Poverty Profile Armenia experienced an extremely sharp fall in output and a near collapse of its economy following the breakup of the Soviet Union and the blockade that resulted from the conflict over Nagorno-Karabakh. The drop in output of more than 60 percent between 1992 and 1994 resulted in the collapse of household incomes and living standards, as wages failed to keep pace with hyperinflation, as subsidies on energy and food were reduced, and the decline in government revenue caused drastic cuts in social transfers, essential services, and maintenance of infrastructure. Although positive growth in 1994 and 1995 has since allowed a slight recovery, real wages are still only about one-fifth of what they were in 1992. Poverty became widespread and inequities have been growing rapidly. There is no official poverty line in Armenia. For this profile, relative poverty lines are used, based on the 1994/95 household expenditure survey. "Very poor families were defined as those with expenditures between 15 and 40 percent of the median. Thirty-one percent of urban families were found as being poor (of which 20 percent being very poor) and 25 percent of rural families (of which 12 percent being very poor). Inequalities in the distribution of income are high by international and FSU standards. Different surveys conducted in 1995 have gini coefficient a little over 0.50. Surveys carried out in 1994 and 1995 revealed unusual characteristics of poverty at that time and pointed to difficulties in identifying good indicators of poverty for targeting social transfers. No strong relation was found between poverty and age, gender, unemployment, level of education, family size, stock of consumer goods, or housing attributes. The factors most strongly related to poverty, especially in urban areas--the lack of extended family support, private remittances, or informal sector earnings--are extremely difficult to measure; and they may also cause families to move into or out of poverty very quickly. Land privatization has provided a safety net for the majority of rural families; poverty is less serious in rural areas than in urban areas; most of the severely poor in rural areas are those without access to good quality agricultural land or the means to farm it. Location is one of the strongest poverty correlates and potentially one of the most useful for policy and targeting purposes. The worst-off regions were found to be in the earthquake zone and in border areas. Differences in climate, elevation irrigation levels, and soil quality are reflected in the extreme dispersion of poverty rates by village. Considering the rapidly changing conditions in Armenia, however, it is likely that the poverty profile will change quickly with the restructuring of the economy.
Incentive and Regulatory Framework Following the break up of the former Soviet Union (FSU) and its independence in 1991, Armenia inherited a distorted, inefficient and obsolete national economy strongly affected by the collapse of the central planning system and the disruption of traditional trading arrangements within the FSU. The consequent economic and social problems were compounded by the devastation caused by the 1988 earthquake and by the virtual economic siege that resulted from the political conflicts in Georgia and the dispute with Azerbaijan over Nagorno-Karabakh. These conditions precipitated a catastrophic decline in output accompanied by hyperinflation. Real output in Armenia declined by 52 percent in 1992 and by 15 percent in 1993. Following the introduction of a national currency (the dram) at the end of 1993, government policies have been successful in stabilizing the economy. The comprehensive reform program introduced early in 1994 included tight financial policies, price liberalization, privatization, tax reform, and liberalization of the exchange and trade system. Privatization of land had already been achieved: Armenia was the first Republic in the FSU to embark on land privatization in 1991, and more than 90 percent of the land was in private hands by 1994.
Living standards of the population have been hit by the collapse in real wages, compounded by the removal of subsidies on essential goods and drastic cuts in spending on social services. Although the government raised the minimum wage a few times during 1992-1994, real wages1 declined by 60 percent in 1992, 42 percent in 1993, and a further 76 percent in 1994.
A further problem for the poor was the progressive removal of subsidies, prompted by fiscal pressures. For the living standards of the poor, the most significant reductions in food subsidies were those on bread, since many households had increased their consumption of bread in order to survive on low wages. Compensation was introduced but was not well-targeted. The impact of suppression of energy subsidies was cushioned to some extent by the major support of humanitarian agencies in kerosene distribution, and also by the failure to enforce payment of energy bills. The resulting increases in the cost of transportation, however, have been felt severely.
