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Improving Social Assistance in Armenia
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Armenia FY99 PA | | • | Read the Full Text (12Mb PDF) |
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In recent years Armenia has made significant progress in reforming its economy, restoring a sustainable path for growth and maintaining macroeconomic stability. Despite these advances the recovery remains fragile. Although overall living standards have improved since 1994, poverty is still widespread, and little or no impact has been made on the incidence of extreme poverty. It is urgent, therefore, to assess how the government's poverty reduction strategy can be made more effective and to identify the role social assistance can play in this area. The objectives of this study are to better understand the changes in poverty since 1994, to reassess options and priorities for the government's poverty reduction strategy, and to provide recommendations on improving the poverty focus of social assistance programs.
After the sharp descent into poverty from 1992 to 1994, when the vast majority of the population experienced conditions of absolute poverty, some improvements in living conditions have been achieved. The average wage doubled in real terms between 1994 and 1996, and substantial increases were achieved in the proportion of households with electricity and piped water. Nevertheless, poverty in Armenia remains widespread and severe. From the 1996/97 Household Budget Survey, about 55 percent of the population was estimated to be living in poverty and 28 percent of the population was under the food line. The average wage was still only one-third of its 1992 level. Vulnerability to poverty also continued to be high, with many households moving in and out of poverty. The trend of rapidly increasing inequality appeared to have stabilized in 1994 but remained very high. In 1996/97, per capita consumption was still 18 times higher in the top decile than for the poorest decile.
The poverty correlates typical of market economies are still not evident in Armenia. The correlation between poverty and unemployment was found to be stronger than in 1994, but still very weak compared with non-Commonwealth of Independent States (CIS) countries. Although the incidence and depth of poverty is highest among the unemployed, the highest number of poor consists of the working poor. Because of the low level of public sector wages, the large number of workers on administrative leave without pay, and the high prevalence of part-time work, employment does not guarantee sufficient earnings to support a family. Education remains a relatively poor predictor of poverty, as those with a high level of education are only slightly less likely to be poor. Overall, the urban population continues to be poorer than the rural population; however, in contrast with 1994, the incidence of extreme poverty was found to be higher in rural than in urban areas, suggesting that agriculture has become less effective as a safety net for the rural population. There now appears to be a link between household size and poverty, but the evidence is not very strong. Some groups that would intuitively be considered as poor have not fared worse than the rest of the population; for example, refugees and pensioners living alone were found to have a slightly lower-than-average risk of poverty.
Households remain poor mainly because of inactivity resulting from the lack of remunerated employment opportunities or assets for investment in private activities, low wages, lack of mobility, poor health and physical isolation. Unemployment is not only high — at 25 percent, as measured by SDS surveys in 1996/97 — it is also stagnant. Half of the unemployed have been without work for more than a year. Recent job creation has been concentrated mostly in self-employment and informal activities. At the same time, because of low wages, employment does not necessarily protect families against poverty. Salaries constitute a mere 13 percent of the average current income of the population, the same share as private transfers and remittances from abroad (both 13 percent). Seasonal labor migration to other CIS countries has become an extremely important source of income for Armenians. The population's heavy reliance on irregular sources of income from private transfers, humanitarian aid and remittances, means that households experience drastic extremes of income depending on the timing of the receipt. State transfers and the declining institutional transfers of humanitarian aid have not been targeted effectively to the poor and have, therefore, had a very limited impact on poverty reduction.
Evidence from the qualitative assessment indicates that social exclusion is increasing in Armenia and is closely linked to extreme poverty. The lack of a strong social network is a significant determinant of poverty. This is most likely to affect people with weak kinship ties, such as orphans and households composed of single parents. However, social exclusion is also related to lack of mobility, to poor health, and to psychological passivity due to repeated failure to integrate into the labor market or a support network.
NGOs play an important role in delivering programs that strengthen social safety nets in some Eastern European countries such as Poland and Hungary. The role of NGOs and the private sector (foundations and private donations, mostly from the Diaspora) is also growing in Armenia. Most of the local and international NGO groups were created in the aftermath of the earthquake of 1988. More than 1,200 NGOs are now registered and active in areas of elderly and nursing care, child support, employment generation activities, and protection of refugees and the disabled. Most operate on a very small scale, hampered by limited funds. State collaboration is still at the embryonic stage. NGOs are often viewed more as competitors than collaborators. The legal framework for NGOs is still incomplete and unfriendly.
The recent evolution of poverty implies the government's need to review its poverty reduction strategy. As poverty is still primarily a transitional phenomenon affecting more than half the population, the main pillar of a poverty reduction strategy remains the acceleration of economic growth. Further efforts are needed to increase public and private savings and to promote private investment. The restructuring of the public sector needs to move forward, as do reforms in the judicial and legal systems. In many sectors, reforms should be deepened to increase transparency, reduce distortion and strengthen capabilities; to restore viability of the energy, water and transport sectors; and to meet the human capital requirements for economic growth.
When unemployment and low wages are primary reasons for poverty, the labor market should play a role in reducing poverty and inequalities. Existing labor market regulations, however, are not creating major rigidities. An important question asked by many policymakers today is the potential role of proactive labor market policies in stimulating growth and employment. Under present economic conditions in Armenia, neither job subsidies nor training and retraining programs are likely to be effective in facilitating job creation. However, more can be done in the areas of micro-credit, support to self-employment, and public works. Recent experience, in particular of the Agriculture Credit Bank of Armenia (ACBA), shows that micro-credit programs can be successful when they are well-designed, with minimal subsidies, and are administered by competent financial institutions. With IDA (Armenia Social Investment Fund) and World Food Program (WFP) support, public works projects designed to stimulate the local economy through the use of small contractors and to improve social infrastructure have already been successfully implemented in Armenia. However, with the exception of a few pilots, the potential of public works designed to create employment through labor-intensive activities has not yet been thoroughly explored.
