Belarus: An Assessment of Poverty and Prospects for Improved Living Standards

Poverty Profile

The 1995 World Bank report on poverty in Belarus¹ found that the incidence of poverty grew from less than 5 percent in 1992 to about 22 percent on average in 1995. This rate varied considerably during the year 36 percent in the first quarter of 1995, dropping to 24 percent in the following quarter. This seasonal variation is explained in part by the increased availability of food from household garden plots during the warmer months; on the basis of cash income only, the poverty rate in the first quarter of 1995 would have been close to 50 percent, compared with only 36 percent based on cash plus non-cash income. In-kind income from small-scale agriculture, which averages between one fifth and one third of total household income, is thus a key component of households' well-being and frequently determines whether a household suffers or escapes from poverty. Poverty incidence is lower in rural than in urban areas (30 versus 39 percent).

Those most affected by poverty are single parents, one-worker families, and large, less-educated families with children. The number of children in a family is the single most important determinant of poverty. Gender differences were found to be insignificant. Poverty incidence by employment varies from 13 percent for military personnel to over 50 percent for the unemployed. The incidence of poverty among pensioners is only 26 percent, making them a relatively privileged group.

Incentive and Regulatory Framework

The dramatic growth in poverty in Belarus is largely the result of the severe drop in output and real incomes in recent years, not of the increased inequality of income distribution. The loss of traditional export markets in the former Soviet Union, large increases in energy prices, lack of market economy institutions, and continued resistance to reforms and adjustment have caused a collapse in production. Between 1991 and 1995, GDP declined by about 40 percent, a factor that accounts for over 30 percentage points of the poverty rate increase as of the first quarter of 1995. In contrast, rising income distribution inequality had added fewer than 5 percentage points to poverty at that point in time. Renewed economic growth is clearly the first and most important step required to establish higher living standards for all. However, until a market-oriented environment that encourages investment and growth has been established, an excessively large share of the Belarussian people will continue to live in poverty.

Public Expenditures

Many social services have worsened since 1990, taking a toll on human development indicators. The state-run health care system has found itself ill-equipped to deal with resource constraints, and health conditions have deteriorated as people have encountered increasing problems in accessing health facilities able to provide the services and medicines that they need. In theory, the entire population continues to be covered for a full range of public health services, but in practice the system is skewed toward those who are employed. Inequalities in delivery and access are widening. Children, the unemployed, and pensioners do not receive adequate care, especially preventive care. Infants and women are suffering most. Male life expectancy has fallen to levels prevalent before the 1950s, and general mortality has increased. Standard performance indicators for education show no significant change, but these quantitative indicators mask qualitative shortcomings and growing inequalities of access to a good education. The public education system has increasingly failed to provide badly needed skills and training. The resulting depletion of the country's human capital can lead to further declines in output and living standards in the coming years and puts growth prospects in Belarus in jeopardy.

Safety Net

Because there was no sizable group of poor under the Soviet system, the social protection system was not built to favor the poor. Consequently, the current social safety net in Belarus encompasses an extensive system of cash and in-kind benefits, but is still unable to provide adequate protection to the poor. Moreover, existing social programs are unsustainable in their current form, and there is no evidence that the current system of welfare benefits is cost-effective. The government spends large amounts of money on social protection13 percent of GDP and 36 percent of total public spending. Despite heavy expenditures, these programs do little to reduce poverty because only a fraction of this support is targeted to the poor. Some programs, such as family benefits, are reasonably well targeted to households that are likely to be poor. Overall, however, the nonpoor receive 1.5 times more benefits than the poor. This is partly due to the fact that social protection includes not only means-tested support for low-income families, but also social insurance programs such as pensions that are not designed to help those who are already poor. Such programs do, however, reduce the risk that people will become poor. Falling output, aging population, and lax eligibility controls are making the social protection programs insolvent, and a crumbling tax base must struggle to support a growing number of beneficiaries at benefit levels that are frequently excessive given other sources of income. The poverty assessment also identified failures in the actual administration of benefits. For instance, in the case of the social pension, about 60 percent of non-poor elderly receive family benefits, while about 37 percent of poor families are not paid family benefits even though they qualify.

Poverty Strategy

The report concludes that limited earnings capacity is the main cause of poverty in Belarus. Promoting income and employment growth is thus the government's best policy to fight poverty. Attaining growth depends on an improved institutional environment that fosters efficiency and profit maximization. Such an environment is needed both to attract the investment that is needed to support the restoration of growth and to assure increased productivity for new as well as existing investments. This is a huge, long-term task, and its outcome will depend on the correct sequencing of reforms and the speed of change in the following areas: (i) reducing and refocusing the role of government; (ii) reforms that affect institutional environment; (iii) creating a broad-based incentive structure founded on meaningful market-determined prices; (iv) developing an efficient financial system; and (v) developing and promoting new enterprises in the private sector. In addition, social programs are needed to protect the most vulnerable groups where poverty occurs. The existing social programs need to become better targeted and administered, thereby increasing their cost-effectiveness. These programs should assure: (i) fiscal sustainability and cost effectiveness; (ii) incentive neutrality; (iii) support for human capital formation; (iv) promotion of self-reliance and rehabilitation rather than dependency; and (v) a clear distinction between social insurance and social assistance.

Statistical Foundations of Social Safety Net Programs

The official "Minimum Consumer Budget" methodology in Belarus suffers from a number of deficiencies: (i) the daily nutritional intake norms are larger than internationally recommended calorie norms; (ii) economies of scale in household consumption are improperly treated; (iii) consumer baskets bear little relation to actual product availability or consumption patterns; (iv) obvious luxuries are included; and (v) the real value of consumption baskets change over time. In addition to moving toward a more suitable set of poverty and means-testing criteria as recommended in the poverty assessment, Belarus needs to develop more readily accessible income information that can be used to administering well-targeted, means-tested safety-net programs.

Notes:

1. Belarus: An Assessment of Poverty and Prospects for Improved Living Standards, Report No. 15380-BY, June 1996.