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Yevgeny Orel, C.Sc.(Econ.), Docent Faculty of Economic Science

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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 (0.687) Transcarpathian oblast (0.475) Ukraine overall (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 – that’s 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 women’s wages in non-agricultural sector amounts to 71% of that of men; the female representation at the legislative bodies amounts to 8%. WB/SCS: female poverty exceeds that of male by 4-5 pp

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. Environmental situation improved in mid1990s due to collapse of industrial output. It has again deteriorated since output went up.

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

15 POVERTY per USDA Poverty is equal to or less than three times an average family’s minimum food expenditures is this definition applicable to Ukraine?

16 POVERTY per Ukrainian Poverty Prevention Strategy
Poverty is impossibility, due to lack of funds, to maintain the way of life peculiar to a specific society within a specified period of time

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 line’s 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? GNI/GNP more difficulty to compute.

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
Regions (and countries) Gini coefficients for income per capita Central Eastern Europe (Cz, Hu, Slo, Pl) South Eastern Europe (Alb, Bulg, Cro, Mc, Ro) Baltic States (Lith, Lat, Est) CIS and Western FSU (RF, UA, Mld, Blr), incl.: Russian Federation 0.26 0.47 Ukraine 0.24 0.33 Moldova 0.27 0.42 Belarus 0.23 0.28 Caucasus and Central Asia (Ar, Gr, Krg, Kaz, Tdj, Trkm) Source: World Bank (2000), Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia, Washington DC: The World Bank. - Table 4.1.

25 Ukraine: Gini coefficient
– 0.24 – 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, it’s 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
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. It started telling only during transition to market economy: When the income inequality started growing, the

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. macroeconomic stabilization – inflation, unemployment, wage arrears, etc.

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 women’s inequality more than men’s?”

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...” “Men’s wage inequality rose more than women’s… Gini … rose by 1.9…”

42 ULMS – [5] – Findings [2] Wage inequality in Ukraine rose moderately relative to other FSU countries and men’s overall wage inequality rose faster than that of women. The latter finding is consistent with findings for Poland (Keane and Prasad, 2002), and Russia (Brainerd, 1998)

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 Strategy approved 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 can’t 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 Strategy “to-do list”
Focusing on the most striking manifestations of poverty; Ensuring a stable increase in real incomes of people; Ensuring of employment opportunities; Middle class (?) Self-employment, secondary employment. Establishing business relationships in agriculture for new owners. (!)

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. (1) Agriculture Policy Project, which supports the formulation of policies that encourage economic development of the agriculture sector and creation of an effective legal and regulatory framework that fosters commercial activity. (2) Small and Medium Enterprise Development Program, which supports selected municipalities and SMEs to successfully development and implement local business plans with local resources. (3) Vocational Training Program, which seeks to facilitate the employment and re-employment of those who are without work as a result of the structural adjustment and transition to the market economy. These three programs have a direct linkage to poverty alleviation. Hence, this Prosperity Program is formulated by building upon the experience and knowledge of these on-going initiatives.

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! Дякую за увагу! Спасибо за внимание!

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