Income Inequality and Poverty in Ukraine and Transition to the Market Economy

1
Income Inequality and Poverty in Ukraine and
Transition to the Market Economy

• Yevgeny Orel, C.Sc.(Econ.), Docent
• Faculty of Economic Science
• National University Kyiv-Mohyla Academy

2
Outline of the presentation

• Introduction
• Deprivation and poverty
• Basic definitions
• Selected statistics
• Selected literature review
• National and international efforts
• Conclusive remarks

3
The Government of Ukraine and people of this
country are in the process of transition to
democratic governance, market economy and
integration into the global system. This means
the transition towards prosperity for all
Ukrainian citizens. Prosperity for Ukrainians is
the ultimate and permanent objective and the most
desired result. To this end, the process of
poverty alleviation is a must.
4
The human deprivation in Ukraine is
multidimensional

• Regional dimension
• Rural dimension
• Gender dimension
• Environmental dimension
• HIV/AIDS dimension

5
Regional dimension

• HDI of Kiev oblast is 0.738 (Income index 0.603)
• Kyiv city 0.811 (0.687)
• Transcarpathian oblast 0.661 (0.475)
• Ukraine overall 0.736 (0.579)

6
Rural dimension

• Agricultural sector provides for 30 of GDP and
  30 of total employment
• Economic growth in Ukraine owes the most of it to
  agricultural growth.

7
Rural dimension (cont.)

• HOWEVER,
• Per UNDP, most of the poverty exists in rural
  areas.
• Per WB, in urban (33-27, per Survey WB/SCS)
• Both agreed The incidence of income poverty does
  not vary much between rural and urban areas.
  Poorer access to social services health
  facilities, education, safe water, basic
  sanitation, provision of productive resources,
  etc thats an issue!
• Economic growth has not translated into increase
  in employment or income.

8
Gender dimension

• It concerns both sharing income and participation
  in the decision-making process
• the ratio of womens wages in non-agricultural
  sector amounts to 71 of that of men
• the female representation at the legislative
  bodies amounts to 8.
• WB/SCS female poverty exceeds that of male by
  4-5 pp

9
Environmental dimension

• People () considering environmental problems
  critical for Ukraine (UNDP/DFID data)
• Air pollution (86)
• Unsafe drinking water (83)
• Nuclear safety, lack of (83)
• Deforestation (81)
• Poor people become victims of the above problems
  more than any other group.

10
HIV/AIDS dimension

• Ukraine The largest HIV/AIDS infection
  incidence, 1-1.5 infected (as estimated compared
  to formal statistics)
• High correlation between poverty and HIV/AIDS
  incidence (?)
• Poor are more vulnerable (?) in terms of
• Greater chances of getting infected (poorer
  prevention and lack of information)
• Lower capability to combat infection and disease

11
Income inequality, its simple definition

• It results from unequal distribution of income

12
Income inequality, its causes

• difference in the inborn abilities
• difference in education
• difference in the efforts
• difference in inheritance
• difference in relations with Lady Luck
• other causes

13
Income inequality results in

• POVERTY (?)
• Is that a fact?
• Does poverty always follow inequality?
• Is poverty always a result of inequality?
• Is poverty possible in the conditions of complete
  equality?

14
POVERTYgeneral definition

• Poverty is the lack of basic necessities that all
  human beings must have food and water, shelter,
  education, medical care, security, etc.
• Poverty
• Absolute
• Relative

15
POVERTYper USDA

• Poverty is equal to or less than three times an
  average familys minimum food expenditures
• is this definition applicable to Ukraine?

16
POVERTYper Ukrainian Poverty Prevention Strategy

• Poverty is impossibility, due to lack of funds,
  to maintain the way of life peculiar to a
  specific society within a specified period of
  time

17
Other terms used in the Ukrainian Poverty
Prevention Strategy

• poverty line income level below which it is
  impossible to satisfy basic needs. At present,
  in Ukraine, the poverty line is established as a
  monthly per capita subsistence minimum.

