Poverty Profile Poverty is not a new phenomenon in Azerbaijan, though was not acknowledged officially until the late 1980s, with official estimates in 1989 of 34 percent of the population below the FSU-wide poverty line. Nonetheless, guaranteed employment, generous public transfers, largely free and universal social services, and subsidies on food, housing, utilities and other necessities meant that income poverty rarely translated into severe deprivation. However, poverty appears to have increased substantially during the 1990s, mainly as a result of the dramatic economic collapse.
This poverty profile is based on the Azerbaijan Survey of Living Conditions (ASLC), which was carried out at the end of 1995. Although Azerbaijan had a long history of household surveys (the Family Budget Survey, or FBS), the sample was not representative, so that the ASLC was the first nationally representative household survey. It was also representative for three sub-groups: the people of Baku, the non-Baku population, and internally displaced people (IDP). The poverty line used was developed by the government, based on an average daily intake of 2,360 calories (adjusted for age and gender). While this is somewhat higher than the minimal required intake, the credibility of the results was enhanced in-country by using an officially developed line. A food-only poverty line was used, because the reliability of important non-food expenditures was questionable (e.g. housing).
Using this poverty line, over 61 percent of the population was poor, and 20 percent were found to be very poor (i.e. household expenditures less than half of the household-specific poverty line). For the three representative sub-groups, poverty was roughly equal in Baku and non-Baku, but substantially higher (75 percent) for displaced people. In urban/rural terms, poverty rates did not vary greatly, largely due to the important role of own-produced food in rural areas. The analysis was also done for 8 economic zones, and this revealed significant regional variation, with the non-contiguous region of Nakhichevan being easily the poorest, and the South-West region relatively the best off.
Although it is difficult to track the dynamics of inequality, anecdotal evidence suggests that it has increased significantly. In the ASLC, the Gini coefficient was 0.35, compared to a 1989 Gini from FBS data of 0.275. Using official and ASLC data for income decile ratios, there appears to have been a substantial widening of the gap between the richest and the poorest since independence, with the decile ratio increasing from 3.3 at the end of the 1980s to between 8.5 and 11 in 1995.
Despite the high levels of poverty, human development indicators remain strong, with school enrollments over 90 percent, literacy at OECD levels, and an infant mortality rate well below average given the per capita income. However, there are emerging problems in social services, such as ASLC findings of 50 percent of the acutely ill not seeking care in health facilities due to the level of informal payments, and periods of extended absence from school of over 40 percent in some regions. In addition, anecdotal evidence suggests that the stable IMR and other health indicators may be a product of increased misreporting and non-reporting, and mask substantial deterioration. Even official data report IMR in some regions as high as 78 per 1,000 live births.
Incentive and Regulatory Framework The decline in output in Azerbaijan has been among the largest in the FSU. By 1996, GNP had fallen over 65 percent since 1990 to only US$490 per capita. In addition to factors common to FSU republics, such as the collapse of inter-republican trade and transition problems, the country suffered from a number of external shocks that have exacerbated the situation. These include the conflict with Armenia (which has resulted in around 12 percent of the population being either displaced or refugees), and the disruption of trade due to the Chechen conflict.
Since 1995, stabilization policies have been relatively effective, with inflation in 1996 the lowest in the FSU, the fiscal deficit under control, and growth resuming in 1996. However, structural impediments remain, such as a fragile financial sector, formal and informal constraints on SMEs, and slow progress on reforms to input and marketing arrangements for agriculture. In addition, the welfare costs of stabilization have been substantial, with the real value of public transfers collapsing in recent years to the point where they now play only a marginal role in household well-being.
Nevertheless, the economic prospects for Azerbaijan are strong, mainly as a result of its large oil reserves. GDP is projected to grow by an annual average of around 12 percent from 1998, continuing well into the next decade. An unknown variable is the likelihood of a full peace agreement with Armenia, which would allow IDPs to return to their areas of origin. In 1997, there appears to have been progress towards a resolution of the conflict, but even a full peace agreement will imply large reconstruction costs.
Like many countries with substantial natural resource wealth, the emerging boom in the oil sector is likely to provide mixed blessings. On the one hand, oil will be the backbone of projected high growth. On the other, the risk of "Dutch disease" is large, and it is imperative that the government invest its oil revenues prudently in the agriculture and non-oil productive sectors, to ensure that currency appreciation does not result in a dual economy, where those in the resource sectors do very well, while those in non-related sectors find their goods increasingly uncompetitive. If this can be done, the prospects for large reductions in poverty are high. If it is not, the poverty rate may remain roughly stable, but the severe poverty rate is likely to increase, and inequality will increase sharply.
