Moldova: Poverty Assessment

The regional crisis in 1998, which helped bring about a sharp decline in Moldova's GDP, has made poverty even greater. Absolute poverty has worsened significantly. Using the same absolute poverty line as in May 1997, 46 percent of Moldovans were poor in the fourth quarter of 1998. In particular, comparing the third and fourth quarters in 1997 to those in 1998, the number of people whose consumption was less than the absolute poverty line have increased sharply (Figure I).

• Poverty is more prevalent in rural areas than in other urban areas. Moreover, those who live in Chisinau are much better off than those in other cities.
• Low labor market outcomes are reflected in the finding that the poorest groups in Moldova are the working poor, especially the landless in agriculture.
• Some elderly people are poor, but pensioners may not be at special risk of poverty.
• Women are less poor than men, but the difference narrows with age.

Those who live in urban areas are better off than their rural counterparts, both in terms of absolute and relative poverty. Those who live in Chisinau are especially well off. In August 1997, per capita consumption in rural areas was only 75 percent of that in urban areas—with the poorest 20 percent of the population in rural Moldova consuming about 73 percent of the corresponding consumption of the urban poor. Similarly, only 6.7 percent of the population in Chisinau were found to be relatively poor, compared to 17.2 percent of the population of other cities, and 21.1 percent of the rural population. The finding is at variance with the situation in some of the other former Soviet countries, where rural farmers were often better off because they could consume their own produce. A reason, however, why urban Moldovans are not at a disadvantage in terms of self-produced food may be the fairly widespread ownership of dacha plots in the countryside by urban Moldovans, the frequent travel to the countryside by urban dwellers (especially in summer) and the continuing close ties with family in rural areas.

Mirroring the geographical distribution described above, agricultural workers (as opposed to farmers) are occupationally the most vulnerable group in Moldova. In May 1997, 27 percent of agricultural workers were below the relative poverty line, as compared to just 15 percent of farmers, and 21 percent of the unemployed (Figure III). The slow progress in structural transformation in Moldovan agriculture is an explanation. Moldova, unlike the countries in the Caucasus, did not undergo land reform in the early years since independence. In 1997, most farms were still unreformed kolkhozi (collective farms) or sovkhozi (State farms). With Soviet input and output channels in disarray, and existing sales mostly in barter, the farms are chronically unable to pay wages to workers, especially in cash. The process of farm restructuring, underway today in Moldova, is rapidly changing this situation.

But some sections of the elderly are, indeed, very poor. Those living alone, or depending exclusively on their pensions for support, may be extremely vulnerable. Those who are no longer capable of physically cultivating their land (including urban gardens) often lease their land to others, in exchange for what is sometimes a very meager portion of the harvest. Special efforts have to be made, therefore, to identify the elderly with these characteristics, and to target social protection payments to them.

Households with more than five members, or with more than two children, are likely to be poor. Almost 1.2 million people live in households with five or more members. Of them, over 400,000 (35 percent) are poor. [4] The numbers increase with household size, so that four out of ten people in households over seven members, and almost all of those in nine-member households, are poor.

Even within these households, poverty depends on how many of the family members are children 14 and under. Almost one out of three of those living in families with two children are poor, and 42 percent of those in households with three or more children suffer from poverty. This is partly because of the family's "dependency burden"—the need to support non-earning members of a family on one or two incomes. Every 100 workers in Moldova support 167 dependents—children, the non-working elderly, the unemployed and those out of the labor force. (This compares, for example, to 114 dependents per 100 workers in the United States).

• Relative price shocks, especially the steep rise in energy prices in recent years, has affected living standards in Moldova.
• But food-related poverty is lower, partly because low demand for agricultural exports has kept domestic consumer prices low. Given that food is the largest part of the consumption basket for the poor, this has been a key factor in moderating the growth in poverty in the recent past.

The poverty of individuals and households in Moldova have mirrored the causes of the overall slowdown in the economy. Many enterprises found that the post-Soviet economic structure resulted in a vast increase in the ratio of their input prices to the market price of their output. Similarly, consumers found that the market prices of necessities—food and especially energy—were relatively (and in a few cases, absolutely) greater than the price their labor could fetch in the new recessionary labor market.

