be decreasing. In 2009 Ukrainians’ daily caloric content decreased to 2269 kcal per person—a decline of more than a third from 3610 kcal in 2008—and proteins and fats consumed dropped by even more. It should be noted that the quality of food in Ukrainian households was not sufficiently balanced even before the crisis, which definitely had a certain effect on health. While reduced fat consumption may be a positive development, the same cannot be said about the sharp reduction (1.7 times) in protein consumption, which now corresponded to only 66% of the standard requirement.

Therefore, the 2004-2008 period saw improvements in household purchasing power and consumption patterns (regardless of the type of household, region or other factors), as was demonstrated by reductions in the share of household expenditures on food. However, in the first quarter of 2009 the situation worsened to a certain degree: whereas the share of household expenditures devoted to foodstuffs increased, indicators of quantity decreased in eight out of ten basic groups.

Consumption of non-food items and services

As noted, during the first quarter of 2009 non-food expenditures constituted 21% (26.42 UAH per person per month in 2004 prices) of Ukrainian households’ total expenditures. Food expenditures in households with children constituted 21.7%, while expenditures of households without children constituted 20.4%. The share of expenditures on other goods and services (self-care, social assistance, insurance, etc.) increased 1.5 times during the above-mentioned period, rising from 8.9% (7.5 UAH per person per month) in the first quarter of 2004, to 13.3% in 2009 (16.74 UAH in 2004 prices).

During this period, among spending on non-food items and services, the largest budget item was housing expenses, which comprised 10% of total household expenditures. Whereas the share of this item decreased by 1.2 percentage points to 9.3% in 2008 (compared to the 2004 baseline year), in 2009 its share increased again, exceeding the indicator of the baseline year (Table 4.6). Nevertheless, expenditures for all periods increased insignificantly: from 8.8 UAH per person per month to 13.7 UAH in 2004 prices.

Table 4.6. Trends in Household Consumption of Non-food Items and Services (first quarter data, 2004-2009, in %)

Types of goods and services 1st Q 2004 1st Q 2008 1st Q 2009

Clothes and footwear 5.0 5.6 5.2

Housing 10.5 9.3 10.9

Housing maintenance 3.2 5.1 3.5

Medicine 3.0 2.9 3.4

Personal and public transport 2.6 3.7 2.3

42

Rest and leisure 0.8 0.9 1.1

Rest and leisure 1.4 1.4 1.6

Other services and non-food items 4.5 5.9 5.8

Total spending on services and non-food items 30.9 34.9 33.7

While housing and gas for cooking are necessities, according to the State Committee of Statistics publication "Poverty and Deprivation Factors in Ukrainian Society", 15.8% of households were unable to pay for these services in 2007. Households in cities and those with children suffer the most from an inability to afford basic housing and maintenance services. 16.9% of families with children were unable to afford these, while 15.1% of households without children were deprived of access to these services in 2007.

The next largest non-food item in household expenditures is clothes and footwear. While the share of these expenditures fell slightly during the first quarter of 2009 in comparison with the previous year (from 5.6% to 5.2%), it remained above the indicator for the 2004 baseline year. At the same time, if in 2004 a person spent 25.9 UAH on average in a month on clothes and footwear, in 2009 these expenditures were 85.9 UAH (42.45 UAH in 2004 prices). Since children grow and their clothes need to be replaced every season, it is logical that clothes and footwear expenditures in households with children are larger than in other types of households. Whereas in 2004 households without children dedicated about 4.8% from their total expenditures (30.1 UAH per person per month) to clothes and shoes, households with children spent 5.9% (22.3 UAH). The situation was the same in 2009, except that spending on clothes and shoes by both types of households increased: to 95.1 UAH (47 UAH in 2004 prices) among households without children and to 78.1 UAH (38.3 UAH) in households with children. Despite the fact that one cannot live without clothes and footwear, almost a third (27.2%) of Ukrainian households declared that they cannot afford to buy essential clothes and footwear for themselves or their family members. In 2007, nearly a third of households with several children could not afford to replace winter clothes and footwear more than once every 5 years; a quarter were unable to do so more than once in 3 years; and 41.5% households with three or more children were not able to provide their children with footwear and clothes as needed.

The share of health care in total expenditures grew by 0.5 percentage points to 3.4% (or 4.2 UAH in 2004 prices) and also exceeded the 2004 indicator (or 2.5 UAH per person per month). The largest share of health care in total household expenditures is found in households with persons of pensionable age – 2.5%. Household health care expenditures are generally insignificant, since medical institutions provide free services. Nevertheless, higher health care expenditures during the first quarter of 2009 reflected considerable growth in the cost of medicines and medical equipment, relative to household income growth.

Compared to 2004, the share of education and cultural/leisure spending total in a household in 2009 increased from 2.2% (or 1.8 UAH per person per month) to 2.7% (or 6.8 UAH or 3.36 UAH in 2004 prices). Expenditures on these items in households with children are larger than in other households. If in 2004 households without children spent about 2% (2.9 UAH per person per month) on education and culture, households with children spent 0.5 percentage points more (in monetary terms only 1.7 UAH). Despite increases in 2009, the share of education and cultural leisure expenditures in household expenditures of both types remained the same: spending in households without children amounted to 1.86%, while in households with children it amounted to 3.58% (correspondingly 2.72 UAH and 3.89 UAH in 2004 prices).

To sum up, while household spending on non-food items and services during 2004-2008 was marked by some positive trends, it nevertheless remained at low levels, as most household

43

income went to food and housing services. At the same time, important non-food articles (in particular clothes, footwear and self care goods) and services (public health, education, cultural/leisure, etc.) were nearly unaffordable for much of the population. Households consisting only of pensioners were not able to purchase adequate treatment and health care. For families with children, providing them with quality education, and spending leisure time appropriately, became serious problems.

In the first quarter of 2009, Ukrainian households’ limited purchasing power was further reduced by the negative impact of the financial and economic dimensions of the crisis.

44

4.2. POVERTY TRENDS BEFORE AND DURING THE CRISIS

Poverty trends during 1999-2008

Analysis of the poverty situation in Ukraine during the 1999-2008 period demonstrates that the economic growth reduced absolute poverty. However, it did not reduce relative poverty, as income inequality did not decrease. We observed rapid reduction of poverty by all absolute criteria, especially the minimum subsistence level and the international criterion. The poverty rate by the structural criterion fell as well.16 The situation with relative poverty by the national definition remained stable enough;17 during the last ten years it varied within the 26-28% range. There was a time when two basic national level income poverty criteria—the minimum subsistence and relative criteria—gave opposite results: whereas the former showed a positive trend (from 72.5% in 2002 to 12.6% in 2008), national indicators for poverty and extreme poverty (correspondingly 75% and 60% of median level of equivalized household expenditures) remained unchanged (Figure 4.7).

Figure 4.7. Poverty Trends by Main Criteria in 1999-2008, %

Source: calculations of the Institute of Demography and Social Studies of the National Academy of Sciences of Ukraine based on HBS data.

While the poverty rate decreased in 2008, when measured by the minimum substance level criterion, it should be noted that the 2008 revision to the minimum substance level was inadequate in light of the inflation in 2007-2008, artificially decreasing the absolute poverty rate and the resulting poverty indicator. According to expert calculations, in 2008 the poverty rate by the minimum substance level criterion was 16.1%, not 12.6%. While this does not change the positive trends, it does reduce the rate of poverty decline. However, data for the fourth quarter of 2008 demonstrate a halt in these trends, when the poverty rate was unchanged.18

The poverty policies implemented according to this strategy and programme since 2001 have not reduced poverty risks among families with children and among the rural population. The national

16

Expenditures on food constitute more than 60% of total household expenditures. 17

75% of median level of cumulative equivalent expenditures. 18

Quarterly data are based on the experts’ calculations of minimum substance.

0

10

20

30

40

50

60

70

80

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

Less than 2100 kcal per day

Expenditures less than minimum subistance

Expenditures less than national poverty rate

Expenditures less than national extreme poverty rate

Share of expenditures on food more than 60 % of total expenditures

45

poverty rate among households with children traditionally exceeds the rate for households without children by 1.7 – 2.0. It was 33.1% against 19.7% in 2008. The poverty rate among households with children decreased by 0.8 percentage points in comparison with 2007, and among households without children by 0.3 percentage points. While the situation did not improve in all households with children, the poverty rate in households with three or more children declined by 2.2 percentage points. Among households with one child, or with children under three years old, poverty rates declined by 0.9 percentage points and 1.9 percentage points respectively. In families with children in which each adult is employed, the poverty rate decreased by 1.7 percentage points. However, among households with two children, poverty increased by 1.4 percentage points (Figure 4.8).

Prior to the crisis, the situation in families with children had been improving every year when measured by the minimum subsistence level. However, the poverty rate for these households still exceeds the rate of households without children. Among families with children the poverty rate stood at 17.0% against 7.5% for households without children. However, this improvement can be better explained by reductions in the share of poor people than by relative improvements in families with children.

Figure 4.8. Trends in Household Poverty Rates, by Numbers of Children (in %, 1999-2008)

Source: authors’ calculations based on HBS data.

Among households without children, the worst situation is observed in households with pensioners, in which both persons are over 75 years old. In 2008, this indicator demonstrated the highest poverty rate ever monitored - 29%. This indicates a reduction in the purchasing power of the minimum pension payment, since persons of pension age cannot get supplementary income. Likewise, poverty rates in cities had been improving, while in the villages deteriorating trends are observed (Figure 4.9).

Figure 4.9. Dynamics of Poverty Rate by National Criterion by Type of Locality, 1999-2008, %

0

5

10

15

20

25

30

35

40

45

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

po

vert

y r

ate

, %

Urban Area

Rural Area

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008

po

vert

y r

ate

, %

families with children by minimum subsistance criteriafamilies without children by minimum subsistance criteriafamilies with children by national criteria

families without children by national criteria

46

Source: authors’ calculations based on HBS data.