Public Expenditures The sharp decline in tax collection since independence (12 percent of GDP in 1996) has forced the government to drastically cut public expenditures. Capital expenditures and expenditures on wages, in particular, have been considerably reduced. Civil service wages are extremely low and insufficient to cover even basic food consumption of a household. Meanwhile, the fiscal deficit, estimated at 9.1 percent of GDP in 1996, is still very high and unsustainable. Social expenditures have been seriously curtailed. Government expenditure on health is estimated to have fallen from 8 percent to 3 percent of total government expenditures and from 5 percent to 1 percent of GDP between 1992 and 1994, a period of steep fall in GDP. The consequences have been little or no maintenance of the country's abundant medical facilities, severe shortage of essential equipment and supplies, collapse of the physician-staffed ambulance services, on which the poor were particularly dependent for non-emergency as well as emergency care, and drastic cuts in the salaries of medical personnel. The allocation of public expenditure in health care is not cost effective and hospital-based health care consumed approximately 92 percent of total health care expenditures while only 8 percent went towards out-clinic-based public health care. Primary health care services have been sustained over the last few years largely through the concerted efforts of humanitarian agencies and Diaspora organization. The result has been a fall in life expectancy, a sharp increase in the incidence of circulatory diseases and other noncommunicable illnesses, a high maternal mortality ratio due to the use of abortion as the primary means of fertility control, and inadequate health services. The situation is similar in the education sector. Public funding for the education sector is estimated to have declined from 7 percent of GDP to 2 percent of GDP and from 11 percent to 5 percent of total government spending between 1992 and 1994. Despite these cutbacks the student-teacher ratio and class size have been maintained at rates that are low by Western standards. Combined with the impact of the 1988 earthquake and energy crisis, the minimal level of public funding has meant that most schools have remained in operation only through emergency assistance from aid agencies and informal contributions from parents. The inefficiency and low level of public spending in human capital has particularly severe consequences for the poor. There is a danger that a new form of long-term structural poverty will emerge if some groups in society are denied access to good health services and educational opportunities and, thus, become trapped over generations in a vicious cycle of poverty.
Safety Net In Armenia today, the main coping mechanisms for the poor are family transfers, remittances, humanitarian assistance, and informal sector activities. Obviously, the very poor are the ones who do not benefit from family transfers and private remittances and do not receive revenue from the informal sector. Formal social assistance cash benefits are insufficient to protect the poor, due to fiscal constraints and the difficulty of targeting. The distribution of humanitarian assistance and community-based support, as well as mechanisms to facilitate the access of the poor to housing and utilities, will be important components of social protection in the short and medium term.
The existing system of cash transfers in Armenia consists primarily of social insurance programs, since there are a few social assistance programs that are operational other than the distribution of humanitarian aid, which is financed by donors. The major cash transfers are the pension system and child allowances, although the government also provides many other transfers, including unemployment benefits, student stipends, limited funeral benefits, and sick and maternity leave (Braithwaite, 1994). None of these transfers are specifically targeted to the poor, although some benefits reach more poor people than others.
Coverage of benefits is broad. Among rural households, 89 percent of the very poor, 87 percent of the poor, and 90 percent of the nonpoor families receive at least one of the four rural transfers; in urban areas, 83 percent of the very poor, 85 percent of the poor, and 84 percent of the nonpoor receive at least one of the seven urban transfers. Child allowances (including single-mother and many-child family payments) were the most broadly distributed transfer, reaching about 61 percent of urban families and 67 percent of rural families. Considering the very severe fiscal constraints, targeting cash benefits to the poor should be an important component of the poverty reduction strategy of the government. There are two commonly used methods of targeting benefits--categorical targeting and income testing--and both are difficult in the Armenian context.
The PAROS project is a system designed to target social benefits and facilitate the distribution of humanitarian assistance to the most impoverished sectors of the Armenian population. The system consists of a Family Chart (or "social passport") that is comprised of information on socioeconomic characteristics, size, composition, estimated revenues, and housing attributes of families. The families who request humanitarian assistance register themselves under the project and automatically obtain this social passport. The architects of the project recognized that some fine tuning is required before the system can be extended to the targeting of social assistance: the instrument relies strongly on the current income statement of the interviewee; the variable within the instrument that measures the families' degree of vulnerability needs to be reexamined; and the choice of the weighting system needs to be justified in order to ensure social and political viability. Some of the attributes registered in the social passport do not have a strong correlation with poverty; there are insufficient control mechanisms to ensure the reliability of the information gathered. Armenia faces a significant challenge regarding humanitarian assistance because projected volumes are expected to decline in 1996 and beyond.
Family transfers and solidarities are very important factors in the household's strategy to avoid poverty. However, they are very difficult to measure, first, because they are mainly informal and households are reluctant to answer questions quantifying levels, and, second, because many are in-kind or are very difficult to observe. The qualitative assessment demonstrated that solidarity with members of the community outside the extended family is quite limited, and that the poor who do not benefit from an extended family network are at serious risk of falling into long-term poverty. In both urban and rural areas, the data suggest that families have unequal access to informal support networks, and that poor households have a smaller number of sources of informal assistance.
Private remittances are an important source of revenue for many families, but the extent and level of these remittances is unknown. Very rough estimates of cash transfers carried by flight passengers during 1995 (from Russia and the USA) were between US$28 million and US$50 million. The disorganization of the financial sector and the lack of trust of the population in banks is a major obstacle to the flow of remittances, which originate mostly from Russia and, to a lesser degree, from the USA, Lebanon, and France.
