Transcript Poverty and Inequality in Transition

Making Transition Work
for Everyone: Poverty
and Inequality in ECA
Poor woman with winter food
supply; rural Tajikistan
Why a Study on Poverty
and Inequality?
Poverty is pain; it feels
like a disease. It
attacks a person not
only materially but also
morally. It eats away
one’s dignity and
drives one into total
despair (a woman from
Moldova)
 Beginning of transition, we expected
poverty would increase, but be shallow
and short-lived…but:
 Poverty increased dramatically: from 2%
in 1988 to an estimated 21% in 1998!
 Inequality also increased: five CIS
countries have levels of inequality
approaching the most unequal countries
in Latin America (greater than Peru)
The Experience of
Poverty in ECA
Imagine traveling along in a car
for seventy years, and suddenly the
road disappears and your car
crashes. You don’t know where to
go --Kyrgyz Republic
 Fall in living standards in context
of profound changes in political,
social and economic life
 Voices of poor: lack of income or
income insecurity is number one
concern
 Psychological pain as devastating
as material hardship
 Poverty is not easy to discuss
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Headcount Index (at $2.15 per person
per day in 1996 PPP)
How Many Poor?
Figure 1: Percentage of Population Living in Absolute Poverty in ECA
Transition Countries
100
90
80
70
60
50
40
30
20
10
0
Absolute poverty significant in IDA countries and Russia; but
relative poverty is a problem everywhere
Who is at Greatest Risk?
Unemployed man engaged in
petty trade; Armenia.
 Households with unemployed heads
(especially in Central Europe)
 Multi-child households but NOT the
elderly
 Rural households (especially in
Central Europe)
 Some localized areas or regions
(e.g. Northeast Romania; East
Ukraine; Imereti region Georgia ).
But the majority of the poor are working,
and live in urban areas.
Re
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Relative poverty risk
Children are at greater risk than
elderly, especially in Central
Europe
Relative poverty risk of children and elderly
2.50
2.00
1.50
1.00
Children
Elderly
0.50
0.00
Capabilities of the Poor
Endangered
My children cannot go to school
because, without them, I wouldn’t
be able to gather enough
cardboard every day (Moldova).
Poor woman with stomach cancer,
Armenia. Cannot afford health care.
 In some countries poor
children not attending school,
poor areas not well served
 Corruption a growing problem
in health and in education,
hurts the poor most
 Insufficient attention to
nutritional deficiencies,
communicable diseases
Why Did Poverty
Increase?
Moldova
Russia
Kazakhstan
Azerbaijan
Lithuania
Bulgaria
Kyrgyzstan
Romania
Latvia
Estonia
Georgia
Hungary
Slovakia
Czech Republic
Poland
Slovenia
-80
-60
-40
-20
0
20
%Change in Real Wages, 1990-98
Decline output  Falling Wages
and Incomes (especially marked
in CIS).
40
 Output collapse key-- but
magnitude varied across region
 Collapse of output experienced by
households as decline in
employment and wages
 ….but also as a fall in social
transfers (especially in CIS)
 Increasing inequality also
important factor
Increases in Inequality: Small
in Central Europe, Larger in
FSU Countries
Gini coefficient (percent)
Changes in Income Inequality in Selected ECA Countries
During Transition
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
a
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1987-90
1996-99
What Explains the Rise in
Inequality?



Not reforms per se  countries
further on reform path have lower
inequality
In CSB, rising education
premiums and emergence of
entrepreneurs …. but taxes and
transfers dampened increase
But not the case in the CIS.
What About the Increase in
Inequality in the CIS?



Rising education premiums explain very little of
inequality in CIS.
Causes lie elsewhere:
 widespread corruption and rents
 capture of the state by vested interests that
have influenced policy to their advantage
 resulting collapse of formal wages and
income opportunities
Result: polarized society where entrenched
economic interests control policy agenda 
leads to very unequal outcomes .
Public Action to Reduce
Poverty



Large variation in policy, performance,
income and vulnerabilities across
countries
Forward-looking policy agenda has to be
country and region-specific
But common themes exist; and less
advanced reformers have much to gain
from experience of those further on the
transition path.
Key Building Blocks




Build effective and
inclusive institutions
Tackle state capture; build
communities; give voice
Provide conditions for
shared growth
Stimulate labor demand and
private sector environment;
build capabilities of the poor
Protect the poor and
vulnerable
 Help the destitute; ensure
long-run equality of
opportunity for poor children;
balance protection, efficiency
Reduce inequality and
enhance opportunities
for the poorest
Reduce rents;measure to aid
those at bottom, lagging
regions; anti-discrimination
Advanced Reformer; High Income
(e.g. Poland, Hungary, Czech Rep.)
Shared growth
Capabilities
Protection
 Improve competition
policies
 Privatize infrastructure
monopolies/utilities
 Rationalize personnel
and facilities
 Improve incentives for
cost containment


Institutions/
Equality


 Reduce contingent
liabilities
 Enhance labor mobility
 Deepen financial sector
 Upgrade quality of
health and education
 Legitimize private
financing & protect
access of poor
Pension reform (multi-  Means-tested cash
pillar w/ minimum)
benefits.. Priorities:
poor children; rural.
Reform disability
pensions (e.g. Poland)  De-institutionalization
Support environment
 Anti-discrimination
for NGOs, communities  Decentralization, but
“Raise” the bottom: skill
address regional
upgrading; min. wages
disparities
Less Advanced Reformer;
Middle Income (e.g Russia, Romania)
Shared growth
Capabilities
Protection
Institutions/
Equality
 Introduce hard budget
constraints
 Remove barriers
entry/exit (SMEs)
 Agriculture/land reform
 Rationalize personnel
and facilities
 Improve incentives for
cost containment
 Reformed PAYG with
benefit/contribution link
minimum pov. benefit
 Replace UE Insurance
with flat/severance
benefit
 Reduce corruption
 Strengthen institutional
checks and balances;
political accountability
 Achieve sustainable
fiscal deficits
 Reorient public exp. to
social sectors and
infrastructure
 Upgrade quality of
health and education
 Legitimize private
financing & protect
access of poor
 Categorical benefits
(means-tested?)
 Eliminate privileges/
replace utility subsidies
(cash benefit/lifeline)
 De-institutionalization
 Build civil society
 Support communities
 Anti-discrimination
 Improve tax collection
Less Advanced Reformer;
Lower Income (e.g. Caucasus, Tajikistan)
Shared growth
Capabilities
Protection
Institutions/
Equality
 Introduce hard budget
constraints
 Remove barriers
entry/exit (SMEs)
 Agriculture/land reform
 Rationalize personnel
and facilities
 Increase spending &
improve incentives for
cost containment
 Flat pension (prepare
for intro funded pillar)
 Replace UE Insurance
with UE Assistance
 Reduce corruption
 Strengthen political
accountability;
institutional checks and
balances
 Increase revenues
 Reorient public exp. to
social sectors and
infrastructure
 Upgrade quality of
health and education
 Legitimize private
financing & protect
access of poor
 Limited cash benefit
 Self-targeting
 Eliminate privileges
 Introduce lifeline .
 Build civil society
 Support communities
 Anti-discrimination
 Improve tax collection/
compliance