Yet Moldova, as an agricultural producer, has been able to protect its consumers reasonably well against increases in food prices—and thus food-related poverty is still relatively low. This has been especially true due to the economy-wide price stabilization since 1995, but has also been because of the large amount of self-production of food. In more recent years, and particularly in the latter half of 1998, food prices have also been driven down greatly by the loss of traditional export markets, especially Russia. As a result, there has been an excess supply of food to the domestic market (especially Chisinau), driving prices down greatly. Given the relative abundance of agricultural commodities, consumers were also able to switch fairly easily between products within food groups as the within-group relative prices changed—the switch by the poor away from bread to mamaliga being a good example. With food and beverages being four-fifths of the poor's consumption basket (Table III), the price effect on the poor's overall consumption has not been as great.

This has caused problems as centralized heating is now difficult for most households to afford, and the Government cannot afford to fully subsidize heating charges for the entire urban population. However, the poor do not spend very much on energy (in May 1997, 2.6 percent of the poor's consumption was on rents and utilities—see Table III). This is partly because there are no effective measures to ensure payment for heat, which is the component of energy for which prices have increased the most.[5]

• Moldovans who have jobs are only slightly less likely to be poor than those who are unemployed or on unpaid leave. Formal employment has become less secure, and young school-leavers and women with child care responsibilities find it difficult to find such employment.
• Food production in dacha plots has become a critical survival strategy for both the employed and unemployed. Informal sector activities, including labor migration, have provided necessary cash.
• To address this problem, the State should create an environment that allows enterprises to flourish, and thus demand labor at high wages.
• The farm restructuring process is a critical element in this direction, providing assets and the means to generate income to some of the poorest in Moldovan society.
• Only rapid growth would reduce absolute poverty over the medium term, with inequality-reducing, rural-based growth achieving the objective much more quickly.

The majority of the unemployed in Moldova do not register as unemployed, because the costs of doing so outweigh the benefits. The benefits include eligibility to receive modest unemployment benefits, and access to training and job placement services. For those on forced or unpaid leave, the costs of registering as unemployed include forsaking any enterprise-related benefits, especially housing or medical services, that they may be receiving. From the perspective of an enterprise, if workers are permanently laid-off, the firm is legally obliged to make severance payments. This provision creates a disincentive to officially fire workers.

Being officially employed or not has a very small effect of whether a person is poor. Although the poverty rate (the chance that someone is poor) for the unemployed is higher than for the employed, the difference is not large. Those with jobs have about a 22 percent chance of being poor, while the unemployed have about a 28 percent chance of being poor. This similarity is due primarily to two reasons. Those who are employed often receive extremely low compensation (January 1997 wages were 190 lei per month, or about US$500 per year, in enterprises with more than 20 employees). To make matters worse, salary payments in many enterprises, especially those in agriculture and heavy industry, are often delayed by several months. On the other hand, the officially unemployed rarely depend on the State's unemployment benefits to survive. Relying on trade, seasonal employment, and transfers from family members, many of them are somehow able to make ends meet.

Subsistence or garden agriculture is a key source of income for most Moldovan households. In addition, petty trade and small home-based enterprises have become an important support. Most of the poor try to combine several strategies at once: some formal employment, subsistence agriculture, and part- or full-time trading or production. For rural, small-town, and even some urban residents, subsistence farming has become the mainstay of household economies. This may be on the nominally restructured collective farms, on privatized "peasant farms", or on household or dacha plots (for which over a million rural households now have title). The dacha plots also provide food to supplement their own consumption. Rural households also supplement their income from collective farms by private husbandry—raising turkeys, chickens, cows and pigs for sale in the market or to individual exporters. In cities and towns, private vehicles are used to provide informal taxi services, and rooms are rented. Foreign trips of short duration are taken to buy goods for resale in local markets. Finally, as circumstances become more strained, bribery, extortion, prostitution, theft and other forms of criminal activity are increasingly resorted to as a means of securing income.

As in other former Soviet countries, labor migration has become the quickest and often riskiest way to earn cash. Unable to find productive income-earning opportunities in Moldova, the more enterprising and able-bodied Moldovans are leaving the country to seek employment as guest workers, and are sending much of their earnings back as remittances. Migrants go to Russia, Ukraine and Belarus (as construction or agricultural workers), Hungary and Romania (for trade), Greece (for agricultural work, housework, and child care), Turkey (to market produce), Germany, Israel and elsewhere. Most often, such migration is not legal, and involves considerable hazards, both from the authorities and from informal extortionists and criminals. In 1996, only 11,000 Moldovan nationals were officially registered as working abroad (the majority in Russia). Nevertheless, informal estimates put the true figure at perhaps 15 times that amount, including those who are unregistered temporary migrants traveling in search of employment.