18
Other terms used in the Ukrainian Poverty
Prevention Strategy

• poverty depth deviation of the amounts of
  incomes and expenditures in poor households from
  the established poverty line

19
Poverty line

• 2000 171 hr.
• 2002 186 hr.
• 2005 284 hr.
• Poverty lines established value
• depends on definition of poverty and
• gives the basis for relating households to the
  category of poor.

20
Other terms used in the Ukrainian Poverty
Prevention Strategy

• abject poverty poverty verging on survival.

21
Reservations concerning poverty-related numbers

• The US poverty numbers do not include in-kind
  transfers or underreporting of income
  (underreported or unreported income), which means
  that economic statistics should be used with
  care
• cited after David C. Colander
• The same relates to other countries, Ukraine with
  its 55 of GDP in the shadow (the second
  economy) is not an exception.

22
Examples of statistics failures 1

• 5 to 7 million Ukrainians work abroad.
• Legally or not?
• Are their incomes counted or not?
• Are they actually poor or not?
• 2/3 of Ukrainians live by less than 2 a day.
• Are they actually poor?
• Are they formally considered poor?

23
Examples of statistics failures 2

• Per ILO
• 85 of Ukrainians consider their incomes
  insufficient to cover health care expenditures
• 80 expect poor or very poor life in older age.

24
Income inequality in Eastern Europe before and
after transition  
Source World Bank (2000), Making Transition Work
for Everyone Poverty and Inequality in Europe
and Central Asia, Washington DC The World Bank.
- Table 4.1.
25
Ukraine Gini coefficient

• 1987-90 0.24
• 1996-99 0.33
• 2000 0.363
• 2004 0.359
• Note Gini coefficients in this and previous
  slide were calculated for income (not earnings)
  distribution.

26
Causes of income inequality and poverty in
Ukraine

• Deterioration of the demographic situation (on
  the other hand, its a result of poverty
  increase)
• Poorly functioning governing bodies

27
Poverty, inequality and social assistance
(Dimitri A. Sotiropoulos)

• Poverty in post-communist Eastern Europe was the
  result not only of the transition to the market
  system, but also of the new social class
  domination, the political priorities of incoming
  governments, and the incoherent social assistance
  policies.
• The average citizen has become a poor person.
  (Absolute poverty. EO)
• In terms of cross-national variation, the worst
  cases of income inequality and poverty are the
  CIS and the South East European countries, while
  the Central East European countries have fared
  better.

28
Poverty, inequality and social assistance (cont.)
(Dimitri A. Sotiropoulos)

• Poverty alleviation measures were often
  means-tested and targeted. They have proven to
  be ineffective and inefficient. Despite the
  acuteness of such problems, most welfare reform
  has concentrated around the reform of pensions.
• A main prerequisite for any welfare reform is to
  proceed with the reform of state institutions.
  Possible collective actors initiating reform may
  include civil society associations and daring
  policy-makers and intellectuals.

29
Ukraine Rate of poverty

• 1988 2
• Poverty as a social problem was either unknown
  or well-dressed up in Eastern Europe before the
  disintegration of socialist regimes. (Dimitri A.
  Sotiropoulos)
• 1998 21
• 2000 26.7
• 2002 26
• 2003 26.6
• 2004 25

30
Abject poverty

• 2000 14.7
• 2001 16.4
• 2002 15.7

31
The main factors contributing to poverty in
Ukraine are as follows

• - low wages,
• - low pensions,
• - poor social aid due to lack of funds
• - high rate of actual unemployment (especially in
  Western and Eastern parts of Ukraine ???)

32
Income inequality 1 Causes peculiar to
Ukraine (per Olga Mikrukova)

• The share of primary income was smaller in
  socialist Ukraine than in market economies or
  developing countries. This is a reflection of
  three phenomena
• virtual absence of property incomes
• absence of occupational pensions and
• greater importance of income redistribution.
  (social transfers in socialist countries
  represented 19 of gross income as compared with
  14 in market economies)

33
Income inequality 2 Causes peculiar to
Ukraine (per Olga Mikrukova)

• Much lower direct taxation under socialism
  (personal income taxes plus employee-paid payroll
  tax) 10 of gross income as compared with 25
  for market economies.
• Direct taxes are usually progressive, whereas
  indirect taxes mostly act in regressive way.