The gap between urban and rural poverty rates increased in 2008 – in urban areas it decreased by 0.6 percentage points in comparison with the previous year, while in rural areas it increased by 0.3 percentage points, constituting 38.2%. The rural poverty rate in 2008 was one of the highest ever monitored (except for 2006). The regional features of the scope of poverty depend on the economic development in a given region. Although poverty in Ukraine does not have clear geographical boundaries, the situation in the industrialized eastern regions is generally better than in the majority of western regions. Therefore, while some positive changes were observed in the pre-crisis poverty situation, serious problems related to child and rural poverty remained. Higher poverty risks among households consisting of older persons, so called “old pensioners”, could become the new problem, related to the crisis.

Poverty Trends by Minimum Subsistence Level Criterion (Quarterly Data during 2000-2009)

Prevailing trends towards poverty reduction when measured by absolute criteria, in particular the minimum subsistence level criterion, continued into the first quarter of 2009. The rate of decline during the first quarter of 2008 to the first quarter of 2009 was approximately the same as during the previous period (Figure 4.10). The data confirm expert assessments regarding the specifics of the crisis’s impact on poverty. Obviously, the economic crisis cannot immediately affect the poverty rate; there must be a lag between the process of economic decline and a break in the above-mentioned reductions in absolute poverty rates. Higher absolute poverty indicators are unlikely to appear earlier than in the fourth quarter of 2009.

Picture 4.10. Poverty Trends by Minimum Subsistence Level (first quarter 2000-2009 data)

47

Source: authors’ calculations based on HBS data.

The poor population mainly consists of the rural population. This trend was clearly observed during 2004-2008 (Figure 4.11). However, in the first quarter of 2009 this trend changed: the weight of the rural poor decreased in comparison with the same period of the previous year. This may reflect a decrease in the gap between income and poverty in urban and rural areas, since the economic crisis mainly hurt the urban population. Therefore, with the economic crisis, a worsening of urban poverty indicators can be expected—while the situation in rural areas can remain the same. By contrast, whereas the weight of large towns among the poor during the first quarter of 2009 decreased, the share of small towns among the poor increased substantially. This could reflect the fact that the crisis began with mono-industry cities in late 2008. Those regions in which the economy is based on sectors most affected by the crisis, are likely to suffer the most.

Figure 4.11. Composition of the Poor by Locality (in %, first quarter data, 2000-2009)

Source: authors’ calculations based on HBS data.

74.2

72.5

72.9

66.2

53.3

47.8

36.1

32.2

23.1

14.7

0 10 20 30 40 50 60 70 80

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Village

Small town

Big town

48

During the entire period of economic recovery, the poorest population came from households with children (60-70%), although in terms of total population they amounted to over 50%. For families with children, the most favourable situation was in 2004–their share among the poor population was about 60%. However, in 2005 it began to grow (Figure 4.12). The first quarter of 2009 was not an exception–the share of households with children among the poor continued to grow, and reached 68.4%.

Some changes in the poverty profiles and risks for different households should be expected in 2009, since the crisis and the freezing of minimum social guarantees will have different effects on different groups.

Figure 4.12. Composition of the Poor Population by Household Type (in %, first-quarter data, 2000-2009)

Source: authors’ calculations based on HBS data.

Poverty risks can be expected to worsen in households with unemployed persons (especially families with children), households consisting only of the elderly (over 70 years of age), and those with children and persons over the retirement age. Improvement of the situation can be expected in households consisting only of employed persons and households with one child and employed parents. In 2009, families with children under 3 years of age may have lived better, especially if state subsidies for birth are provided on-time.

Poverty Trends According to the PPP5USD/day Criterion (first quarter data, 2007-2009)

The PPP5USD/day criterion is an absolute criterion used for international comparison. In Ukraine, it can indicate extreme poverty. Trends in this indicator show that the poorest population groups were already affected by the crisis in the first quarter of 2009. The poverty rate by this definition increased in this quarter -in comparison with the same period of 2008- by 1.4 percentage points (from 4.9% to 6.3%). It should be noted that that the poverty rate dropped significantly in 2008–by more than in 2 times—which corresponds to poverty trends measured by all absolute criteria (Figure 4.13). However, the impact of the crisis in the fourth quarter of 2008 was so powerful, that the positive inertia of previous quarters was overturned in the first quarter of 2009. The poorest

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Childless households

Households with children

49

population groups were the first to be affected by the crisis, since their consumption level was below the minimum subsistence level even before the crisis began.

Figure 4.13. Poverty Trends for the PPP5USD/day Criterion (first quarter data, 2007-2009, in %)

Forecast Poverty Rate (by Minimum Subsistence Level) for 2009-2010

To estimate the possible impact of the crisis on the poorest population groups in Ukraine, a set of computer experiments using the PovStat program were undertaken. The modelling results are provided in the Tables 4.7. – 4.9 and Annex 2. According to these results, the crisis will lead to a worsening of poverty and inequality characteristics. Calculations based on the intermediate forecast for macroeconomic indicators (Annex 2) indicate that the poverty rate according to the minimum subsistence criterion could increase by more than 7 percentage points, reaching 27.6% in 2009 (given the projected GDP lag) and 27.2% in 2010. According to optimistic (given the best forecasted macroeconomic indicators) and pessimistic (given the worst forecasted macroeconomic indicators) projections, the poverty rate could range from 24.2% to 31.0% in 2009, with further growth in 2010 to 25.1% and 33.8% respectively. The poverty gap, squared poverty gap, and inequality Indexes will worsen as well.

Table 4.7. Intermediate Forecast for Poverty Indexes by the Minimum Subsistence Level and Differentiation

Indexes 2008 2009 2010

Poverty Rate 20.3 27.6 27.2

Poverty Gap 4.479 6.493 6.410

Squared Poverty Gap 1.505 2.293 2.262

Number of Poor (th./pers.) 9 070 12 314 12 170

Gini Coefficient 0.291 0.293 0.294

0

2

4

6

8

10

12

1st Q 2007 1st Q 2008 Іst Q 2009

11

4.9

6.3

%

50

Other Inequality Characteristics

Theil Coefficient 0.158 0.162 0.162

Variance of Log Consumption 0.258 0.262 0.263

Generalized Entropy 0.257 0.270 0.272

Table 4.8. Maximum Forecast Poverty Rates (Defined by Minimum Subsistence Level) and Differentiation

Indexes 2008 2009 2010

Poverty Rate 20.3 31.0 33.8

Poverty Gap 4.479 7.626 8.528

Squared Poverty Gap 1.505 2.760 3.151

Number of Poor (th./pers.) 9 070 13 872 15 112

Gini Coefficient 0.291 0.294 0.296

Other Inequality Characteristics

Theil Coefficient 0.158 0.163 0.166

Variance of Log Consumption 0.258 0.263 0.267

Generalized Entropy 0.257 0.274 0.281

Table 4.9. Minimum Forecast Poverty Rates (Defined by Minimum Subsistence Level) and Differentiation

Indexes 2008 2009 2010

Poverty Rate 20.3 24.2 25.1

Poverty Gap 4.479 5.523 5.759

Squared Poverty Gap 1.505 1.908 1.997

Number of Poor (th./pers.) 9 070 10 815 11 233

Gini Coefficient 0.291 0.292 0.292

Other Inequality Characteristics

Theil Coefficient 0.158 0.161 0.161

Variance of Log Consumption 0.258 0.260 0.260

Generalized Entropy 0.257 0.266 0.266

While these poverty rates reflect the subsistence level as mentioned above, this level does not always correctly demonstrate the real changes in the cost of living. Furthermore, this approach does not capture such effects as replacing more expensive products and services by cheaper ones,

51

which is typical for poor households. This may overestimate the magnitude of the poverty increase.

Poverty rates (as defined by equivalized income level at or below 5 USD in PPP per person per day) were forecasted as well. The results of the forecasts of macroeconomic indicators are demonstrated in Table. 4.10.

Table 4.10. Intermediate Projected Poverty Rates (as defined by the 5 USD (PPP) Criterion)

Indexes 2008 2009 2010

Poverty Rate 3.9 6.0 5.9

Poverty Gap 0.639 1.105 1.089

Squared Poverty Gap 0.171 0.314 0.310

Number of Poor (th./pers.) 1 725 2 675 2 636

Gini Coefficient 0.291 0.293 0.294

Other Inequality Characteristics

Theil Coefficient 0.158 0.162 0.162

Variance of Log Consumption 0.258 0.262 0.263

Generalized Entropy 0.257 0.270 0.272

These data suggest that, in the case of the intermediate forecast (Annex 2), the poverty rate will increase by approximately 2 percentage points in 2009 – 2010. The poverty gap and the squared poverty gap will increase by more than 1.7 and 1.8 times, correspondingly.

These results, using the PovStat model, demonstrate that the poverty rate using the minimum subsistence level is the most sensitive to changes in real GDP. If real GDP increases by 1%, the projected poverty rate will decrease on average by 3.1% (0.76 percentage points). The poverty elasticity with respect to changes in the employment rate is significantly lower overall and depends on GDP trends. Figure 4.14 shows the change of the poverty rate (defined by the minimum subsistence level) in 2009, using different possible changes in real GDP (0% - 4% - 8% - 12%) and changes in employment (whereby employment in agriculture is projected to decline by 1% under all scenarios, and in industry and services by 0%, 5%, 10%, and 15%). Other parameters are held constant for all the modelled options. Calculations are made using the PovStat program.

As presented by the data shown in Figure 4.14, the expected poverty rate largely depends on the rate of per-capita GDP change, rather than on employment trends. For example, a GDP decrease of 2% would put the economy approximately in the middle of the vertical line segment connecting the curves corresponding to GDP changes of 0% and -4%, respectively. The forecasted poverty rate under it would be of approximately 21.7%.

