Latvia: Poverty Assessment

In 1995 a wave of second generation transition issues common to a number of transition economies disrupted the early stages of Latvia's economic recovery. Competitive pressures on the profitability of enterprises, together with lax banking supervision and regulation, produced a serious banking crisis and resurfacing of fiscal imbalances. Supported by a Structural Adjustment Loan from the World Bank, the authorities embarked on a broad ranging reform program. The program sought to steer the Latvian economy toward a rapid and robust growth path, as a means to permanently reduce poverty.

The most recent Latvia CAS (177706-LV) was discussed by the Board in April 1998. The proposed program of lending and non-lending services in the CAS reflects the need to complete the structural reform program by putting the main emphasis on redefining and reshaping the public sector in Latvia. The CAS identified five areas for priority action by the Government. The first was strengthening the macro-economy and financial sector. Measures in this area included the strengthening of bank and non-bank financial supervision and reforms to ensure the medium-term sustainability of fiscal expenditures. The second was accelerating development of the private sector with emphasis on pushing ahead with the privatization of remaining large enterprises, along with the development of the regulatory framework needed for infrastructure privatization. Reform of the 'overburdened and poorly functioning judicial system' and the need for better corporate governance were noted as particular issues in this regard. The third priority was reshaping the role of the state with emphasis on pay reform and dealing with the growing problem of extra-budgetary funding of public sector agencies. A fourth area identified was promoting sub-national Government capacity to cope with environmentally sustainable regional development and local Government reform. The CAS noted the problems of the fragmentation of sub-national entities and their lack of administrative capacity and financing. The final area was strengthening the financing and delivery of social services. Among the issues were the affordability of the pension system and the need for ensuring that social assistance reached the neediest groups given the problems at the sub-national Government-level referred to above.

As part of the Bank's assistance to Latvia to define and implement an effective poverty reduction strategy, the Bank has completed in FY99 a social assessment of poverty in Latvia in participation with the UNDP and the Latvian Institute of Philosophy and Sociology, called 'Listening to the Poor.' This study has obtained valuable qualitative information on living conditions and gender, and its implication for poverty. It was essential to follow-up the social assessment with a quantitative oriented poverty assessment to provide the Government with quantitative information through which it can address its priorities in the areas of poverty reduction. In addition, the Government of Latvia is working together with the UNDP, ILO and the World Bank to come to a strategy that will alleviate poverty in Latvia. Separate reports have been written on various poverty related topics and this poverty assessment feeds directly into this ongoing discussion of the interdepartmental working group of the Government of Latvia.

The poverty assessment is focused on three areas. The first is an update of the poverty profile: who are the poor in Latvia in 1998, and what determines their low level of income. The second, in light of a strong link between poverty and unemployment, is to look at the labor market: determinants of earnings, and unemployment. The third is to assess how the system of social assistance functions: who are the recipients of social assistance's, what is the amount of "leakage", and why are certain households excluded. The functioning of social assistance is also linked with the issue of regional inequality in its delivery—a problem that has been repeatedly highlighted in the Latvian context.