34
Income inequality 3 Causes peculiar to
Ukraine (per Olga Mikrukova)

• Child benefits were more important in socialist
  countries than in market economies (4 of gross
  income cf 1)
• Overall income distribution was more egalitarian
  than in most market economies. Cash social
  transfers were distributed almost equally per
  head, whereas in market economies such transfers
  were focused on poor.

35
Transitional Changes (per Olha Mikrukova)

• Two categories of social costs of transition
• costs associated with decreases in output due to
  systemic changes (i.e., the transition to market
  economy) and to macroeconomic stabilization.
  These costs are expressed in lower incomes,
  higher inequality, and greater poverty.
• job-loss costs associated with the transition.
  Job-loss is sometimes accompanied by poverty, but
  not always. Unemployment is a distinct issue from
  poverty.

36
Specific(?) to Ukraine

• Hereditary poverty (if they are born to a poor
  family, they are condemned to be poor) (nepotism)
• Huge discrepancy between formal and actual
  incomes
• Are these two really peculiar only to Ukraine?

37
Ukrainian Longitudinal Monitoring Survey (ULMS)
1

• Performed by researchers from NaUKMA and
  University of Michigan
• Examined were Changes in wage inequality during
  17 years, from 1986 to 2003.
• Overall findings The income inequality did
  increase during the period under study.

38
ULMS 2

• What drove this inequality increase
• Changes in the labor force composition?
• Changes in the wage structure?
• To what extent did wage inequality rise?
• Can we explain the extent to which the rise in
  inequality was due to
• changes in the composition of the labor force
  versus
• changes in the structure of wages (returns to
  human capital and various job characteristics)
  brought about by the transition to the market
  economy?

39
ULMS 3

• Would changes in the demand for labor resulting
  from market forces and the introduction of
  private ownership result in compositional changes
  that would increase or decrease womens
  inequality more than mens?

40
ULMS 4 Basic facts established

• no official unemployment and wages were
  determined by a centralized tariff or wage grid,
  so there was little room for employers to
  determine wages.
• (the Criminal Code penalized for sponging. EO)
• The wage system during perestroika was loosened
  and decentralized in order to spur growth. This
  led to larger differences in wages, and hence in
  incomes.

41
ULMS 5 Findings

• The rise in wage inequality in Ukraine from 1986
  to 2003 was significant.
• the Gini coefficients rose by 1.5
  percentage points...
• Mens wage inequality rose more than womens
  Gini rose by 1.9

42
ULMS 5 Findings 2

• Wage inequality in Ukraine rose moderately
  relative to other FSU countries and
• mens overall wage inequality rose faster than
  that of women.
• The latter finding is consistent with findings
  for Poland (Keane and Prasad, 2002), and Russia
  (Brainerd, 1998)

43
ULMS 5 Findings 3

• Overall inequality in 2003 would have been higher
  if men and women working at that time had the
  same demographic and job characteristics as
  workers in 1986.
• employed individuals in 1986 (as compared to
  those employed in 2003) were younger (for women),
  less educated .working in the agricultural or
  industrial sectors, state sector and large or
  very large firms.
• the large movement of men into the small-scale
  sector helps explain the increase in inequality.

44
ULMS 5 Findings 4

• Overall inequality in 2003 would have been
  significantly lower if men and women had been
  paid according to the 1986 wage structure
• For both men and women, wages rose more for the
  more educated, for non-agricultural jobs relative
  to agriculture and for the larger firms relative
  to the smaller firms. These findings have been
  confirmed for other transition countries Czech
  Republic, Estonia, Hungary, Poland, and Slovenia
• The minimum wage did indeed play a role in
  lowering inequality from what it might have been,
  but only for women.

45
ULMS end notes

• On the one hand, the transition to the market
  economy leads to an increase in the income
  differentiation, because of the market forces.
• On the other hand, since the composition of labor
  force is changing in the course of transition to
  a market economy, this inequality could have been
  larger, had the labor force composition been
  preserved.