Figure. 4.14. Relationship between the Forecast Poverty Rate (by Minimum Subsistence Level) and the Forecast Changes in Real GDP per Person and Employment in Industry and

Services

52

These results suggest that the most important crisis transmission channels in Ukraine—as in many other countries—are prices (production, consumption, wages) and employment. The direct impact of prices, although observed with a seven-month lag, will have the greatest importance in the first phase of the economic decline. In the future, the negative effect will increase through the employment channel, reflecting the forecast increase in the unemployment rate and slower GDP growth. Declining household access (especially of the poor) to goods and services can also be expected. Hence, the application of the PSIA methodology based on macro and micro-level data affords great potential opportunities to analyze various scenarios of the economic crisis impact on poverty and inequality, define poverty elasticity with respect to key variables, and provide policy makers with suitable information. However, the models and software must be carefully used in terms of the time frames in question, and the results should be discussed with experts.

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4.3. HOUSEHOLD ASSESSMENTS OF THE CRISIS’S SOCIO- ECONOMIC IMPACT

Providing a full assessment of the impact of the crisis in Ukraine requires a reference to sociological surveys. Such surveys are usually quite specific and the number of questions is quite small, which facilitates prompt data processing. Since October 2008, the Kyiv International Institute of Sociology, the O. Razumkov Ukrainian Center for Economic and Political Studies, the Kyiv Institute for Management Problems of Gorshenin, and other institutions, have conducted sociological surveys aimed at assessing the crisis impact on the socio-economic situation in Ukraine.

According to these self-assessments, the most significant event in 2008 in Ukraine, and in the whole world, was the economic crisis. The survey results provided in December 2008 by the O. Razumkov Ukrainian Center for Economic and Political Studies demonstrated that almost every fifth respondent considers the economic crisis to be the most significant issue for Ukraine. The same sentiments are captured by another survey conducted in August 2009 by the Kyiv Institute for Management Problems of Gorshenin, which found that the share of respondents that considered the economic crisis to be the most significant event in Ukraine grew to 64%.

According to the experts who conducted these sociological surveys, the importance of the crisis (for average citizens) is more a psychological reaction to the messages of politicians and the mass media about the economic crisis, since only a quarter of respondents expressed their concern about the "social protection of the population" (24.7%) and “salaries and pensions payments" (24.6%).19 These two aspects are among the most important indicators of economic stability in any country. Respondents’ assessments showing decreasing confidence in the future also point to the psychological impact of the crisis. While in December 2008 pessimistic attitudes among respondents amounted to 31.8%, in March 2009 - its share had increased to 43.7%.20 Special attention should be paid to these issues, since the psychological dimensions of the economic crisis can become of social dimensions.

The results of different surveys provide different data; for example, the share of people who claim that the economic crisis has affected some area of their life varies between 83.2% and 90%. In general, however, these results can help to identify the common trends in the crisis’s impact on life and welfare in Ukraine, based on subjective assessments.

The Main Areas of Ukrainian Life Affected by the Economic Crisis

Data from sociological surveys differ with regard to the share of the population, and the areas most affected by the crisis. Still, these data demonstrate that during December 2008 - April 2009, the Ukrainian population indeed was affected by the crisis. Primary manifestations of this were higher prices and tariffs, along with lower incomes for much of the population (Figure 4.15). Respondents’ self-assessments likewise, indicate a deterioration in the quality of food that their families can afford.

Figure 4.15. Subjective Assessments of the Main Areas Affected by the Economic Crisis, March – April 2009 (in %)

19

Kyiv Institute on Management Issues of Gorshenin. “What are Todays’s Most Crucial Problems for Ukraine?”, Press-Release of the Study. http://www.kipu.com.ua/Sotsyalog.html 20

“How did the Economic Crisis Impact your Life?”, Sociological Poll. http://www.uceps.org/ukr/poll.php?poll_id=408

54

Significant changes in the labour market also affected the socio-economic status of the population. This is apparent in answers of respondents who lost their jobs during this period, or were forced to take unpaid leave, and in fact became "unemployed" (Figure 4.16).

Figure 4.16. Self-Assessments of the Crisis Impact on the Labour Market, December 2008 and March 2009 (in %)

An additional negative echo of the global financial and economic crisis is demonstrated by respondents (1.3% in December 2008 and 3.9% in March 2009) reporting reduced financial assistance received from relatives working abroad. In addition to these reductions in income received from abroad or the resulting increases in poverty among certain population groups, these answers reflect a significant number of migrant workers who are returning to Ukraine and replenish the "army" of unemployed.

The subjective assessments provide data regarding delays in payments of wages and pensions (the main sources of household income). Interestingly, according to the results obtained at the beginning of the economic crisis in Ukraine and over the next five-six months, the share of respondents who felt themselves affected by delays in the payment of wages or pensions

44.8

68.5

44.8

83.7

0

10

20

30

40

50

60

70

80

90

100

My income level decreased Prices and tariffs increased

O.Razumkov Ukrainian Centre for Economic and Political Studies data, March of 2009

Kyiv International Institute of Sociology data, April 2009

5.3

6.7 77.1

5.1

9.4

0

1

2

3

4

5

6

7

8

9

10

I lost my job I was forced to take unpaid leave I cannot find job

December 2008 March 2009

55

declined, from 19.6% in December 2008 to 17.8% in March 2009,21 and from 13.5% to 10% in April 2009.22

Delays in paying wages or pensions, the sharp decline in income for many households, and their inability to adapt quickly to the new crisis conditions, makes people start using their earlier savings. However, various surveys indicate that 8-14% of the population were unable to access their savings in banks ("cannot take money from the deposit”), and 5-8% have lost at least part of their savings (Figure 4.17).

Figure 4.17. Share of Population that Lost Savings or Did Not Have Access to Them as a Result of the Economic Crisis, 2008 and 2009 (in %)

Survey data also indicate that many households experienced declining access to personal credit (although this can be explained by a decrease in household income as well as by tightening of eligibility criteria). Difficulties with loan re-payment, and possible losses of property acquired on credit, were also reported (Figure 4.18).

Figure 4.18. Subjective Assessments of the Crisis Impact on Credit Opportunities, 2008 and 2009 (in %)

21

“How did the Economic Crisis Impact your Life?”. Sociological Poll. http://www.uceps.org/ukr/poll.php?poll_id=408 22

Kyiv International Institute for Sociology. “Ukrainian Population Self-Assessment of the Economic Crisis Impact”. Sociological Poll. http://www.kiis.com.ua/txt/doc/29042009/pr.doc

14

7.8

15.7

10.8

8

5

7

5

0

2

4

6

8

10

12

14

16

I lost share of my seavings I cannot take my money from deposit

December 2008 March 2009 February 2009 April 2009

56

Subjective assessments of the crisis impact on living standards by demographic characteristics

Region of residence. Survey data indicate that Ukraine’s significant regional disparities have not had a large effect on the areas of life affected by the crisis. Over 80% of respondents, regardless of their region of residence, felt the crisis impact due to higher prices and tariffs, and more than 40% due to lower income.23 Regional differences were observed in assessments of job losses and delays in paying wages and pensions—particularly in the eastern regions, where almost one sixth of respondents lost their job; then in the South, where one out of eight lost their job. Ukraine’s Western regions were affected the least (5.1%); Eastern regions, the most (16.4%).

Locality of residence. The survey data indicate that negative assessments of the impact of the crisis are slightly higher among urban than rural respondents: 96.1% versus 94.1%, respectively. Despite this, the areas affected by the crisis were the same in cities as in the countryside: higher tariffs, lower incomes, and loss of jobs .24 Since urban residents have better access (primarily due to better developed urban infrastructures) to banking services (including consumer loans, bank deposits), urban households are more likely to report difficulties in loan re-payment and withdrawing money from bank deposits (Figure 4.19).

Figure 4.19. Self-assessment of the Crisis Impact on Key Areas of Life, by Type of Locality (April 2009, in %)

23

Kyiv International Institute for Sociology. “Ukrainian Population Self-Assessment of the Economic Crisis Impact”.

Sociological Poll. http://www.kiis.com.ua/txt/doc/29042009/pr.doc. 24

Kyiv International Institute for Sociology. “Ukrainian Population Self-Assessment of the Economic Crisis Impact”.

Sociological Poll. http://www.kiis.com.ua/txt/doc/29042009/pr.doc.

11.6

6.7

3.6

12.7

7.2

4.3

0

2

4

6

8

10

12

14

It is getteng more difficult to re-pay the loan

I cannot get a loan I can loose the property acquired with a loan

December 2008

March 2009

57

Age characteristics. The survey data also report changes in socio-economic situation by age groups. Among people 30-44 years old, only 4.8% did not feel the impact of the crisis. The youngest active working age group of the population (18-29 years old) was affected the most by layoffs and delays in paying wages. The impact of the crisis felt by older persons (pensioners 60 years of age and older) was somewhat softer. Only 1.4% of these respondents reported losing their jobs; one third suffered lower income levels; and 4.7% experienced delays in payment of wages or pensions (Figure 4.20).

Education level. Survey data indicate that people with specialized general and higher educations are better protected from loss of work than people with secondary education only: 10.8% and 7.4%, versus 15.4%, respectively. However, a significant number of people with higher education (compared to people with lower levels of education) reported difficulties in repaying loans, delays in wages, difficulties in withdrawing funds from bank accounts, or loss of at least a portion of these funds. This suggests that people with higher education may be more vulnerable to the effects of the crisis than it might have otherwise been assumed.

