Poverty is Falling in Eastern Europe and the Former Soviet Union, but Challenges Remain

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WASHINGTON DC, October 12, 2005 — Some 40 million people were moved out of poverty in Central and Southeastern Europe and the countries of the former Soviet Union during 1998-2003 as a result of rapid growth and narrowing inequality, says a World Bank report released today. According to the report^*, the number of people living in poverty in the Region in 2003 was 61 million, or 12 percent of the population. This compares with 20 percent living in poverty in 1998.

Household consumption surveys are used to build a comparable indicator of living standards across the 27 countries covered in the report . An absolute poverty line of $2 a day is used for most countries, given the cost of heating and warm clothing required for the cold climate. An additional 153 million people living in the Region on $4-a-day or less are considered economically vulnerable rather than poor.

"The report shows how countries already stressed by transition managed to pull millions of people out of poverty in the wake of the 1998 financial crisis in Russia. This turn-around highlights the importance of growth in creating conditions for a better life. To sustain this, more jobs are needed to help those left behind, especially in rural areas and some of the region's many secondary cities," said Shigeo Katsu, World Bank Vice President for Europe and Central Asia (ECA).

The report recommends pursuing enterprise reforms, boosting rural growth, and promoting opportunity in lagging regions. Other reform priorities they identify include improving the delivery of basic services, and ensuring better, more targeted social protection, particularly for the working poor and children.

According to the report, the resurgence in growth during 1998-2003 was driven largely by the Commonwealth of Independent States (CIS) countries. Russia's role is pivotal, given its oil wealth and importance in regional trade and migration flows. At the same time, European Union (EU) integration has helped to broaden markets and lock-in reforms for acceding countries. The end of the war in the Western Balkans made the economic environment more conducive for investment and growth.

From 1998 to 2003, poverty fell in most countries of the Region. The highest levels of absolute poverty are in poor countries of Central Asia, like Tajikistan with a 70 percent poverty rate, and the South Caucasus, where Georgia, for example, had a poverty rate of 50 percent in 2003. Yet most of the poor and vulnerable in the transition countries of the Region are in large middle-income countries such as Kazakhstan, Poland, Russia, and Ukraine. Those most at risk are the young, residents in rural areas and in secondary cities. The unemployed, people with little education, and those belonging to underprivileged minorities, such as the Roma are also at great risk. Most of the poor are working poor.

Poverty's response to growth. The report finds that several fast-growing countries â€" for example, Russia and Kazakhstan -- witnessed shifts in the distribution of income toward the poor. As a result, poverty has declined more rapidly than was expected. In contrast, in Georgia and Poland, the distribution did not move towards the poor, and poverty actually rose. The most rapid fall in poverty has been in capital cities.

Jobless growth. Very few countries, even those that progressed furthest in reducing poverty, managed to create enough jobs. This failure to generate jobs means falling employment, except in a few fast-growing countries like Kazakhstan, Russia, and Ukraine. In the new EU member states and in the countries of Southeastern Europe, the employment ratio, which now stands at 56 percent, is well below the so-called Lisbon target of 70 percent set by the European Union.

Inequality. The report finds that inequality as measured by household consumption of goods and services declined overall in the CIS. The pattern was less clear in Central and Eastern Europe, the Baltic countries, and Southeastern Europe. By 2003, consumption inequality in the Region was comparable to that in relatively egalitarian regions such as East Asia or even some of the world's rich countries. However, large regional inequalities exist, both between and within countries.

Affordable access to quality services. Trends in access to education, health care, safe water, sanitation, and heating are less inspiring, according to the report. Inequalities persist in access to good schooling, health care, reliable water and electricity. In some cases they have increased, particularly in the CIS. In Tajikistan, for example, the reliability of water has declined for all but the top fifth of the population.

The role of public policy and future prospects. The report warns that if the trend of jobless growth persists, fewer people will be pulled out of poverty. If growing inequalities in the quality of basic services are not reversed, they will weaken the beneficial effects of growth.

To speed growth and ensure it works in favor of the poor, the authors call for:

• Further reform of the enterprise sector to encourage the release of resources from old, less productive firms to new, more productive firms;
• Policies to promote agriculture and rural growth by integrating rural areas into the rest of the economy with regard to labor and capital markets, access to credit, trade and services;
• Efforts to generate greater opportunity in lagging regions;
• Improving quality of basic services and preserving their affordability to the poor; and
• Further improvements to the social safety net.

"At current growth levels, we predict that by 2007 around 40 million people will still be poor and roughly 110 million will be economically vulnerable. Given this and the threat to the achievement of human development goals, it is essential that governments work to accelerate growth and ensure that everyone shares in it," concludes Asad Alam, Team Leader of the report and Sector Manager in the World Bank's Gender, Poverty and Macroeconomics Unit in ECA.

The report and related materials are available at:
http://www.worldbank.org/eca/ecapovertyreport