Creation of productive employment opportunities is crucial to poverty alleviation. But this does not imply that the Government should go back to creating employment or sustaining jobs in state enterprises which are not commercially viable. When low unemployment is the result of maintaining large numbers of workers in unproductive jobs, social welfare is compromised. This is because such a policy, in the long run, results in either wage arrears or the need for large transfers from the budget. Such transfers may contribute to inflation—and inflation hurts the poor the most. Instead, the Government has to create conditions for economic growth that, in turn, creates the demand for labor—where it will be in the enterprises' own interests to hire more workers at higher wages.

The recent reforms in agriculture are a promising step in this direction. Farm restructuring in agriculture, which is breaking up large and unviable kolkhozi and sovkhozi, is expected to be completed by the end of 2000. This is creating a new class of private farmers with titles to their land, and allowing them to either farm the land themselves or lease it out to obtain income. As has been seen in Figure III, private farmers are significantly less poor than agricultural workers, who suffer from low and late wages. Preliminary indications are that the transfer of income generating assets to the workers has, indeed, resulted in increased incomes for the beneficiaries, and may be the way towards reducing rural poverty in Moldova. This would also reduce overall poverty in Moldova faster, and, by increasing incomes and consumption for rural laborers, among the poorest in Moldova, may be inequality-reducing (Tool Box I).

• The capability of Moldova's Government to provide for social protection has been compromised by its fiscal crisis, and marked by expenditure arrears.
• The social assistance system is rudimentary, and relies heavily on pensions and an array of untargeted and unfunded privileges to those deemed worthy rather than needy.
• The Government is reinventing the system of privileges, taking steps to eliminate them for the less needy and replacing them, over the medium term, with a transfer targeted to the needy.
• Over the medium term, as resources become available, "self-targeted" programs will need to be developed and utilized, and the Government will have to move towards a targeted cash transfer mechanism.

The Government has been increasingly unable to meet its expenditure commitments, and the result has been a run-up of arrears. Public sector expenditure arrears, to public employees, pensioners and suppliers (especially suppliers of energy) have been mounting steadily since the mid-1990s, to reach 11.4 percent of GDP in end-1998, almost half of actual tax collections for the year. Over the past half-decade, the situation has worsened, due to a continued combination of overstated revenue targets, lack of provision for anticipated expenditure shocks and a lack of monitoring and control over local government spending, which have all essentially conspired to create a situation of "planned arrears".

The social protection system is mostly unreformed from its historical design. In Soviet times, all people of working age worked, and older people received pension payments. Although formal wage payments were low, there were significant non-wage benefits, as well as price controls and subsidies on consumer goods. Therefore, only those totally cut off from the formal labor market were considered to be in need of special interventions. Poverty was regarded as a social pathology, and these "excess" cases included alcoholics, the handicapped, vagrants or the elderly infirm. The Moldovan social protection system is still oriented towards this old philosophy.

Moldova, like many FSU countries, has a broad array of special privileges for specific categories of people deemed to be 'worthy', not necessarily needy. Overall, almost 1.3 million Moldovans (well over a third of the population) enjoy these privileges, which depending on the beneficiary, can be benefiting either the poorer sections of society or the non-poor. The key, however, is that few of them were instituted as pro-poor measures—instead, they were rewards given to certain "worthy" sections of the population that the Soviet society wanted to recognize and subsidize.

The system is extremely expensive for the economy as a whole, and particularly for the enterprise (mostly in the energy and transport sectors) supplying the privilege. Privileges are essentially an implicit subsidy provided by an enterprise. Technically, the Government is supposed to compensate the enterprise for this subsidy. The mechanism for this compensation is, however, complex, and the Government has in recent years simply not budgeted enough to pay for the privileges. In 1998, privileges cost the economy over 800 million lei (around 8 percent of GDP).

