Poverty in Ukraine - DOC - DOC

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					Poverty in Ukraine
Simon Clarke

Data Sources
The World Bank’s Poverty Assessment of Ukraine was published in June 1996. The World Bank’s
analysis was entirely based on the data of a household survey of 2,024 households conducted in
June 1995 by the Kiev International Institute of Sociology, supplemented by an anthropological
study of 500 families run by Catherine Wanner of Penn State University. The attached report by
Professor Revenko uses a different source, the Goskomstat Household Budget Survey, which was
not available to the World Bank. Unfortunately the World Bank report did not provide much
technical information about its survey, so its quality cannot be judged. One aspect of the survey is
that it was conducted in the summer months, when domestic agricultural production is at its peak
and domestic energy consumption at a minimum. It should also be noted that it is very difficult to
get a good response rate from surveys conducted in the summer in the FSU because many people
are on vacation and/or tending their garden plots, although the response rate was given as a
relatively high 84%.
The Goskomstat survey is still the traditional survey inherited from the Soviet era, based on a very
large panel sample of households drawn from a non-random sample of enterprises. This means that
pensioners and the new rich, in particular, are substantially under-represented. The sample rotates
by 20-25% per year and respondents are, at least in principle, paid for their participation which
leads to a very high response rate, although people may be reluctant to declare unreported incomes
to an official survey. However, the survey monitors income and expenditure over the whole year
and contains a great deal of detailed information on sources of income and patterns of expenditure.
This source has not been available in the past, and even Professor Revenko only obtained the data
with difficulty. His report is the first to use this data for research into poverty in Ukraine. Neither
data source appears to be entirely adequate, although the Goskomstat methodology is currently
being reviewed, and both the World Bank and Professor Revenko call for much more research to be
undertaken on poverty in Ukraine.
One feature of both surveys in Ukraine is that they show expenditure to be considerably higher than
money income for all types of household. This is no doubt partly a consequence of under-reporting
of income, but it is primarily because of the very substantial scale of domestic production and
private transfers in the Ukrainian household budget. The World Bank’s survey estimated that home-
produced food accounted for 18% of total consumption. (The World Bank somewhat incongruously
characterises this reversion to subsistence agriculture as a feature of the entrepreneurialism of the
‘informal economy’). According to the Goskomstat data, income in kind accounts for an even larger
23% of the aggregate income of urban households and 56% of the aggregate income of rural
households, while private transfers account for an average of 7% of the aggregate income of all
households. Thus, the World Bank’s survey found that expenditure was more than twice as high as
income, a rather larger gap than revealed by the Goskomstat survey which found that money
income is about 60% of aggregate income, including income in-kind. The important role of income-
in-kind makes the quantitative assessment of poverty even more imprecise than usual.

Economic collapse
Whatever the quality of the data, both of these surveys confirm the impression of any visitor to
Ukraine, that the country has suffered a devastating economic blow and a large proportion of its
population is very poor. As in Russia, a substantial proportion of the population is dependent on the
Simon Clarke                           Poverty in Ukraine                                          2

production of their and their relatives’ garden plots and on private transfers in order to survive. A
distinctive feature of Ukraine is that pensions have fallen sharply as a result of budgetary
difficulties, so that the elderly population now shares the poverty of the working population and the
unemployed. Poverty is a major political issue, and promises to become even more important in the
forthcoming election campaigns. This is one reason why there has been so little research on
poverty, and why estimates of the scale of poverty bandied around vary wildly.
The scale of the economic collapse in Ukraine can hardly be captured by statistics. However,
between 1990 and 1996 GDP fell by 57%, production by 50%, aggregate consumption, bolstered by
domestic production, fell by a third and real wages fell by about two-thirds, most of the fall
occurring between 1990 and 1993. The costs of Chernobyl, which had been covered from the Soviet
budget, have fallen on Ukraine since 1992, paid for by a special 12% payroll tax. At the same time
as output and income have fallen, inequality in Ukraine has increased dramatically, primarily as a
result of the rapid increase of the incomes of a very small proportion of people at the top of the
scale and the failure to compensate the mass of the population for the colossal inflation which has
seen prices rise 165,000 times and destroyed personal savings.
It is interesting that the World Bank’s poverty assessment of Ukraine attributes the economic
collapse to the government’s failure to pursue recommended stabilisation policies whereas in the
case of Russia, which has pursued such policies, collapse is attributed to the legacy of the past. The
fact that collapse has been fairly uniform across the FSU and the Balkan countries, regardless of
government policies, would indicate that the Bank attributes too much significance to the impact of
policy on the real economy and too little to the impact of the disintegration of the system as a result
of its rapid incorporation into the world market. It is the latter that has hit Ukraine the hardest, since
it was tightly integrated into the Russian economy, heavily dependent on subsidised fuel and
protected Russian markets.
Much of the analysis of the Russian situation applies a fortiori to Ukraine. Regional differences in
Ukraine are not substantial, but they are complicated by the relationship between the nationalist
West and the Russophile East of the country.