Figure 4.20. Assessments of Crisis Impact by Age (April of 2009, in %)

Despite some differences in the survey data, they confirm that Ukrainians’ socio-economic welfare has been negatively affected by the crisis. The psychological impact of the crisis is

5.9

87.1

37.4

12.76 4.43.9

82

48.3

9.6 12.4 10.3

0

20

40

60

80

100

I h

aven

't b

een

effe

cted

by t

he

cris

is y

et

Pri

ces

and

tar

iffs

incr

ease

d

My l

evel

of

inco

mes

dec

reas

ed

I lo

st m

y j

ob

My s

alar

y o

r

pen

sio

n p

aym

ent

are

del

ayed

It i

s m

ore

dif

ficu

lt

to p

ay f

or

cred

it

Rural population

Urban population

0

10

20

30

40

50

60

My incomes level

decreased

I lost my job My salary, pension

payments are delayed

It is more difficult to

pay credit

18-29 years old 30-44 years old

58

apparent in the fact that one out of five respondents regarded this phenomenon as one of the major events of 2008 in the world and in Ukraine. The most negative impacts of the crisis were observed in the worsening economic situation, particularly in terms of higher prices and tariffs and less confidence in the future. The labour market was affected, in the form of a reduction in the number of jobs due to uncompetitive industries shutting down, and in "waves" of layoffs or "leaves without pay." However, December 2008 - May 2009 survey data also suggest that the economic situation began to stabilize in some areas. This stabilization is apparent in a decline in the share of the population reporting delays in payment of wages and pensions, as well as in reports of being put on unpaid leave. Nonetheless, these trends reduced household’s abilities to buy high-quality food and repay credits for previously purchased consumer goods or real estate. They also reduced household’s access to credit and savings accounts in banks. Reduced income levels, difficulties with repaying loans, loss of access to own savings, loss of work and lack of employment prospects, delays in payments of wages and pensions, and related psychological discomfort—all these increase the risk that growing segments of the population will become poor or socially vulnerable, and that a steep drop in living standards for large segments of the population has taken place.

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CHAPTER 5. SOCIAL POLICY FOR POVERTY ALLEVIATION

5.1. THE GOVERNMENT ANTI-CRISIS PROGRAMME

To stabilize the economic situation in Ukraine and to minimize financial and economic losses due to the impact of the global economy, an anti-crisis legislation was adopted during late 2008-early 2009. Particularly, in December 2008 the Parliament of Ukraine adopted the Action Plan of the Cabinet of Ministers of Ukraine on Overcoming the Global Financial and Economic Crisis Impact and Progressive Development ( Programme).

The Programme’s strategic goal is to establish European levels of social, economic, and democratic standards for citizens of Ukraine. Therefore, measures proposed in the Programme to achieve this goal cover all areas of human life, society, and state. The Programme covers a broad range of government activities, from social and economic development issues and harmonious state and human development, to international cooperation issues and innovative and technology policies. Each activity area under the Programme describes the issues in that specific field, and suggests actions and expected results for their implementation.

The implementation of the Programme can be divided into two stages:

1. identification of the crisis’s impact on the Ukrainian economy and determination of priority tasks to overcome its consequences (here the government developed a set of primary anti-crisis measures for the end of 2008 – 2009 period); and

2. a strategy for Ukraine’s progressive socio-economic development during the 2010-2012 post-crisis period.

The government is to perform five priority tasks during the crisis period to overcome its consequences and to minimize their impact on Ukraine:

1. Macroeconomic stabilization must be achieved by eliminating current problems in fiscal and tax systems and stabilizing monetary and credit systems (recovery of trust to banking system, renewed access to credit). In particular, the government must ensure support for the state budget via funds from international financial organizations, supporting the implementation of the national infrastructure and innovative investment projects, increasing the efficiency by which these funds are used, and also preserving the balanced budget system. At the same time, tax policy should reduce the tax burden, broaden the tax base, abolish ineffective taxes and duties, reorient the tax burden from direct to indirect taxes, and from the less rich to the richest population groups.

2. Prevent declines in living standards, by minimizing the negative impact on the labour market to avoid sharp reductions in employment and household incomes, and by strengthening social protection for the most vulnerable population groups (unemployed persons, families with children, and the poor).

3. Support business development: the government will focus on preventing significant growth in unemployment, creating favourable conditions for private sector development, and removing administrative and regulatory barriers constraining the development of small and medium enterprises (to promote growth in employment and household income).

4. Stimulate investment by reducing capital flight, facilitating the channelling of national savings into investment spending, increasing the volume of foreign direct investment in Ukraine, ensuring the development of an organized securities market, promptly implementing state

60

regulations in the financial services market, and creating conditions to accelerate the technological modernization of domestic production.

5. Support the real sector of the economy, first of all in those sectors25 which have been most affected by the crisis, via provision of state support (including state guarantees), and by introducing effective energy saving policies and increasing the technological level of the national industry.

25

Mining and metallurgical complex, machine building enterprises, enterprises in the chemical, light, and coal industries; enterprises in the fuel and energy and agricultural complex, and in housing and construction.

61

5.2. SOCIAL TRANSFERS: CONTINUITY AND CHANGE DURING THE CRISIS

Social assistance is key to poverty alleviation policies. The current social assistance system in Ukraine includes a number of benefits, which seek to support the less prosperous population groups by ensuring their income does not fall below the minimum subsistence level. Targeted assistance seeks to reduce the poverty scale and soften the consequences of the crisis, since it is provided to population groups that are in need, as determined by family income. Categorical assistance provides support to certain groups of the population, regardless of their level of wealth. However, achieving this goal is possible only if the social assistance is significant and comprises a significant share of household income, compensating for the decrease in income from other sources.

Substantial increases of targeted assistance in household income may indicate a significant deterioration of the poverty situation in the country and difficulties in certain sectors of the society. Today the system of the targeted assistance in Ukraine includes two types of payments:

1. support to families in need;

2. subsidies for housing services and electricity.

During 1999-2008, the share of social assistance that was intended to reduce poverty did not constitute even half of one percent of total household incomes. (This share fluctuated between 0.31% in 2002 and 0.07% in 2007.) In 2008, the weight of assistance to reduce poverty decreased by 0.01 percentage points in comparison with the previous year, and was only 0.04 percentage points above its lowest value of 2000 (Figure 5.1). The housing subsidies programme is much larger, covering about a quarter of Ukraine’s families. As a targeted payment, the subsidy does reduce the risk of poverty among poor families. In the first years of its implementation, its share in household income was relatively high (more than 2%) compared to other forms of social assistance, but its importance has steadily decreased since then. An insignificant increase took place in 2007 (by 0.06 percentage points), but the next year the weight of subsidies decreased again by 0.04 percentage points, exceeding the 2006 value by only 0.02 percentage points.

Figure 5.1. Role of Different Types of Assistance in Households Income, 1999-2008

62

Source: authors’ calculations based on HBS data.

The role of certain types of categorical assistance in cumulative household income has changed unequally. Up until 2004, assistance for children rose and fell within a range of 0.2-0.6 percentage points. Significant growth took place in 2005, when the share of assistance in household income almost doubled (from 0.52% to 0.92%). In 2006, growth reached 0.38 percentage points while in the last two years a slight decline was observed. However, this variation did not reflect a sharp change in poverty among families with children. The majority of benefits are categorical; it is only assistance for children under parental care that are subject to means testing (i.e., it is given under the condition that the monthly average of received benefits or pensions during the previous six months does not exceed the minimum subsistence level for a child of a certain age). The steep increase in the share of assistance for children in household income, reflects the April 1st, 2005, introduction of an 8500 UAH payment for the birth of a child. In 2008, this payment was increased and differentiated based on the number of children in the family.

Unemployment benefits are another form of categorical assistance paid from the State Social Insurance Fund, not from the state budget funds. Its share in household incomes can be seen as an indirect indicator of the labour market situation. Throughout the whole period, the role of unemployment benefits was not high but it was quite stable–the changes did not exceed 0.08 percentage points per year. Starting on 2003, its share decreased consistently and in 2008 it reached its lowest point – 0.2% of GDP.

Trends in different types of assistance in household income during 1999-2008, show that the poverty situation was quite stable, and that the system of social protection is ineffective. As a result, such a system is unable to significantly support household income during the crisis in order to decrease household poverty risks. Similar conclusions can be made while comparing first quarter data during 2007-2009, which show that the role of social assistance to reduce poverty in household income, was decreasing from year to year. In the first quarter of 2008, the decline amounted to 0.02 percentage points (compared to the first quarter of 2007); while for the same period of 2009 it reached 0.04 percentage points (Figure 5.2.).

The share of subsidies declined almost twice in the first quarter of 2008 in comparison with the same period in 2007; in 2009, a slight increase was observed (0.01 percentage points). A sharp

0

0.5

1

1.5

2

2.5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

Assistance due to unemployment Assistance for children Assistance due to poverty Subsidies

63

increase in the share of assistance for children in the first quarter of 2009 was caused by increases in various benefits, including one-time payments for childbirth, as well as other factors not related to changes in the welfare of families with children (for example, demographic processes, etc.).

Trends in unemployment benefits tell a somewhat different story, reflecting labour market developments. While in the first quarter of 2008 the share of unemployment benefits in household income decreased (by 0.07 percentage points), in the first quarter of 2009 rapid growth was observed (by more than one and a half times).

Figure 5.2. Shares of Different Types of Social Assistance in Household Incomes (Relative to the First Quarter of the Corresponding Year)

Source: calculations of the Institute of Demography and Social Studies of the National Academy of Sciences of Ukraine based on HBS data.

Real trends in assistance per person (in prices from the first quarter of 2007) indicate that the poverty situation did not deteriorate dramatically in the first quarter of 2009; or if it did, its impact on household welfare could not yet be observed. Whereas average assistance for children increased by 23%, subsidies increased only 6%, while assistance for poverty reduction decreased by almost 50%. By contrast, unemployment benefits increased by more than half (Table 5.1).

Table 5.1. Different Type of Assistance per Person (in Prices from the 1st Q of 2007)

Type of Assistance

Years Rate of Increase

2007 2008 2009 2008/

2007

2009/

2008

Assistance due to unemployment 6.68 6.53 9.91 0.98 1.52

Assistance for children 25.31 29.68 36.61 1.17 1.23

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1st Q of 2007 1st Q of 2008 Ist Q of 2009

%

Assistance due to unemployment

Assistance for children

Assistance due to poverty

Subsities

64

Assistance due to poverty 2.53 2.53 1.45 1.0 0.57

Subsidies for housing, gas, and fuel 4.34 2.88 3.05 0.66 1.06

Source: authors’ calculations based on HBS data.

