Poverty in the 1990s in the Kyrgyz Republic

High levels of poverty are present in the Kyrgyz Republic and the trend has been one of increasing poverty in the last decade. While there is no counterfactual to indicate what might have happened without the economic transition-it is possible that poverty could have been higher without the transition-certainly, the last decade has brought with it greater poverty. Most recently, the financial crisis in Russia led to a sharp increase in poverty and the problems of armed conflicts on the borders further threatens the living standards of the population.

The government recognizes the severity of the problems and is now in the process of developing two important strategies for the future: a Comprehensive Development Framework (CDF), and a National Strategy for Poverty Reduction (NSPR). These efforts represent an important challenge for the government and the society. The successful formulation of such strategies and programs requires a sound understanding of the present poverty situation in the country as well as the factors that cause poverty and the way in which government interventions can ameliorate living conditions.

One important source of data that is of particular relevance to the government in the CDF and NSPR processes are the household level data collected by the National Statistical Committee (NSC) of the country during the past years. These national surveys were designed to measure the levels and depth of poverty as well as to identify the determinants of poverty and other social outcomes and indicators. While by no means the only relevant source of data concerning poverty and its causes, these surveys can, and should, form a significant foundation for constructing a poverty alleviation strategy in the country.

Economic growth dropped in the early part of the 1990s, rose in 1996 and 1997 and then fell in the wake of the Russian financial crisis. Resources available to the government are significantly lower. At the same time, government spending as a share of GDP maybe at unsustainable levels, and may need to be reduced. This creates the dilemma that as poverty increases, the government has fewer resources to provide assistance and services to its citizenry.

Poverty

Close to two-thirds of the population have total consumption below this level and, hence, are categorized as poor. Extreme, or food poverty, affected 23 percent of the population. And the shortfall in consumption is quite significant. The gap between the consumption of the poor and the poverty line is, on average, 25 percent.

National Poverty Levels

Source: Data from Kyrgyz Household Energy Survey (KHES) 1999, calculations by NSC and the author.

Between 1996 and 1997, overall poverty stayed the same. But extreme poverty grew in rural areas (at the same time that in fell in urban ones). The Russian financial crisis that occurred in 1998 had a substantial effect on poverty in the country as poverty rose dramatically, from 51 percent to 63.6 percent. Due to the nature of the crisis, which affected urban formal sector activities most, the brunt of the economic crisis was felt by the urban population. In the space of a year, urban poverty went up 22 percentage points. During this period rural poverty also increased, but by less (6.8 percentage points); enough however, to maintain greater overall poverty rates in rural areas than in urban areas. From 1998-99 poverty again stabilized. No data on poverty exist for 2000 so it is not clear to what extent the Russian crisis has been surmounted.

Livelihoods of the Poor

The poor have lower levels of labor force participation than the non- poor (among the working age population) with women in extreme poverty having the lowest rate. Unemployment rates have fallen over time. The overall levels of unemployment, however, hide some differences among the welfare groups. Unemployment rates are lowest among the extreme poor, indicating that, to some extent, unemployment is a luxury good that only those with other sources of income can afford. But there is clearly an issue of limited employment opportunities also: in urban areas, it is the poor in general (not the extreme poor or non-poor) who have the highest unemployment rate (in both 1997 and 1998).

Self-employment

A large share of those working as self-employed persons are doing so in the agricultural sector. The poor are heavily concentrated in these types of activities and the returns to such labor appears limited. Non-agricultural self-employment is small overall: just eight percent of those employed are working in this capacity. For the extreme poor, however, it appears that this type of employment may be more productive than others. The share of income obtained from this type of employment is greater than the share of labor dedicated to it Wage income: Wage income is most important for the non-poor but is also significant for the urban poor. In spite of the massive changes in the economy in recent years, there is strong return to education in the labor market. Women, however, are at a disadvantage as their earning are substantially lower then men, even if all other characteristics are the same. Public sector wages may well be out of line with the prevailing market although further work is needed to determine this.

Agriculture

Agricultural income is the main source of income for the poor, especially in rural areas. But households that rely heavily on such income tend to be extremely poor. The poor are more likely to grow and sell crops than the non-poor, but the majority of production is not sold iii but consumed by the households. This is true for livestock as well. In contrast to crops, the non- poor sell more livestock than the poor and have significantly larger herds. There appears to be a split in the agricultural sector, wherein some are able to increase their earnings substantially through agricultural activities while others produce only for consumption. This may reflect the gap in inputs that individuals have (land, equipment, irrigation, fertilizers and the like). There is evidence, however, that lack of access to markets is a significant issue in agriculture.

Issues Affecting the Poor

There is a certain level of dissatisfaction among the population concerning utilities, education and health. The levels of dissatisfaction are higher for the extreme poor than for any other group. This dissatisfaction stems from several fundamental issues. First, the poor have less access overall to services in these sectors. Second, there is evidence that some of the services available to them are of lower quality than the services obtained by the non-poor. Third, the costs of services are substantial. The poor pay a disproportionately high share of their total income (consumption) for services. Finally, while only a small share of the population appears to receive subsidies and privileges, these benefits are regressively distributed: the non-poor benefit more than the poor.

The issue of costs is critical. Evidence in both the education and health sectors indicates that costs are preventing the poorest populations from obtaining services. Costs are one factor explaining the higher drop out rates of extremely poor children and costs are cited as a key reason for not seeking medical care. In short, the high costs of services to the poor have the potential of negatively affecting human capital in the country and impeding efforts in the future to alleviate poverty.

Conclusions and Recommendations

Poverty is a serious problem and one that cannot be expected to diminish greatly in the short or medium term. Thus government policies will need to have an explicit poverty focus if the poor are to benefit from public spending. Targeting of resources in social assistance needs to be improved, but targeting of other programs is also necessary. To the extent that the poor engage in different activities than the non-poor, programs in agriculture and the labor markets that take into account these differences will be more effective in alleviating poverty. Also, efforts to improve services will require sectoral reform and the rationalization of services. Furthermore, the burden on the poor of the costs of services must be alleviated. This will require explicit pricing polices and the re-channeling of existing subsidies and additional ones (made possible by reform) to the poorest populations.