Poverty measures and the scale of poverty
The World Bank report used an absolute poverty line based on the food component of the official
minimum consumption basket, scaled up for non-food expenditure as indicated by their survey, at
$24 per person per month in June 1995.1 They used household consumption expenditure, rather
than income, as the basis of their estimates. This gives a headcount of 29.5% for June 1995 which,
the World Bank report indicates, is rather lower than the figure estimated by the Russian poverty
assessment at 31%, although the food consumption basket defining the Ukrainian poverty line is
more generous than that for Russia.2 However, as noted in the report on poverty in Russia, the
World Bank poverty estimate for that country appears to be a very considerable over-estimate at
that time. The poverty line selected for Ukraine is at the modal consumption level, so the poverty
headcount is very sensitive to changes in the level of expenditure or the poverty line. On this
measure, the poverty gap is smaller than either Poland or Russia (9.6% against 13.2% and 11.7%

  People spending the poverty line amount on food spent a massive 83.5% of their income on food - this compares with
a more reasonable 62% of income spent on food by the same category of the population in the Goskomstat survey. The
equivalent figures for Russia are about 70% according to RLMS data and 60-65% according to Goskomstat data.
  Milanovic reports the relative headcounts on a $PPP 4 per day poverty line as 63% for Ukraine and 50% for Russia on
a money income definition (the Russian figure adjusts to 44% if income is scaled up to correspond to the GDP measure)
and 26% for Ukraine and 39% for Russia on expenditure data.
Simon Clarke                      Poverty in Ukraine                                   3

respectively). There must be considerable doubts about the data used for the Ukraine report, with
expenditure so far in excess of reported money income and food absorbing such a large proportion
of consumption expenditure. Using macro data, Milanovic estimates that over 60% of the Ukrainian
population live below the poverty line (Milanovic, p. 104).
Professor Revenko’s report paints rather a different picture from that of the World Bank, noting the
extent of the fall in GDP, with GDP per head now only around a third of the Polish level. 16.5% of
the population are considered poor in relation to the new official poverty line which has been set at
50% of the average aggregate income per head. Such a relative measure might be realistic in terms
of the targeting of social assistance, but it is very conservative in a low income country where it can
easily prove lower than any acceptable absolute poverty indicator. Around 85-90% of households in
1996 had aggregate incomes (including all in-kind income and social and private transfers) below
the 1990 poverty line, below which only about 10% of the population fell in 1990, very similar to
the figures for Russia. Well over 90% of the population had aggregate incomes below $4 per day at
the current exchange rate.
With quantitative data of dubious quality, low levels of income and expenditure and a marked
clustering of households around the putative poverty lines, poverty headcounts tell us very little. A
much more realistic picture is presented by the analysis of data on consumption patterns, which is
discussed in detail in Professor Revenko’s report. This shows the dramatic increase in the
proportion of income spent on food, from 33% in 1990 to 60% in 1996 (part of which is a result of
the substantial increase in the relative price of foodstuffs as subsidies were withdrawn), the decline
in food consumption and the even sharper fall in purchases of non-food items. It is interesting that
the data on the caloric content of food consumption presented by Professor Revenko in his report is
very similar to the data presented by Dr Ovcharova in her report on Russia. In both cases it would
appear that around 10% of the population has a diet which is deficient in calories. In the Ukrainian
case the entire rural population appears to consume sufficient calories, but the diet of about 25% of
the urban population is calorie deficient.