Therefore, both changes in absolute amounts of various forms of social assistance and in their shares of household income suggest that the poverty situation did not deteriorate dramatically in the first quarter of 2009, or at least, that the crisis did not significantly increase the expenditures on various types of assistance. The increases in unemployment benefits may be an indicator of the crisis impact on the labour market. However, the logic of socio-economic processes that have taken a hold in Ukraine suggests that, by the end of 2009, the crisis may have taken on a much more significant impact on the poverty situation. If so, needs for increased social assistance for vulnerable groups can be expected to grow.

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5.3. ASSESSMENT OF SOCIAL POLICY IMPACT ON POVERTY

The efficiency of social policy depends on the financial capacity of the state and the correct choice of priorities for funding. This is especially the case during times of fiscal austerity, when efforts to direct benefits to the most vulnerable groups must be preceded by the identification of these groups.

Since Ukraine became an independent state, its social policies have reflected the economic situation. For many years, the social sector was regarded as secondary because the priority task was overcoming the economic crisis. It was believed that the return of economic growth and accelerated economic development would create the appropriate conditions for social policy reforms, and that most of the problems in this area could be resolved automatically. This attitude led to imbalances and distortions in social protection, particularly regarding support for various population groups.

Even in the crisis of the 1990s, spending on social programmes was around 5% of total budget expenditures, which—under the circumstances—was a relatively significant share. However, because its overall financial capacity during this period was limited, the state was unable to create the conditions for adequate social protection. Families with children, the unemployed, and pensioners were the most vulnerable groups, but the situation for employed persons was not much better, since there were large declines in real incomes and delays in paying wages. Social protection and social security expenditures during this crisis period did not show stable trends; social policy was not balanced. When applied to social protection expenditures for mothers and children, these social policies had an effect on reproductive trends in Ukraine, as was reflected in a sharp decline in fertility, and the postponement of births.

Although economic growth began in 2000, trends in social protection were inertial. In 2002, for the first time since the independence, the budget showed a surplus, making possible increased investments in economic development and/or increased social expenditures. In 2002, emphasis was placed on social policy, which led to substantial increases in funding for health and education. Large-scale increases in social guarantees for the population and the regulation of social standards began in 2004.

Economic recovery gave greater opportunities for social protection both for the disabled and for able-bodied workers, which should help improve living standards broadly, and for vulnerable groups in particular. Spending on social protection gradually increased in absolute amounts, relative to total expenditures, and as a share of GDP. In fact, for the 2000-2007 period, expenditures on social protection and social security increased 8.11 times, particularly after 2005, when the social reorientation of the budget took place. In later years, growth in social spending was not significant; the government mainly tried to ensure financing for the budgeted social activities. Average annual expenditures for social protection during this period amounted to about 20% of the consolidated budget.

The most significant part of social spending from the state budget is directed at children. This is apparent in transfers from the central to local government budgets for assistance to families with children, poor families, those disabled from childhood, disabled children, and temporary assistance to children. In 2008, this support amounted to 13 billion UAH; it was to have reached 16 billion UAH in 2009. But despite these substantial increases in social expenditures for children, the amount of assistance for children (except for childbirth assistance) still remains far from minimum subsistence level and from the real needs of families with children.

Spending on social protection (according to the international standards, this includes the consolidated budget expenditures on social protection and social assistance, social insurance, and

66

health) and on programmes aimed at protecting families and children, reach 5.2%, and 1.4% of GDP, respectively. Spending on social protection for the elderly (pensions, protection of war veterans and pensioners, social assistance to the elderly) amount to 69.4% of the national spending on social protection and 18.2% of the GDP. This shows how social policy and public spending focuses primarily on protecting older and disabled people. Support for the employed population mainly takes the form of social guarantees for pensioners under the pay-as-you-go pension system, while support for children generally reflects the residual principle. On the other hand, any increase in public spending on social activities increases fiscal pressure, which constrain possibilities for future economic development. Ongoing social spending can be considered as a form of consumption at the expense of development, which in the long term negatively affects the economic situation in the country and possibilities for financing the budget.

Today, the main social policy issue is that long-term national development and social policy strategies, and the tools to implement them, have not yet been defined. During the economic crisis of the 1990s, the priority was to support the general population, which led to inefficient social policies and the dissipation of social spending. Social policy instruments did not ensure that the social assistance was directed to those who needed it most. Despite constant increases in social protection spending in absolute and relative terms, the social functions of the state are not implemented as intended. Significant improvements in social protection have not been achieved, and many people who really do need social support do not get it.

The government’s programme of support for motherhood, childhood, and youth is not funded properly. In 2008, only 50 budget programmes (5% of the total) were funded properly. Expenditures on 139 programmes were less than half the envisaged amount. For 182 programmes (primarily social ones), no funds were allocated from the budget. The programmes of health care, measures to support child welfare, information and educational institutions, labour protection, and others, were partially funded. Funding of several health care programmes (e.g., the introduction of new technologies to support the disabled, against the tuberculosis and AIDS epidemics, and centralized measures to treat diabetes) was not provided. Of 573.9 million UAH envisaged in 2008 to fund programmes against the tuberculosis and AIDS epidemics and treatment of cancer patients, only 200,000 was allocated.

The catastrophic decrease in the number of children in rural areas, underscores the continuing importance of educational services. On one hand, it may not be worthwhile to operate schools in areas with a small number of children, and where recruitment of teachers and other conditions are not satisfactory. On the other hand, it should be possible to consolidate schools into better staffed and equipped institutions, and organize the transport of pupils to schools that are within 10 kilometres of their residence. The government’s "School Bus" programme seems to perform this task. In its first year, the programme was funded according to plan; bus subsequent funding became more irregular and less complete. For example, in 2008, funds were allocated only in May. This actually means that the children had to get to the place of study on their own, which is far from home—and this actually worsens their situation and limits their access to education. In addition, some of the vehicles provided by companies under this programme were near the end of their useful lives, leading to frequent breakdowns. There were also problems with fuel. Therefore, this programme remained a slogan.

While certain groups (those sick with contagious diseases, people with disabilities) may receive support from non-governmental sources, support to motherhood and childhood clearly is a governmental priority. However, since these programmes are financed under the residual principle, reductions in funding can be expected. For example, to balance the 2008 budget, the enactment of 102 laws in the social sphere was suspended. Budget savings from these suspensions reached 105 billion UAH, while only 30 billion UAH in social expenditures were actually funded.

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Then again, even during the years of economic growth, increases in budgetary resources for social programmes were not accompanied by significant organizational and technological changes in the provision of social services. Currently, there are 156 types of social benefits, guarantees, and compensations for 230 categories of population, which are regulated by 46 different legislative acts (22 by professional criteria, 24 by social criteria). Some 19.5 millions citizens have the right to social benefits under this second criteria, the value of which equals 19-29 billions UAH per year—which significantly exceeds the volume of state funding. Most social benefits, are in fact received by those who have some special merit in the eyes of the state and by professional groups—rather than by poor families.

Although the state is not able now to provide the necessary social guarantees for able-bodied workers (e.g., decent level of wages, avoiding their devaluation, employment guarantees), the children’s situation is perhaps even more difficult. Thus, the relatively favourable social policy trends pertaining to children (in particular, increasing childbirth assistance) can be lost in the crisis conditions. It is therefore of the utmost importance to change social policy priorities, as current budget constraints magnify the importance of clearly defining the population groups most in need of support.

Overall, Ukraine’s social protection model is becoming more liberal—social policy is increasingly limited only to support the vulnerable groups and those in need; while education, health care, and social protection for other groups is being privatized. However, the implementation of such model requires certain economic prerequisites, such as a developed market, gradual implementation, and preventive measures to ensure that minimum living standards are met. But, since in Ukraine today, these preconditions are not met, the introduction of this social protection model is neither possible nor expedient. Moves toward this model place families with children, which have the highest risk of poverty and which are limited in their ability to satisfy their needs, at greatest risk.

Social protection systems traditionally seek to support vulnerable population groups, and hence reduce social inequality. The social protection system in Ukraine by contrast, mostly increases inequalities—especially its pension and social benefit systems, which significantly differentiate the population by income. Whereas the pension system’s contribution to inequality seems relatively small, the contribution of social benefits seems to be more significant. Thus, it seems that wealthy population groups receive the greatest advantage from Ukraine’s social benefit systems. On the other hand, in recent years Ukraine has reported decreasing shares of social benefits in household income—and therefore, reductions in these benefits’ contribution to overall inequality. At the same time, the role of the main types of social assistance—for children and for poor families (targeted assistance to reduce poverty)—has increased, which tends to reduce inequality.

Among the different types of social assistance, assistance for children makes the largest contribution to household income, comprising 1.2% of the total household income. Even though it is based on the categorical principle, this form of assistance makes the largest contribution to reducing inequality (-1.1%). While targeted assistance to poor families only constitutes 0.1% of total household income, it also serves to reduce inequality (by -0.3%). This form of assistance during the past seven years has been growing in amount, and seems to be the most efficient in terms of its impact on overall inequality. By contrast, subsidies for housing and energy demonstrate quite different trends. Until quite recently, these subsidies increased inequality, but now this effect seems to have weakened. During 2001-2007, with the growth in household income (particularly for pensioners who are the main users of the housing subsidies programme) and stable housing taxation policies, the subsidies lost their role as the most inefficient type of social assistance – their weight in household income fell from 1.5% in 2001 to 0.1% in 2007. The case for eliminating this inefficient programme seemed quite strong. However, the increase in

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housing tariffs during 2007-2008 increased the popularity of this programme, and made closure of the programme fraught with negative consequences.