46
Poverty Overcoming Strategyapproved 15-Aug-2001

• The Strategy summarized that
• GDP down by 60 from 1990 to 1999
• Real wages down 3.8 times
• Pensions down 4 times
• First year of economic growth has not told on
  real incomes of people
• By-income and by-wealth stratification of the
  population continued.
• You cant feed people with macroeconomic
  indicators (Anatoly Kinakh, 1st Vice-Premiere)

47
Poverty Overcoming Strategy

• Established criterion of relation of people to
  the poverty category 75 of median total
  expenditures per capita (per a hypothetical
  adult). The aims were as follows
• Keep to international statistics standards
• Cover (indirectly) all types of activity,
  including those in the second economy.

48
Poverty Overcoming Strategyto-do list

• Focusing on the most striking manifestations of
  poverty
• Ensuring a stable increase in real incomes of
  people
• Ensuring of employment opportunities
• Middle class (?)
• Self-employment, secondary employment.
• Establishing business relationships in
  agriculture for new owners. (!)

49
Donor support, UNDP

• (1) Agriculture Policy Project
• (2) Small and Medium Enterprise Development
  Program
• (3) Vocational Training Program
• All three programs have a direct linkage to
  poverty alleviation.

50
Donor support, others

• DFID rural development and entrepreneurship
  development programs and projects
• TACIS Private Farm Support Centres project
• World Bank Country Assistance Strategy (CAS) for
  Ukraine, poverty and human development at the
  core
• USAID rural development as well as small and
  medium enterprise development
• Others.

51
What is more important

• To feed poor?
• To train them how to feed themselves?
• A fish or a fishing-rod?

52
Political significance

• Combating poverty remains my top goal. (Viktor
  Yushchenko, President of Ukraine)

53
Poverty is one of the causes of the so called
flower revolutions

• Kazakhstan does not suffer from the ethnic
  divisions and poverty that conspired to make
  Georgia and Ukraine so volatile. Oil revenues
  have produced five years of significant economic
  growth and soothed discontent.
• Source Waiting for the next dominoes. Economist
  1/15/2005, Vol. 374 Issue 8409, p40, 1/3p

54
Citation 1

• The war on poverty is not a struggle simply to
  support people, to make them dependent on the
  generosity of others. It is a struggle to give
  people a chance. It is an effort to allow them
  to develop and use their capacities, as we have
  been allowed to develop and use ours, so that
  they can share, as others share, in the promise
  of this nation
• Lindon Johnson

55
Citation 2

• Welfare is a cancer that is destroying those
  it should succor and threatening society itself.
• Ronald Reagan

56
Conclusive remarks 1

• Ukraine is in transition towards a market
  economy
• Poverty reduction is an essential condition for
  establishing an efficient and equitable market
  economy that can bring maximum possible benefits
  to all members of society

57
Conclusive remarks 2

• The government is not to stand by and passively
  watch, nor is to manually rule the economy, but
  is expected to correct market failures (poverty
  in particular) in the most civilized way without
  abolishing the principles of market economy
• Overcoming poverty in Ukraine is an essential
  condition to complete transition to a market
  economy, as well as enter regional and global
  organizations

58
Conclusive remarks 3

• An efficient market system enhances human
  ingenuity and creativity and an equitable market
  brings the maximum possible benefits to all the
  participants in the market economy. Only people
  whose capabilities have been built, who have
  access to social services and productive
  resources, who is free from hunger and material
  impoverishment can effectively participate in the
  market economy and reap maximum benefits from the
  process.

59
Conclusive remarks 4

• The notion of the market is now rapidly expanding
  from national to global markets and the concept
  of national integration is stretching to regional
  integration. Prosperity of a nation critically
  hinges on how it can be part of these processes
  and optimize the relevant benefits. Overcoming
  poverty is an essential condition to achieve the
  goal of transition to market economy and also for
  regional and global integration. Needless to say,
  that these are also contributing factors to
  sustained reduction of poverty as well.

60
Thank you for attention!????? ?? ?????!???????
?? ????????!