Local solidarity groups, NGOs, the Armenian church, and local charities have a potentially important role in undertaking projects supporting the poor. For the moment, however, indigenous community-based structures are weak, while organizations of the Diaspora are often perceived by the population as external organizations. Many NGOs have been created in recent years, and about 700 national NGOs are registered at the Ministry of Justice; however, few are effective in the field, and even fewer are oriented towards practical development work with the poor (Peabody 1995). Unfortunately, the population is suspicious of collective action due to previous problems with Soviet-era organizations. Nevertheless, a number of old structures seem to be restructuring and changing orientation with some success, particularly some women's organizations and parents' associations.
Poverty Strategy Economic growth will be essential for poverty reduction, but it may not be sufficient to erase poverty either in the short or long term. As it is not clear at this stage how the profile of poverty will evolve, careful monitoring of this evolution will be extremely important. The vulnerable groups that are most at risk of being excluded from the benefits of restored growth include: households living in geographical areas that suffered from destruction of infrastructure (in the earthquake zone and border areas), or in rural areas where land is scarce and of poor agricultural quality; families whose children drop out of school, or who are unable to afford good quality education; families that are unable to invest in adequate health care; and workers whose skills are not adapted to market demand in the new growth sectors.
For the development of poverty-reducing growth strategies, four key issues are identified, and some suggestions are made concerning possible approaches for addressing these issues. First, the scale of the informal sector and the lack of good poverty indicators present enormous difficulties for both categorical and income targeting of social assistance in Armenia. This, in conjunction with tight budgetary constraints, means that cash transfers can only have a relatively limited impact on poverty reduction in the short to medium term.
Second, ensuring that the poor have access to good quality health and education services presents a particular challenge. It is clear that investment in human capital will be a crucial factor in promoting economic growth and poverty reduction. Lacking abundant raw materials for export, Armenians have depended historically on the strength of their human capital base. However, recent erosion of this base, due to rapid decline in the quality and coverage of education and health services, is jeopardizing the potential for economic recovery while creating the risk of social instability and longer term structural poverty. Therefore, priority should be given to improving both the level and the efficiency of public expenditure on health and education, concentrating public resources on ensuring universally affordable and good-quality basic services.
Third, restructuring of the economy is liable to leave sections of the population without access to productive assets or employment unless concerted actions are taken to prevent this. As agriculture moves from subsistence farming to modern productive methods, it will cease to play the role of safety net, as it has done in the recent past. The process of agricultural modernization will need to be accompanied by specific measures to protect the interests of small farmers and avoid a rapid increase in rural poverty. Such measures include accelerating land titling, creating a transparent market for land, supporting a system of cooperative rural credit, restructuring extension services, and improving rural transportation. Short-term measures for broadening income-earning opportunities include keeping the minimum wage low to encourage hiring by enterprises. Policies for the medium term include reducing the level of the payroll tax, in parallel with the restructuring of pensions; encouraging the development of private sector training programs by enterprises, NGOs and specialized institutions; and creating a fiscal and administrative structure that does not impede formal self-employment and small businesses.
Finally, there is considerable scope for strengthening the capacity of organizations involved with poverty alleviation. Despite the inherent difficulties in targeting benefits to the poor in Armenia in the short and medium term, some improvements can be made to existing social assistance programs by testing new approaches to geographical and categorical targeting. For example, private sector and local group initiatives can be encouraged and expanded by creating NGO partnerships with local and central governments, by supporting small business and NGO activities, and by increasing transparency and effectiveness in the distribution of humanitarian aid through improvement of the PAROS program.
Statistical System Armenia was the first Republic in the FSU to design and carry out a national representative random sample household expenditure survey to monitor the living standards of the Armenian population. The project was carried out in 1993-94 by Yerevan State University's Department of Sociology, in collaboration with the State Committee for Statistics, Goskomstat Arminii. This pilot survey was carried out with support from the SOROS Foundation and the analysis was undertaken with financial support from the World Bank.
Based on the experiment of the pilot survey, a program of living standards monitoring has been designed to be carried out between 1996 and 1999. The program includes support for two surveys. The first one will be rapid, with a single visit and a large sample. The survey will cover household revenues and expenditures, health and education, employment, access to public services and some qualitative questions on cultural and social issues. The second one will cover 12 months and will measure seasonal variations in income and expenditure. The questionnaire will be very comprehensive and will allow for an in-depth analysis of the determinants of poverty. The household questionnaire will be supplemented by a qualitative module on people's aspirations and a community module on infrastructure, community equipment, and communal life.
A small study fund has also been set up to hire local consultants from the University and research institutions to support the studies necessary to inform policy decisions. The first study to be funded under the study fund will be an update of the minimum consumption basket. The program is supported by the IDA-funded Social Investment Fund Project.
Notes:
1. Wages refer to the State sector (budgetary and non-budgetary) only. There are no official data available on wages in the private sector. |
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