In assessing the effect of social assistance on household income, the significant contribution of certain social payments to overall inequality must be emphasized. While the childbirth assistance and assistance for poor families moderately reduce the Gini coefficient (indirectly demonstrating their positive effect on the situation of the poor), the housing subsidies tended to increase overall inequality, while in 2005-2008, reductions in these transfers essentially nullified their impact. Today, housing subsidies do not increase inequality; but they do not reduce it, either. Evidence that social benefits increase overall inequality in Ukraine demonstrates that these programmes are not performing their social assistance functions for vulnerable groups. However, the categorical principle of offering social assistance seems to have been exhausted: many categories cannot be considered poor, as it was thought to be the case during the crisis of the 1990s. A gradual transition away from the current system towards a new one based on supporting the poor and vulnerable groups, can help reduce poverty even when budget resources are limited.

The best way to display the effects of the different types of social assistance on poverty is to compare the poverty rate before and after receipt of the social transfer in question. These effects are best displayed using the absolute poverty criterion. If 20.3% of the population had equivalized consumption rates below the minimum subsistence level in 2008, the abolition of child-birth assistance would increase the share of the population living below this threshold to 22.2%. By contrast, the cancellation of social assistance for poor families or housing benefits would not have a significant impact on poverty rate, which would rise to only 20.5% and 20.4%, respectively. If social benefits were abolished, the poverty rate would increase to 21.1%; and if all types of social assistance were abolished, the poverty rate would increase to 23.1% (Figure 5.3).

Figure 5.3. Poverty Rates Before and After Receipt of Social Assistance and Social Benefits, 2008 (by the MLS Criterion)

On balance, social assistance in Ukraine does reduce absolute poverty, due to the relatively large number of recipients and relatively large size of social assistance programmes. In addition, these programmes ensure the maximum targeting of this assistance (as far as is possible with categorical payments) for such groups as children, who have the highest risk of poverty. At the

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same time, targeted assistance for poor families and housing subsidies reduce the poverty rate by only 0.2 and 0.1 percentage points, respectively. Such an insignificant impact can be explained by the small size of the population covered by these programmes and the small size of the positive effect on the population. That social privileges have a significant impact on decreasing poverty can only be explained by these programmes’ large coverage (in fact, at least one person in almost every second household enjoys such privileges).

Under current conditions of fiscal stringency, targeted assistance becomes even more important for a poverty reduction. However, the high administrative costs often associated with targeted assistance programmes make them viable only if they are highly effective. Otherwise, if the number of recipients and their poverty profiles cannot be clearly determined, use of mechanisms such as means testing, may be irrational and of budget funds.

Social assistance to reduce poverty is a key social protection instrument today, since it is targeted to households most in need. In 2008, 56.3% of the recipients under this programme belonged to poor population groups; also, almost 30% were extremely poor. Since in Ukraine 27.0%26 of the population is classified as poor, it can be assumed that this form of social assistance generally reaches those who need it most. However, its insignificant level of coverage of poor people, limits the effectiveness of this programme. This low level of coverage (and thus the programme’s ineffectiveness) primarily reflects the fact that the benefits actually provided, are less than half of the poverty line. In contrast to targeted social assistance, childbirth assistance is not received only by poor households, as the benefit operates on a categorical basis. Some 40% of the recipients of childbirth assistance are among the poor population, and since less than 30% of the recipients of housing benefits are among the poor, childbirth assistance is better targeted toward those in need. In addition, the share of the poor among the recipients of childbirth assistance is larger than among the overall population of Ukraine.

This further supports the conclusion that, overall, Ukraine’s social benefits system is not oriented towards the poor population. Only one fifth (20.6%) of recipient households are among the poor, while the poor constitute 27% of Ukraine’s population. Since poor households receive benefits less frequently than non-poor households (42.1% against 51.1%), they receive less income from these programmes – 431.2 UAH per year, as opposed to 777.3 UAH per year for non-poor households. Furthermore, Ukraine’s social assistance system allows many claimants to receive benefits when they do not really need them. Mechanisms to verify family income are both expensive and not always reliable – and have been this way for years. Ukraine’s social assistance system requires serious changes if it is to have a significant impact on the poverty situation.

26

Referring to the poverty rate by the national criteria – 75% of median level of cumulative equivalent expenditures

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CHAPTER 6. POLICY RECOMMENDATIONS TO OVERCOME POVERTY DURING THE CRISIS AND SOFTEN ITS IMPACT

6.1. POVERTY ALLEVIATION UNDER CRISIS CONDITIONS

In response to economic crisis conditions, the state should seek to simultaneously resolve two contradictory poverty alleviation tasks:

preventing the majority of the population from falling into poverty by ensuring that minimum social guarantees are enforced, so that the fully employed, and those who are entitled to social insurance payments (primarily labour pension and unemployment assistance) are not poor; and

protecting those most in need of support from the risk of extreme forms of poverty, particularly as the crisis unfolds.

The risk of increasing poverty under crisis conditions threatens both individuals and society as a whole, in terms of:

1) overall poverty, and particularly the marginalization of certain social groups; and

2) the threat of social instability due to mass protest actions.

The existence of absolute poverty in a civilised society (the inability to satisfy basic needs) can be seen as an unnatural social risk, which threatens society as a whole, and should be reduced to the minimum. Under crisis conditions. it is essential to prevent growth in absolute poverty. The trends observed during 2002-2008 suggest that the eradication of absolute poverty, defined by either international or national criteria, is possible.27 Nevertheless, due to the crisis, this problem has become a key issue, especially as the purchasing power of the minimum social guarantees has fallen. Beneficiaries with income close to minimum guarantee levels are, therefore, the first group facing ultra-high risks of absolute poverty. If the crisis continues to expand, this group can be enlarged by those who are unemployed for more than six months, part-time workers, and other high-risk groups (e.g., families with two or more children, with a child under three years old, etc.).

Relative poverty that is reflected in social stratification (in different scales and forms) by definition cannot be eliminated, but it can represent another danger to social stability. It is therefore necessary to establish socially dangerous thresholds for basic indicators, such as the relative poverty rate and poverty gap. During 1999-2008, the relative poverty rate and poverty gap practically did not change, suggesting that inequality remained roughly constant. Therefore, it can be expected that the current crisis will not lead to a significant increase in relative poverty growth.28 However, if the share of people unsatisfied with their relative social position were to increase from one third to one half of the population, this could threaten social stability and national security.

Principles for Poverty Alleviation as Multidimensional Phenomenon

Establishment and maintenance of rational and scientifically justified relationships between minimum guarantees and minimum wages;

27

Referring to the minimum sustenance level criteria. 28

Referring to the national criteria of the poverty rate and the extreme poverty rate which define the relative poverty rate.

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Alignment of the magnitudes of means-tested targeted social assistance with the national poverty line and basic minimum guarantees;

Social support for able-bodied workers should focus primarily on stimulating economic activity and encouraging employment;

Ensure the fair distribution of public benefits;

Reform of social assistance to refocus its priorities on poor population groups;

Promote multichannel financing of poverty alleviation activities;

Alignment of poverty alleviation measures and programmes with the results of systematic monitoring and evaluation.

Short-term Poverty Alleviation Principles

Focus fiscal policy on reducing inflationary pressure, inter alia by prohibiting the monetization of state budget deficits;

Elaboration and introduction of the redistributive mechanisms through state tax and transfer systems, restoration of tax exemption for incomes at or below minimum subsistence levels;

Continued reform of wage setting by balancing inter-sectoral wage relations, to strengthen the main principles of the unified wage system in the budget sector;

Ensure access for all population groups -regardless of place of residence and welfare- to quality budget-financed health, educational, cultural, and housing services;

Introduction of insurance principles into the pension system, and of direct linkages between the size of pension payments contributions;

Prevention of dependency syndromes in society;

Assistance in reinforcing proactive labour-market behaviour by able-bodied workers;

Development of all kinds of public initiatives;

Support for the development of independent employment and micro-enterprising;

Promote philanthropy, particularly in the form of charitable activities;

Strengthen public control over the use of budget funds, inter alia to facilitate the outsourcing of the provision of assistance to disabled population groups to public organizations;

Social patronage of poor families.

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6.2 POLICY MEASURES TO MITIGATE CRISIS IMPACT ON POVERTY AND WELFARE

Income Policies and Minimizing Labour Market Risks:

Develop a scientifically justified model of social budgeting, covering all public social expenditures and social development needs with macroeconomic forecasts and state financial resources;

Limit growth in revenues to finance social transfers, and not permit their use for other purposes, except to finance the budget and the social insurance funds;

Restore, at qualitatively new levels, progressive personal income taxation, and better align progressive income taxation with European standards and practices;

Increase the transparency of household income sources, particularly by linking more closely social insurance payments to paid contributions, and by adopting measures to legalise unregistered labour activity and shadow wages;

Develop an action plan to alleviate poverty among the employed population, create conditions for stimulating economic activities of able-bodied population groups; first of all, by reforming the wage system;

Promote labour mobility by applying flexible modes of employment with appropriate mechanisms for compensation of income losses from employment;

Stimulate self-employment and employment via small and medium-sized enterprises, to promote re-employment of redundant workers;

Simplify the administration of taxes, licenses, permits and reporting for small enterprises;

Improve state support to small enterprises in terms of access to credit, inter alia via the introduction of the national microcredit programme and incentives for banks and non-bank financial institutions to improve information and expand the financial education of citizens;

Expand regional networks of centres for crafts and handicraft training;

Involve unemployed and inactive households in rural areas and small cities, in the development of "green" (rural), cultural, and ethnographic tourism;

Strengthen the effectiveness of vocational training and retraining programmes to increase the labour market competitiveness of unemployed and inactive workers, particularly when such programmes can be financed by non-budget sources;

Create conditions for expanding public work and investment projects, particularly in transportation infrastructure and in the development of depressed regions with high unemployment rates;

Increase the ability of the State Department of Supervision of Observance of the Labour Legislation of the Ministry of Labour and Social Policy to monitor employers’ observance of worker and social protection legislation, particularly regarding the payment of workers’ wages in a complete and timely manner;

Strengthen observance of labour legislation by employers, regarding payment of social guarantees to workers made redundant, inter alia via the application of part-time employment schemes.