Public Expenditures Public expenditures have collapsed since independence, largely in line with the fall in GDP, but also as a result of revenue collection problems. Public expenditure was 36 percent of GDP in 1994, before falling in 1995 to around 20 percent, and further in 1996. Less than 1 percent of GDP went to capital expenditures in 1995 and 1996. Under optimistic estimates, public expenditures will only account for around 20 percent of GDP by the end of the decade, with revenue performance up to mid-1997 suggesting that the actual outcome may be lower. One benefit of the severe expenditure contraction was that the overall deficit fell from over 11 percent of GDP in 1994 to under 3 percent in 1996.
The fall in public spending as a share of GDP is reflected in social spending. The GDP share spent on education and health fell from over 9 percent of GDP in 1992 to around 5 percent in 1996. Despite this, the government has defended social service expenditures better than most, with their overall share in public expenditures increasing significantly, from 19 percent in 1992 to around 27 percent in 1996. However, real expenditures remain at very low levels, with public education spending in 1996 only around one quarter of its 1992 level, and health spending only 20 percent of its 1990 level.
In recent years, the picture with transfer expenditures has been similar: a significant fall in expenditures as GDP share and in real terms, but accounting for an increased share of public spending. Between 1994 and 1996, spending on the major transfer programs (pensions, child allowances, and compensation payments) fell from 7.6 percent of GDP to 5.4 percent, with a backlog of arrears. At the same time, transfer expenditures as a share of public spending rose from 16 percent to 26 percent. Despite this defense of spending, the minimum pension in 1995 fell to only 2 percent of its 1991 real value, and average pensions fell to 4 percent of their real 1991 value.
The fall in public expenditures on social services have been substituted for in part by sharply increased private expenditures. This is particularly true of health spending, where private expenditures were over three times the level of public in 1995. The substitution of private for public spending has had negative access effects, exacerbating pre-existing problems with public expenditures that are oriented towards curative hospital-based care and tertiary education. The report recommends several reforms to mitigate these impacts, including reorientation of public spending towards primary care, development of a free basic package of health care that will be offered in public facilities, revision of input norms in education, strengthened oversight of informal access problems in education, and assessment of existing informal payments in social services, in order to promote both more transparent co-payment systems, and efficient use of out-of-pocket revenues.
Safety Net Azerbaijan inherited a comprehensive social safety net. However, the system is increasingly ineffective, given the generous eligibility rules for public pensions, and partial effectiveness of targeting of social assistance. Even within the constrained budgetary envelope, there is substantial scope for improving the real value of transfers by reforming eligibility criteria of both pensions and social assistance. In addition, even sustaining the current share of GDP devoted to social protection should see a large increase in the real amounts available for transfer programs in the medium term.
The main recommendations on the safety net include: (i) reform of the pension system, including raising the normal retirement age, reduction in early retirement provisions, and reduction in the level of working pensions; (ii) assessing the potential for supplementing wage-based means-testing of social assistance with proxy means-testing, or establishing different eligibility thresholds in rural and urban areas (due to differences in income structures); and (iii) introduction of an energy compensation scheme for poor households to mitigate the social impact of energy price liberalization.
Poverty Strategy The strategy proposed is the common one of broad-based growth, complemented by increased and more efficient investment in social services, and better targeted transfer spending. On the first element, growth should occur in Azerbaijan in coming years, given its resource endowments. The issue will be ensuring that the non-oil sectors operate in a policy environment where they can compete at home and abroad. This will require easing of constraints on SME operations, better official understanding of the interaction between exchange rate movements and sectoral competitiveness, and sensible investment of oil revenues.
Social service delivery can be improved in many respects. In health, focusing on a basic package of care and the facilities that deliver primary care could have a big impact on both efficiency and equity. In education, there must be rationalization of recurrent expenditures (e.g. reducing staff/student ratios), in order to free up resources for required investments. In the case of the safety net, the main reforms are outlined above. While in the medium term there will be more fundamental reform issues (e.g. systemic pension reform), for now there are large potential welfare gains from a better targeted system, which will allow more generous social assistance and insurance benefits.
Statistical System Azerbaijan inherited and continues to operate the FBS. In addition, the inherited system has no tradition of unit record analysis. However, interaction with the State Statistical Agency throughout ASLC design and implementation has resulted in important reform proposals for the sample, questionnaire and analysis of household survey data, which are expected to be introduced in 1998. For the reforms to be really effective, there is a need for further external technical support, particularly in the areas of sampling and data analysis. Line ministries have also expressed interest in using the new results during policy development, but there will be a need to strengthen institutional linkages between the statistical agency and line ministries to ensure that their objectives are realized. |
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