The Government, in 1999, has begun taking actions to rationalize its privileges and compensation strategy. The Government has a four-tiered strategy in this area: (a) remove the communal services compensation scheme, which is poorly targeted, and unaffordable for the budget; (b) eliminate all energy and transportation privileges; (c) install in its place an interim energy compensation scheme targeted to specific categories of the population which are deemed to be most in need of social assistance, and ensure that payments are made in full and in cash to the beneficiaries; and (d) develop a comprehensive social assistance strategy for the medium to long term which eliminates all privileges, while putting in place an effectively targeted social assistance program that is tied in magnitude to the envelope of budget revenues in any given year.

In spite of the best intentions of policy-makers and individual social workers, the pension and social assistance systems are inequitable. More non-poor than poor households receive all sorts of government benefits, for every category except unemployment benefits. For maternity and sickness pay and social pensions, all the benefits "leak" to the non-poor (Table IV). Overall, as shown by Figure VI, although most of the poorest in society are covered by social assistance transfers, the bulk of the transfers themselves go to the better-off in society.

Any reform in the system of social assistance in Moldova has to be built on increased access to the poor, and cost-effectiveness. The reform will have to acknowledge that the traditional groups receiving social assistance (including privileges) may only comprise a small part of those most in need—and many of these groups may be less vulnerable, and thus less in need of protection, than others. Since current resources are very restricted, they should be narrowly spent to bring about the greatest improvements in the living standards for the poorest. As the resources of the Government increase, the social assistance mechanism could also expand, so that the Government is able to help provide a better standard of living to more of the population. However, creating an entitlement system by, for example, legislating that all individuals are entitled to a certain percentage of an arbitrarily determined "minimum existence level" could prove to be disastrous, since the resulting transfer system would have no link to the resources actually available to the Government. The broad principles for this realignment of social protection are given in Policy Box I.

• In health and education, public expenditures have been falling and major structural reforms have not occurred.
• This has left a system that provides inadequate services to most, and is mostly unaffordable to the poor.
• Access to health care needs significant informal payments for services and supplies, and educational access is falling mostly due to the declining demand caused by the inability of the poorest families to afford the ancillary costs of education, especially in rural areas.
• Lack of access to education is particularly worrisome, given high rates of returns to literacy, and to higher education.
• The systems will have to be structurally changed, to reduce the overall inefficiency and ensure the availability of basic services to the poor. This may entail a focus on primary over tertiary care in both health and education, and a more efficient and effective funding of education and health services in rural areas.

Reduced budgetary expenditures and the inability of the education and health systems in Moldova to adjust to the new realities of transition has meant that the human capital of the poor is worsening. Both education and health care in Moldova, especially at the basic levels, is provided by the Government. Budget allocations to these two sectors, however, are meager and decreasing (Figure VII)—9.4 percent of GDP for education and just 6.4 percent of GDP for health in 1996.

To compound the problem, these funds are spent inefficiently, with a large proportion going to the tertiary level and a lack of cost recovery even from those who can afford it. At the same time, health workers and teachers are grossly underpaid (annual salaries range from the equivalent of US$330-600 for doctors and an average of US$430 for teachers), and often have several months' lag in wage payments. They now informally charge for their services, in cash or in the form of "gifts", creating a de facto system of private medicine and education. The poor are the worst off in this process, being unable to afford these informal fees.

The health care status of Moldovans is worsening, with the poor suffering the most. The crude death rate (death rate per 1,000 persons) increased markedly from 9.7 in 1990 to 11.5 in 1996, and the infant mortality rate increased from 19.0 per 1,000 live births in 1990 to 20.2 in 1996. The incidence of diseases such as tuberculosis, hepatitis, circulatory diseases, malignant neoplasms and syphilis have also increased rapidly since independence. Overall, poor families are visiting primary health care services almost 40 percent less often than the non-poor, although their use of hospital services are on par. The poor's expenditures on health care was just over 7.5 percent of their non-food expenditures, and only 12 percent of the corresponding expenditures by the non-poor. Illnesses needing hospital care are particularly unaffordable, since patients must provide everything from bed linens to syringes. For the poor, therefore, ill health bears a double burden—if untreated, it threatens their ability to keep their jobs, and if treated, it drains limited resources.