The incidence and cause of poverty
Identifying the incidence of poverty is something of an academic exercise when the great mass of
the population is poor, when there is so much reliance on domestic agriculture and support
networks and when the data is fairly weak. Nevertheless the World Bank drew some fairly
predictable conclusions from its survey data.
The poor are particularly those with more children and more people over 65. Poverty incidence
increases with age over 60 because pensions have been severely eroded, with the average pension
being about 40% below the poverty line, but the World Bank argues that higher pensions would be
an inefficient way of solving this since 40% of pensioners are under 65 and only 35% of pensioners
are poor.
The most important difference in Ukraine is between the urban and the rural population, which
have markedly different levels of money income but similar standards of living because of the
greater scope for domestic agriculture in the rural regions. This means, as the World Bank report
notes, that rural and urban poverty are qualitatively different. The urban poor run the risk of going
hungry because they are less likely to have access to land. The rural poor are much less likely to go
hungry, but they will be much shorter of money and the things that only money can buy. Beyond
this there are not marked regional differences. However, the urban-rural differences mean that there
are significant differences by nationality, since the rural population is mostly Ukrainian, with lower
money incomes, while the Russian population is predominantly urban. This is politically an
extremely sensitive issue.
Simon Clarke                     Poverty in Ukraine                                  4

The principal cause of poverty in Ukraine, as in Russia, is low wages and the non-payment of
wages. Wages fell by 55% in 1993 alone, to reach less than a third of their 1990 level in 1994,
before recovering slightly since then, despite the continuing decline in GDP. The effect of this
decline was that the share of wages in household income fell below 50% by 1993. The scale of non-
payment of wages in Ukraine in 1995 was even greater than in Russia, although Russia may now
have caught up.
Registered unemployment in Ukraine is extremely low because of tight eligibility conditions for
benefit and the very low level of benefit. Registered unemployment in October 1995 was 0.35%,
rising to 1.9% by July 1997. The World Bank estimate of ILO unemployment in mid 1995, based
on their survey, was only 3.8% plus 1.5% hidden unemployed who were laid off. The first
Ukrainian Labour Force Survey found 5.6% unemployed in October 1995 and 7.6% unemployed in
October 1996. As in Russia, while more women than men are registered as unemployed, the
majority of the survey unemployed are men. A comparison of the total number of employed with
the total number of full-time equivalents employed indicates that underemployment amounts to
something like 14% of working time. There is no doubt, however, that there are very large numbers
of people currently employed whose jobs would disappear in a competitive market economy.

Household survival strategies
Ukrainian households are roughly as dependent as Russian households on their garden plots for the
production of food. But they are even more dependent than Russians on these plots as a source of
income, the sale of produce contributing an average 8% to the total cash income of Ukrainian
households (more than four times as much as from all other ‘informal’ sources of income)
according to the World Bank data, as against only 2.5% in Russia. As in Russia, it is the poorer
families who have benefited least from participation in the informal sector.
The collapse of wages means that households are increasingly dependent on social benefits,
although the real value of such benefits has been sharply eroded by inflation and non-payment. The
World Bank’s anthropological survey found that the mass of the population experience the
administration of the benefit system as complex, bureaucratic and humiliating. This is reflected in
the low take-up of benefits, many not knowing about the benefits available and many more being
unwilling to demean themselves to secure the very low benefits available. The result of low take-up
is that around a quarter of poor households receive no transfers at all, and over two-thirds of all
benefits went to non-poor households, primarily because pensions are not means-tested. The
experience of means-tested benefits appears to have been even worse. In 1995 Ukraine began a
programme of sharply increasing housing-related charges to eliminate housing subsidies, linked to a
targeted housing subsidy which aimed to limit to 15% the proportion of income paid for housing
and communal services. By the end of February 1996 14% of households were receiving subsidy,
but targeting appeared to be haphazard and there were many complaints about the system, with
increased charges leading to widespread extreme hardship. In 1996 housing accounted for 5.8% of
aggregate expenditure, a substantial increase over the 1.4% in 1994, and close to the Russian level.
Child benefit is similarly means-tested but the take-up is low. As Professor Revenko argues,
effective means-testing is impossible in the Ukrainian situation, were money income is a very poor
guide to household welfare and where the distribution of aggregate income is very compressed
around the poverty line.