Kyrgyz Republic: Poverty Assessment and Strategy

Poverty is a prevalent and persistent problem in the Kyrgyz Republic. Even before the disintegration of the Soviet Union in 1991, about one third of the population had a "socially unacceptable standard of living." Much of the existing poverty in the country is, therefore, inherited and structural. The 1993 Kyrgyz Living Standards Survey (KLSS) provides a profile of the post-independence situation, indicating that 40 percent of households lived in poverty with 25 percent classified as very poor. Roughly half of the total population are now thought to be poor. Rural households are 1.6 times more likely to be poor than urban. In the south, a higher proportion of households is poor than in the north, but the oblast with the highest rate of poverty is Naryn (which is in the north). The capital city of Bishkek has the least poverty.

The age of the head of household is an important predictor of poverty; households headed by younger people are significantly less likely to be very poor. Youth poverty is probably due to the depressed labor market situation. If the household head is an entrepreneur, then the household is much less likely to be poor. There is no clear differentiation between the poor and the nonpoor on the basis of their sector of employment, occupation, education, or other observed indicators. There is a slightly greater risk of poverty in households whose head is unemployed or not working due to disability. Households where the majority of household income comes from pensions and social assistance are significantly more likely to be poor. However, households headed by women are not more likely to be poor. Overall, households with more children are at greater risk of being in poverty, even after the receipt of social assistance benefits. However, this finding reflects the situation in the rural areas where there is a strong positive correlation between poverty and large family size. This relationship does not hold in urban areas. Poverty does not seem to be correlated with low educational attainment, probably because, up to now, there has been a weak link between educational achievements and earnings in the labor market. The last official estimate (for 1993) is that per capita GDP has dropped to $830. There has also been a significant widening of income distribution.

Incentive and Regulatory Framework

Since 1993, the government has made generally satisfactory progress in stabilizing the economy. Directed credits have been eliminated, interest rates have been liberalized, a floating exchange rate has been introduced, and the currency has been made fully convertible. However, during the last three years, industrial output has fallen by over 50 percent and overall input by about 35 percent. The main issues impeding poverty reduction are dramatic and continuing economic decline, associated with adverse external developments (including a breakdown of trade, a severe terms of trade shock, and a loss of fiscal transfers), and the difficulties in creating a favorable environment for the economy to respond to liberalization. Although the government has been withdrawing from the micro-management of the economy, it has not been very successful in developing the institutions necessary for making the emerging market economy operational. The taxation rate is very high on enterprises and disproportionately low on individuals, while tax compliance is unsatisfactory. Although land can now be leased to farmers for up to 49 years, it still cannot be privately owned. The medium-term high case outlook envisages a gradual output recovery.¹ Robust growth is not likely to be attained before 1997-98.

Public Expenditures

Following independence, in order to stabilize the economy, the government attempted to reduce the level of financing of the broad social programs inherited from the Soviet system, which was at an unsustainable level. Social expenditures fell from nearly 17 percent of GDP in 1990 to 9 percent in 1993, although by 1994, the figure had increased to 14 percent. Social assistance expenditures were most affected and may need to be increased to provide sufficient funding for targeted compensation to the poor (including food security arrangements and a targeted energy subsidy). Spending on education and health now appears to be absorbing appropriate shares of GDP (around 7 and 4 percent respectively). While in 1994 local governments covered 74 percent of the expenditures on education and 84 percent of health expenditures,² the current intergovernmental system has several features that could jeopardize the social safety net: (i) revenue-sharing arrangements that give subnational governments limited incentives to increase their tax efforts; (ii) a transfer system that provides soft budget constraints for subnational governments and reduces incentives to cut expenditures and/or increase the revenue collection efforts; (iii) local tax administrations that might be more loyal to the local level leading to potential non-compliance; (iv) limited correspondence of expenditures, revenues, and transfers, which forces local governments to accumulate large payment arrears; and (v) full expenditure autonomy at the local level, which leads to ad hoc expenditure cuts or large arrears for social expenditures, especially in the poorer regions. Measures should be taken to ensure minimum universal standards of the social safety net to all the population.