Social Protection of the Disabled and Other Vulnerable Groups:

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Introduce monitoring and evaluation practices into the social protection system, pertaining in particular to financial flows, increasing the effectiveness of social protection, and rationalizing the scope and areas of public expenditures;

Review procedures for the identification and application of minimum subsistence levels as the basic social standard, to fully align these standards with the real value of the minimal consumer basket;

Establish scientifically justified correlations between basic social guarantees in order to prevent social policy distortions, particularly regarding the relationship between minimum wages and social transfers;

Develop and introduce regional coefficients for social guarantees for those regions with high living costs (based on regional price trends);

Transform the social privileges programme into an effective social assistance system; particularly, by increasing the importance of targeted assistance programmes;

Conduct a gradual transition to a uniform targeted payment as a basic tool for supporting families that are close to the poverty line;

Accelerate the technological modernization of social service delivery, inter alia via the provision of various forms of state assistance under one application, and the creation of unified databases of recipients of all types of social assistance and benefits;

Begin public discussions for increasing pension ages;

Revise the early retirement system by streamlining assessment of working conditions and by more accurately defining the responsibilities of the state labour examination;

Improve pension indexation mechanisms, in order to maintain pensioners’ purchasing power and reduce relative poverty among pensioners;

Improve children’s access to public health care, social services, transport, and new information and communication technologies;

Accelerate the recovery of preschools that work on public institution principles;

Organize courses on entrepreneurship for students in general, professional, and higher educational institutions;

Develop integrated approaches to fight child homelessness and support orphanages;

Implement measures to alleviate child poverty, reduce the neglect of children and orphanages, and to better support families with children, primarily by strengthening the workplace guarantees for mothers;

Develop recommendations for managers of enterprises and organisations of all forms of ownership for implementing flexible work schedules for parents;

Increase the effectiveness of the tax exemptions for working people who are raising children; and

Support non-governmental and charitable organisations that deal with the poverty alleviation issues.

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6.3. USING POVERTY AND SOCIAL IMPACT ANALYSIS TO IMPROVE POLICY-MAKING AND STRATEGIC PLANNING IN UKRAINE

As the results of this study suggest that PSIA methodology can be an effective tool in analyzing the impact of the economic crisis (growth) and socio-economic policies, on vulnerable population groups. According to a recent definition, PSIA is a systematised approach to analyzing the distributional impact of policy reforms.29,30,31 The PSIA methodology’s primary objective is to improve the results of policy reforms, based on reducing poverty risks through informing stakeholders about possible impacts of these policies. The use of empirical data regarding expected impact on living standards, inequality, alternative reform programmes, risk identification, and initiation of wide public debates on policies and available alternatives, are key elements of this approach.

The PSIA methodology can:

help policymakers determine the most suitable and timely forms of compensation for the negative impact of policy reforms on groups that might lose the most as a result of these reforms or the economic crisis;

strengthen the information base for policy design and implementation, inter alia by increasing the transparency and participatory character of policy reform processes;

promote close cooperation and dialogue in planning and implementation among legislative and executive authorities, trade unions, NGOs, donors, and others;

promote dialogue between analytical groups, organizations and agencies that design and implement policies, which can help promote the more rapid and complete implementation of policy recommendations;

produce timely, accessible, and understandable results, which can be used in policy development;

be integrated into official national systems for measuring and monitoring poverty, to better analyze policy impact, develop corrective measures, and significantly improve the quality of strategic planning.

29

World Bank. 2003. “A User’s Guide to Poverty and Social Impact Analysis”. Washington, USA: IBRD / World Bank: 114. 30

OECD “Promoting Pro-Poor Growth”. 2007. Practical guide to ex ante poverty impact assessment. OECD, Paris: 82. 31

World Bank “Poverty and Social Impact Analysis (PSIA) Reviewing the Link with In-Country Policy and Planning Processes Synthesis Report.” Washington DC: World Bank: 60.

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BIBLIOGRAPHY

1. Ageyev. 2008. “Crisis – its Time, Space, Characters and Risks”. Philosophy of Economy Series No.6: 28.

2. Buzgalin A.V., Kolganov A.I.. 2008. “Crisis – 2008: Virtual Fictitious Capital and Alternatives to its Uncontrolled Development”. Philosophy of Economy Series No.6: 19-20.

3. Datt G., Walker T. 2002. PovStat 2.12. “A Poverty Projection Toolkit/User’s Manual”. World Bank: 31.

4. Essama-Nssah B. 2005. “The Poverty and Distributional Impact of Macroeconomic Shocks and Policies: A Review of Modeling Approaches”. Policy Research Working Paper Series No. 3682.Washington DC: World Bank: 78.

5. Kyiv Institute on Management Issues of Gorshenin. “What are Today’s Most Crucial Problems for Ukraine”. Press-Release of the Study. http://www.kipu.com.ua/Sotsyalog.html

6. Ministry of Economy of Ukraine. 2009. “Ukraine: Development Prospects”. Consensus-Forecast Series No.21: 45.

7. OECD “Promoting Pro-Poor Growth”. 2007. Practical guide to ex ante poverty impact assessment. OECD, Paris: 82.

8. State Statistics Committee of Ukraine. 2008. “Methodology on Preparation of Standard Reports on the Quality of Results of the State Random Surveys of the Population (Households)”: 92.

9. State Statistics Committee of Ukraine. 2009. “Expenditures and Incomes of Households of Ukraine in 2008”. Statistical Collection. Part І. Kyiv: 450.

10. “How did the Economic Crisis Impact your Life?”. Sociological Poll. http://www.uceps.org/ukr/poll.php?poll_id=408

11. Kyiv International Institute for Sociology. “Ukrainian Population Self-Assessment of the Impact of the Economic Crisis”. Sociological Poll. http://www.kiis.com.ua/txt/doc/29042009/pr.doc

12. “The Crisis Affected 90% of Ukrainians”. http://news.liga.net/ukr/news/NU091603.html

13. World Bank. 2003. “A User’s Guide to Poverty and Social Impact Analysis”. Washington, USA: IBRD/World Bank: 114.

14. World Bank “Poverty and Social Impact Analysis (PSIA): Reviewing the Link with In-Country Policy and Planning Processes Synthesis Report.” Washington DC: World Bank: 60.

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ANNEXES

ANNEX 1

Poverty and Composition of the Poor Population Based on Quarterly Data in 2000-2009

2000 2001

1st Q

2nd Q

3rd Q

4th Q

1st Q

2nd Q

3rd Q

4th Q

Poverty rate, % 74.2 71.0 70.2 67.6 72.5 72.6 72.5 70.1

Total amount of the poor population, persons 36048175 34683830 34268635 33032608 34964631 34993762 34958632 33806097

Composition of the poor population by type of settlements

Big city 37.2 34.8 34.9 34.7 35.2 34.2 33.7 34.2

Small city 29.6 30.4 30.7 30.5 30.5 31.1 31.0 31.2

Village 33.2 34.8 34.4 34.7 34.3 34.7 35.3 34.6

Total 100 100 100 100 100 100 100 100

Composition of the poor population by type of household

Households with children 65.4 66.0 65.8 66.3 64.8 64.2 64.4 65.4

Households without children 34.6 34.0 34.2 33.7 35.2 35.8 35.6 34.6

Total 100 100 100 100 100 100 100 100

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Composition of the poor population by number of persons in household

Singles 6.7 6.7 6.8 6.4 6.8 6.9 7.0 6.5

Households with two persons 17.4 17.4 17.3 16.7 17.6 18.1 17.7 17.2

Households with three persons 22.7 22.0 22.2 22.2 22.6 22.6 21.9 22.5

Households with four persons 29.1 28.8 28.6 29.0 29.6 29.1 29.4 30.0

Households with five or more persons 24.0 25.1 25.1 25.6 23.5 23.4 24.0 23.7

Total 100 100 100 100 100 100 100 100

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2002 2003

1st Q

2nd Q

3rd Q

4th Q

1st Q

2nd Q

3rd Q

4th Q

Poverty rate, % 72.9 74.4 73.2 70.9 66.2 65.8 63.5 61.5

Total amount of the poor population, persons 34833422 35549555 34970211 33901693 30570367 30381940 29325622 28432581

Composition of the poor population by type of settlements

Big city 35.8 35.4 33.4 33.0 34.2 34.1 33.3 33.7

Small city 28.8 29.1 29.6 29.6 27.7 27.5 27.2 27.9

Village 35.4 35.5 37.0 37.4 38.1 38.4 39.5 38.4

Total 100 100 100 100 100 100 100 100

Composition of the poor population by type of household

Households with children 64.3 63.5 63.3 63.9 61.7 61.2 61.4 62.0

Households without children 35.7 36.5 36.7 36.1 38.3 38.8 38.6 38.0

Total 100 100 100 100 100 100 100 100

Composition of the poor population by number of persons in household

Singles 7.0 7.0 7.1 6.7 7.4 7.5 7.7 7.3

Households with two persons 18.3 18.6 18.6 18.3 18.8 19.4 19.1 18.5

Households with three persons 23.2 23.4 23.3 22.9 25.3 24.5 24.3 24.9

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Households with four persons 26.3 26.9 26.2 26.6 26.7 27.2 27.0 26.8

Households with five or more persons 25.2 24.1 25.0 25.5 21.7 21.3 21.8 22.5

Total 100 100 100 100 100 100 100 100

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2004 2005

1st Q

2nd Q

3rd Q

4th Q

1st Q

2nd Q

3rd Q

4th Q

Poverty rate, % 53.3 57.3 53.3 47.0 47.8 44.5 41.4 34.9

Total amount of the poor population, persons 24606205 26435433 24613252 21715979 21915474 20383976 18988172 15983923