The health care system needs a comprehensive overhaul, marked by a reduction in excess capacity, and a realignment of the resources released by this to strengthening the primary care network and safeguarding basic public health. Currently, too much of health expenditures, low as they are, are spent on hospitals—which do not always serve the basic needs of the poor. A realignment of services, focusing on primary care, would orient the system more towards the poor, while improving overall efficiency (and, over the medium run, providing enough resources to reduce the out-of-pocket expenditures by the poor to obtain health services) (Policy Box II).

Additionally, absenteeism among poor children is becoming endemic, as they drop out to join the labor force, primarily in subsistence or wage agriculture. Overall, over 15 percent of poor children were not going to school in 1997, with the problem being worse for girls in rural areas. In higher education, only 14 percent of poor Moldovans between 17 and 24 of age were enrolled, compared to 40 percent of the youth from non-poor households. This difference in educational access threatens to have serious consequences for the future—with the children of the poor also doomed to remain poor because of their relative lack of education and skills.

This is especially worrisome given the high returns to education that are seen in Moldova. There is a monotonically increasing relationship between incidence of poverty and lower educational attainment of individuals aged 14 years and over. The difference that education makes is marked. In May 1997, the poverty rate for a person with higher education was 7.3 percent compared with 25.8 percent for an illiterate person. There is a risk, therefore, that poor educational access by today's poor children may drag them into poverty as adults.

In education, restructuring will have to be done over the longer run, with a focus on reallocating public resources from tertiary education to primary and secondary schools, especially in rural areas. Income growth and its distribution will also be the key influences in the long-run. Greater cost recovery for higher education, and for optional courses (such as music and languages) at lower education levels, will also release resources that can be best targeted to the poor. Over the longer time horizon, however, increased incomes, by lowering the opportunity costs to poor households of sending their children to school, will allow them to focus on investing in education rather than on just how to meet consumption needs.

Much of poverty in Moldova is a labor market phenomenon, driven by the reduced opportunities for remunerative work in the economy. The high incidence of poverty among the working poor, especially agricultural workers, on the one hand (which demonstrates the low wage levels in stagnant occupations), and the high poverty among the unemployed and those on unpaid leave on the other (which points to the lack of good jobs) drive much of the poverty in the nation. Therefore, the fundamental approach to reducing poverty in Moldova will have to be through increasing growth and income opportunities for the population, particularly in rural areas.

At the same time, poverty is also high among those outside the workforce, including the disabled and a part of the more vulnerable among the elderly. Thus, in addition, efforts will have to be made to find ways to reach them, through both private and public means. However, this is going to be constrained by limited public resources, which in turn is connected to the decline in the economy.

Access to human capital, because it affects the ability of people to obtain and retain remunerative work, is a critical element of any anti-poverty strategy. The low rates of access to education by the poor that are found in Moldova would imply the creation of an inter-generational cycle of poverty, as the poor children of today do not get access to better-earning jobs in the future. Similarly, lack of access to primary health services jeopardizes the ability of the poor to work for a living.

Moldova's poverty alleviation strategy therefore has to rest on two pillars:

• Sustained economic growth that generates productive employment and thus higher wages, with a focus on rural-centered growth that reduces inequalities and empowers people to increase their own earnings abilities; and

• A focus on improving the poor's access to social services and a safety net, underpinned by improved efficiency of the public sector revenue generation and expenditure management.

1. Throughout this document, "Moldova" refers to the Right Bank, i.e., the part excluding Transnistria. The technical papers, in Volume II of the report, also present evidence for Transnistria.

2. The quantitative analysis uses data from the Moldova Household Budget Survey, the pilot for which was done in February 1997, with successive rounds in May, August and November 1997, and quarterly since. The data, however, is not a panel, but a sample in each time period. The samples are representative within each quarter and for the entire year.

3. The poverty line used is a "relative" one, using as the threshold 40 percent of the average consumption. These results are, however, quite sensitive to what assumptions are used about the distribution of consumption within households. Here, it is assumed that an additional family member consumes as much as any other. If, on the other hand, additional family members consumed smaller marginal amounts (there were "economies of scale" in consumption), members of larger families could be considered to be less poor than in these findings.

4. Once again, this calculation does involve assumptions about "economies of scale." If we assume that each additional household member does not consume as much as previous members, the poverty status of large households would be better than calculated here.

5. Although the share may have increased since May 1997, the overall effect of prices on consumption is still likely to be overwhelmingly dominated by food-related expenses.