Safety Net

The safety net inherited by the Kyrgyz Republic is sophisticated but inefficient. With the assistance of the World Bank and other aid agencies, the government is trying to make the safety net better targeted and more affordable. The funding of social assistance and social security comes from a number of sources, including payroll taxes for the extra-budgetary funds and the republican and subnational budgets. One of the early developments following independence was the amalgamation of the revenue raising for three existing social insurance funds (the Employment Fund, the Pension Fund, and the Social Insurance Fund, covering mainly sickness benefits) into one administration - the Social Fund.

The most important type of social insurance benefit is the old age pension. Pension rates are theoretically linked to past earnings, but the pension system is collapsing as pensions are set at unrealistic levels, well above the financial capacity of the Social Fund. The impact of the arrears on the pensioners is aggravated by the arbitrary way in which the available funds are distributed. Politically more important regions, such as the city of Bishkek, receive pensions on time, while in many provincial and, in particular, rural areas the payments are delayed by six months or longer.

The payment of unemployment benefits has been less of an issue so far as open unemployment has been low. This picture is changing, however, as it is expected that unemployment will rise significantly in 1995.

The system of categorical social assistance benefits, which were poorly targeted, was replaced by a "common monthly subsidy" on January 1, 1995. Its effect has been to ensure that families with an average, non-working income below the minimum wage will continue to receive a monthly subsidy, so that their income rises to between 75 and 130 percent of the minimum wage.
Compounding the economic decline, the lack of institutional capacity is also a critical issue in providing an adequate safety net to the population. The World Bank's Social Safety Net project, focusing on the institutional development of the governmental bodies responsible for social assistance, employment services, vocational training, and socioeconomic statistics, will serve as a catalyst for strengthening the existing system.

Access to education and health services was universal in the past. Both sectors, however, are now burdened with a number of deficiencies and inefficiencies including excessive capacity.

State-owned enterprises used to play a very important role in financing kindergartens, polyclinics, sanatoriums, and other social facilities, which created parallel social services to the municipal ones. However, in the face of severe financial difficulties, enterprises have started to divest themselves of their social facilities, which often takes place in a chaotic way. A rationalization of all social services is, therefore, needed. The World Bank is preparing a project to help the government to rationalize the health care system.

Poverty Strategy

The report emphasizes that macroeconomic stabilization and structural reforms are the keys to reducing poverty in the medium term. In general, individuals need to be encouraged to make maximum efforts to help themselves and to avoid poverty through their income generation activities, but the government has a major supporting role to play. Overall, there would seem to be four main elements in the poverty reduction strategy.

• Maintaining macroeconomic stability and promoting economic growth in order to regain lost income levels as quickly as possible and to maximize the demand for labor
• Pursuing reforms in key sectors of the economy, particularly in the agricultural and industrial sector while implementing an affective regional development policy, further strengthening the Employment service, and creating a mechanism for alleviating the negative social effects of the restructuring and price adjustments in the energy sector
• Strengthening the social safety net, which will be particularly important in the short run, by further rationalizing the social assistance and social insurance programs and enhancing the capacity of the Ministry of Labor and Social Protection.
• Maintaining and strengthening the provision of essential social services, especially for children and the poor, such as health and education.

Statistical System

The 1993 Kyrgyzstan Living Standards Survey has provided a starting point for the modernization of the Kyrgyz statistical system. Continuing problems include the inadequacies of the sampling methods and other technical aspects of generating the data, as well as a general lack of knowledge about the use of such data in policymaking. The government's capacity to generate and use statistical information will be enhanced as a result of the technical assistance that is being provided under the Social Safety Net Project (which will assist in carrying out seven additional surveys using a panel approach and three modules on family planning, agriculture, and energy).

Notes:

1. CAS for the Kyrgyz Republic, April 1995.
2. Kyrgyz Republic Intergovernmental Finances -- Green Cover