Composition of the poor population by type of settlements

Big city 35.0 33.6 32.2 31.6 33.6 33.4 31.6 29.6

Small city 27.7 28.0 27.9 28.5 27.3 27.3 27.3 27.8

Village 37.3 38.5 39.9 39.8 39.1 39.2 41.1 42.6

Total 100 100 100 100 100 100 100 100

Composition of the poor population by type of household

Households with children 60.8 60.6 60.5 64.4 62.8 63.1 63.2 66.5

Households without children 39.2 39.4 39.5 35.6 37.2 36.9 36.8 33.5

Total 100 100 100 100 100 100 100 100

Composition of the poor population by number of persons in household

Singles 7.1 7.2 7.1 6.1 7.0 6.7 6.7 5.7

Households with two persons 18.4 18.8 18.6 16.5 16.7 15.4 15.7 15.0

Households with three persons 24.9 24.7 24.1 23.7 24.8 25.8 24.9 24.6

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Households with four persons 25.4 25.9 25.8 27.8 28.3 29.2 28.3 29.2

Households with five or more persons 24.2 23.5 24.4 25.9 23.3 22.9 24.3 25.4

Total 100 100 100 100 100 100 100 100

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2006 2007

1st Q

2nd Q

3rd Q

4th Q

1st Q

2nd Q

3rd Q

4th Q

Poverty rate, % 36.1 41.0 37.9 34.9 32.2 37.3 31.6 22.9

Total amount of the poor population, persons 16382027 18605911 17195974 15845841 14520700 16814187 14223732 10325772

Composition of the poor population by type of settlements

Big city 31.9 30.6 29.4 27.1 29.5 29.3 27.0 24.0

Small city 26.9 27.6 27.9 27.9 26.7 28.2 28.5 28.7

Village 41.2 41.9 42.7 45.0 43.8 42.6 44.5 47.3

Total 100 100 100 100 100 100 100 100

Composition of the poor population by type of household

Households with children 66.2 58.6 63.5 66.7 65.5 63.6 63.4 67.8

Households without children 33.8 33.8 36.5 33.3 34.5 36.4 36.6 32.2

Total 100 100 100 100 100 100 100 100

Composition of the poor population by number of persons in household

Singles 7.7 7.9 8.1 6.6 7.1 7.8 7.6 6.7

Households with two persons 14.9 15.9 16.9 15.4 15.7 16.3 16.3 13.9

Households with three persons 23.7 23.9 23.5 22.4 23.7 25.1 24.6 24.2

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Households with four persons 27.3 27.5 26.6 28.5 30.0 28.0 29.6 29.7

Households with five or more persons 26.5 24.8 24.9 27.1 23.4 22.9 21.9 25.5

Total 100 100 100 100 100 100 100 100

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2008 2009

1st Q

2nd Q

3rd Q

4th Q

1st Q

Poverty rate, % 23.1 30.7 22.6 22.9 14.7

Total amount of the poor population, persons 10337833 13741149 10079473 10238832 6554390

Composition of the poor population by type of settlements

Big city 26.5 29.0 26.2 26.1 23.5

Small city 24.7 26.4 27.7 25.8 29.7

Village 48.7 44.5 46.1 48.1 46.8

Total 100 100 100 100 100

Composition of the poor population by type of household

Households with children 67.6 65.6 66.8 68.5 68.4

Households without children 32.4 34.4 33.2 31.5 31.6

Total 100 100 100 100 100

Composition of the poor population by number of persons in household

Singles 6.7 7.1 6.9 5.7 6.2

Households with two persons 14.1 15.7 15.6 14.2 13.7

Households with three persons 24.6 24.2 23.5 24.7 24.4

Households with four persons 28.0 27.9 27.3 29.8 24.2

85

Households with five or more persons 26.6 25.0 26.6 25.6 31.5

Total 100 100 100 100 100

86

ANNEX 2

Table 2.1. Results of Modelling of the Poverty Indicators in Accordance with Intermediate GDP Forecasts, with a Lag

Input Settings

General

Poverty Line (LCU / person / month) 703.60

Survey Year Population (thousands) 44 689

Survey Year Sectoral Labour Shares

Agricultural Sector 15.84

Industry Sector 23.43

Services Sector 60.73

2009 2010

Output Growth (percent annual)

Agricultural Sector 2.200 2.300

Industry Sector -16.180 -4.670

Services Sector -2.000 -1.040

GDP Growth -9.000 -2.490

Employment Growth (percent annual)

Agricultural Sector -5.000 -5.000

Industry Sector -10.000 -10.000

Services Sector -7.000 -7.000

Population Growth -0.010 -0.010

CPI 116,40 112,90

GDP Deflator 113.20 112.50

Projections 2008 2009 2010

Foster-Greer-Thorbecke Indexes

Headcount Index 20.295 27.557 27.239

Poverty Gap Index 4.479 6.493 6.410

Squared Poverty Gap Index 1.505 2.293 2.262

Number of Poor (thousands) 9 070 12 314 12 170

Mean Per Capita Consumption 1 213.90 1 094.98 1 101.11

(LCU per Month)

87

Gini Coefficients

Economy-wide 0.291 0.293 0.294

Agricultural Sector 0.288 0.288 0,288

Industry Sector 0.278 0.278 0,278

Services Sector 0.300 0.300 0,300

Other Inequality Indexes

Theil Coefficient 0.158 0.162 0,162

Variance of Log Consumption 0,258 0.262 0.263

Generalized Entropy 0,257 0.270 0.272

88

Table 2.2. Results of Modelling of the Poverty Indicators in Accordance with Minimum Forecast Levels of GDP, with a Lag

Input Settings

General

Poverty Line (LCU / person / month) 703.60

Survey Year Population (thousands) 44 689

Survey Year Sectoral Labour Shares

Agricultural Sector 15.84

Industry Sector 23.43

Services Sector 60.73

2009 2010

Output Growth (percent annual)

Agricultural Sector 1.800 2.000

Industry Sector -19.750 -12.240

Services Sector -2.620 -3.870

GDP Growth -11.120 -7.270

Employment Growth (percent annual)

Agricultural Sector -5.000 -5.000

Industry Sector -10.000 -10.000

Services Sector -7.000 -7.000

Population Growth -0.010 -0.010

CPI 115,90 109,70

GDP Deflator 109.50 107.00

Projections 2008 2009 2010

Foster-Greer-Thorbecke Indexes

Headcount Index 20.295 31,044 33,822

Poverty Gap Index 4.479 7,626 8,528

Squared Poverty Gap Index 1.505 2.760 3,151

Number of Poor (thousands) 9 070 13 872 15 112

Mean Per Capita Consumption 1 213,90 1 043.02 1 110.29

(LCU per Month)

Gini Coefficients

89

Economy-wide 0.291 0,294 0,296

Agricultural Sector 0.288 0,288 0,288

Industry Sector 0.278 0,278 0,278

Services Sector 0.300 0,300 0,300

Other Inequality Indexes

Theil Coefficient 0.158 0,163 0,166

Variance of Log Consumption 0.258 0.263 0,267

Generalized Entropy 0.257 0.274 0,281

90

Table 2.3. Results of Modelling of the Poverty Indicators in Accordance with Maximum Forecast Levels of GDP, with a Lag

Input Settings

General

Poverty Line (LCU / person / month) 703.60

Survey Year Population (thousands) 44 689

Survey Year Sectoral Labour Shares

Agricultural Sector 15.84

Industry Sector 23.43

Services Sector 60.73

2009 2010

Output Growth (percent annual)

Agricultural Sector 2.500 2.800

Industry Sector -12.740 -1.100

Services Sector -1.650 0.000

GDP Growth -7.060 -0.300

Employment Growth (percent annual)

Agricultural Sector -5.000 -5.000

Industry Sector -10.000 -10.000

Services Sector -7.000 -7.000

Population Growth -0.010 -0.010

CPI 117.00 119.00

GDP Deflator 117.20 117.7

Projections 2008 2009 2010

Foster-Greer-Thorbecke Indexes

Headcount Index 20.295 24.204 25.140

Poverty Gap Index 4.479 5.523 5.759

Squared Poverty Gap Index 1.505 1.908 1.997

Number of Poor (thousands) 9 070 10 815 11 233

Mean Per Capita Consumption 1 213.90 1 147.44 1 133.96

(LCU per Month)

Gini Coefficients

91

Economy-wide 0.291 0.292 0.292

Agricultural Sector 0.288 0.288 0.288

Industry Sector 0.278 0.278 0.278

Services Sector 0.300 0.300 0.300

Other Inequality Indexes

Theil Coefficient 0.158 0.161 0.161

Variance of Log Consumption 0.258 0.260 0.260

Generalized Entropy 0.257 0.266 0.266

92

Table 2.4. Poverty Indicators (as per the Definition of PPP5 USD per day) and Intermediate Forecast Levels of GDP, with a Lag

Input Settings

General

Poverty Line (LCU / person / month) 440.70

Survey Year Population (thousands) 44 689

Survey Year Sectoral Labour Shares

Agricultural Sector 15.84

Industry Sector 23.43

Services Sector 60.73

2009 2010

Output Growth (percent annual)

Agricultural Sector 2.200 2.300

Industry Sector -16.180 -4.670

Services Sector -2.000 -1.040

GDP Growth -9.000 -2.490

Employment Growth (percent annual)

Agricultural Sector -5.000 -5.000

Industry Sector -10.000 -10.000

Services Sector -7.000 -7.000

Population Growth -0.010 -0.010

CPI 116.40 112.90

GDP Deflator 113.20 112.50

Projections 2008 2009 2010

Foster-Greer-Thorbecke Indexes

Headcount Index 3.859 5.986 5.899

Poverty Gap Index 0.639 1.105 1.089

Squared Poverty Gap Index 0.171 0.314 0.310

Number of Poor (thousands) 1 725 2 675 2 636

Mean Per Capita Consumption 1 213.90 1 094.98 1 101.11

(LCU per Month)

Gini Coefficients

Economy-wide 0.291 0.293 0.294

93

Agricultural Sector 0.288 0.288 0.288

Industry Sector 0.278 0.278 0.278

Services Sector 0.300 0.300 0.300

Other Inequality Indexes

Theil Coefficient 0.158 0.162 0.162

Variance of Log Consumption 0.258 0.262 0.263

Generalized Entropy 0.257 0.270 0.272