Social insurance programs, in particular old-age pension and unemployment benefits, do not effectively provide protection from poverty in the short term because savings levels, and consequently the levels of benefits, are very low and the poor are not well-targeted. In the long term, however, if the ongoing reforms are maintained, the pension system could become a more efficient tool to protect the elderly from poverty. Unemployment benefits cannot be efficient as long as the informal economy continues to flourish, which will probably be the case for a long time in Armenia. Another important area of the government's poverty reduction strategy involves protecting the poor's access to quality social services. In this area, deepening the social sector reforms will be very important, in particular strengthening primary health care services and general education. Additional mechanisms are needed to target health programs and education subsidies to the poor.
In this context, social assistance is one of the very few instruments available to protect the poor not benefiting from economic growth in the short and medium term. The objective of social assistance should be to protect the poorest of the poor and the most vulnerable groups from becoming socially excluded. For such a strategy, targeting is crucial. Social assistance should not create or promote dependence on charitable support, but provide the means for those who have been marginalized to reenter society. This presents an enormous challenge for Armenia because (i) the approach is contrary to the Soviet principles of social assistance on which values and expectations still tend to be based; (ii) both public and private resources are severely limited; and (iii) the large scale of the informal economy makes it extremely difficult in practice to identify the poor. Until the introduction of the Family Benefit in January 1999, the state-run system of social assistance — including cash transfers (child allowances and social pensions), residential institutions for a variety of vulnerable groups, and some very limited outreach programs for the elderly and the handicapped — had not been poverty-targeted.
Aware of the system's shortcomings, the government has begun its reform of social assistance. In December 1997, it passed a decree to replace child allowances and other social benefits with a family benefit targeted to the poor. The introduction of this new benefit in January 1999 represents a major shift from the categorical system, oriented to socially deserving members of society, to a system focusing on protecting the poor. The government has also taken other actions to improve outreach, train social workers and improve the capacity of the social services centers. Reforms need to be deepened to create an adequate institutional framework to deliver the targeted programs and to use humanitarian assistance more effectively. Outreach could be improved by increasing the role of elected local governments and NGOs in the design and delivery of social assistance programs and by strengthening partnerships with state structures. In addition, incentive systems needs to be improved, both to encourage social assistance centers to perform outreach activities and to encourage families and communities to support the poor and minimize dependence on the state.
To target the new family benefit, the government plans to use the Paros proxy means testing system. This system, introduced in Armenia in 1994 to improve the targeting of humanitarian assistance, was the first proxy means testing system adopted in Eastern Europe and Central Asia (though Russia is now experimenting with it on a pilot basis). The targeting performance of the Paros system was evaluated using the results of the Household Budget Survey. About 71 percent of Armenian households report they were registered with Paros in the fall of 1996. Registration by decile shows very little self-selection in the system. Errors of exclusion were found to have essentially three causes: barriers in registration for the poor; problems with measurement of proxies; and informal procedures used by social workers to pre-screen beneficiaries before registering them. Errors of inclusion were related to the difficulty of using proxies in the Armenian context and the lack of home visits for the purpose of control.
Many changes can be made in the system to improve targeting of the poor. It appears that changing the proxy formula would provide some improvements, and that changing the weight of the indicators used in the existing formula would also improve the targeting outcome. On the other hand, an increased customization of benefits would not change the targeting outcome. Several reforms can be introduced to improve the administration of the Paros system: decentralize the process of assessing household scores; improve public information on the formula and the registration mechanisms; integrate a more systematic outreach by the social workers with the help of local governments and NGOS; set up formal and informal appeal systems; and create a mechanism for program monitoring and evaluation. The family benefit program will also require the development of a streamlined, credible payment mechanism, and clear procedures for managers and staff of the social services centers, through a unified operational manual and training of social workers. After these reforms have been introduced and the impact of the targeted family benefit has been assessed, more thought should be given to using the proxy means testing system to support other programs in health, education or social services.
Alternatives to the proxy means test for poverty targeting are limited. Because of the localized nature of poverty in Armenia, geographic targeting could provide an administratively efficient mechanism for targeting of social sector spending; however, this would require more comprehensive and disaggregated data on poverty than are currently available, at least until the forthcoming census is carried out. The new capitation systems for financing of general schools and primary health care will need to take into account the large variations in poverty rates between districts and communities and incorporate a poverty weighting in the funding formula. Until better data are available, adjustments could possibly be based on the number of recipients of the family benefit in the catchment area. More assessments and analysis are also needed to explore the feasibility of community-based targeting of health and education subsidies, such as the school-based targeting mechanism recently introduced to waive textbook rental fees for the poorest pupils.
Considering the limitations to the development of social insurance in the short and medium term, and the relatively limited scope for interventions in terms of proactive labor market policies, strengthening social assistance is critical to support the very poor and socially excluded groups that are not in a position to benefit from the impact of growth. A number of measures can be taken to improve targeting and outreach to ensure that social assistance helps poor groups integrate into the economy and society, and to prevent undue dependence on the welfare system. At the same time, the system needs to be closely monitored and remain flexible in order to adapt to an ever changing situation. |
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