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Poverty in Russia: An Assessment

Russia FY95 PA

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Poverty Profile

The poor in Russia are primarily families with children, the unemployed, the disabled, the single elderly living alone, and women. The homeless and previously institutionalized population as well as some refugees form a small but critical group of the poor. The working poor are the largest group--66 of the poor live in households where at least one adult is employed. The largest sub-group of the working poor are families with children (approximately 60 percent of poor households have one or more children), and single-parent and young families are particularly at risk. Generally, the younger and more numerous the children there are in the household, the more likely that the household is poor. Family size and composition is a strong predictor of a household's poverty status, and poor and very poor families are larger on average than nonpoor families.

Unemployment is strongly linked with poverty, and an estimated 63 percent of households headed by an unemployed person were poor in 1993. Approximately 60 percent of unemployment benefit recipients are limited to the minimum benefit, and nearly 20 percent of the registered unemployed are involved in informal sector activities. Although the average duration of unemployment in Russia to date has been short (six months), it has increased, suggesting a rising number of long-term unemployed. Job losses have been disproportionately borne by women and early retirees.

Households with a disabled head are more likely to be poor, and the presence of a handicapped family member also increases significantly the chances that the household is poor (35 percent of households with disabled member(s) are poor).

Average pensions have been better protected in real terms, and the position of pensioners actually improved relative to wage-earners during the transition. However, the minimum pension was allowed to erode significantly in real terms, meaning that those pensioners who live alone and are restricted to receiving only the minimum pension (typically widows) faced real hardship. The poverty rate for elderly women (aged 55 and over) was 44 percent higher than that for elderly males. However, there are relatively few pensioners in that situation (about 25 percent of pensioners live alone), as more than 20 percent of pensioners continue to work and receive wage income in addition to their pensions. Pensioners have the lowest rates of measured poverty in Russia, and there is a very strong inverse correlation between poverty status and age, meaning that older heads of household are significantly less likely to be poor and more likely to be a donor of private transfers rather than a recipient.

While poverty during the transition has broadened in scope, it has also become more dynamic in nature. Headcounts for poor families (expenditures below the official poverty line) in Russia were 25.2 percent in July-September 1992, 31.9 percent in June-September 1993, and 26.8 percent in October 1993-February 1994. Very poor families (those with expenditures less than 50 percent of the official poverty line) comprised 8.4, 1 2, and 10.4 percent of households respectively. During the 1980s, approximately 10 percent of the Russian population had a per capita income below the minimum consumption basket," based on overly generous consumption allowances for food and non-food items.

In addition, poverty during the transition, while wider, is also more dynamic than poverty under the old system. During the survey periods, a significant percentage of households rose out of poverty, while new households fell below the poverty line. In fact, nearly half of the very poor households in 1992 were not poor one year later, and only 7.3 percent of all households were consistently poor (1.0 percent of the very poor) between 1992 and 1994. Layoffs, involuntary leave without pay, and wage arrears are temporary shocks that cause households to be poor, while successful marketing of home production, profitable entrepreneurial ventures, and finding a well-paying job contribute to households rising out of poverty.

Finally, regional disparities in living standards have sharply widened during the transition, as price liberalization has resulted in sharply differing the costs of living and the average wages of the oblasts (regions) of Russia. The prevalence of one-company towns has meant that restructuring has been disproportionately concentrated in certain regions (such reductions in light industry in the textile-producing oblasts of central Russia). Other regions, that were traditionally poor under the old system (Dagestan, north Caucasus, and some areas in the Far East) have not yet benefited from the new economic opportunities in European Russia.

Incentives and Regulatory Framework

Recorded GDP fell by more than 40 percent from 1991 (although significant informal sector activity is not included in official statistics), and inflation was extremely high in 1992-1994, though falling from 23 percent per month on average in 1993 to 10 percent in 1994. Tighter fiscal and monetary policy in 1994 led to a deceleration in inflation, but output had not recovered noticeably. The overall drop in output partly reflects necessary industrial restructuring and a movement towards market prices for energy and raw materials. Progress on structural reforms has been uneven, with significant progress in price and trade liberalization, but privatization (although affecting 60 percent of the industrial workforce) has not yet had a major impact on enterprise behavior or increased profitability overall.

Public Expenditures

Fiscal imbalances resulting from government support to state-owned enterprises and poor tax collection have imposed enormous pressure on the Russian economy during the transition. Total transfers have fallen significantly since 1992, but still amounted to 8 percent of GDP in 1994, while public expenditure on social protection (pensions, unemployment benefits, family and maternity allowances, and local social assistance) comprised 9 percent of GDP in 1994. Evidence suggests that social spending in the aggregate has not been disproportionately affected by fiscal adjustment to date, although there is a need to restructure existing spending. In the aggregate, health and education expenditures in Russia have been broadly maintained as a share of GDP, although declining GDP means a large decrease in real aggregate and per capita spending. The reduction in social spending by enterprises (by an estimated 30 percent in 1993) means a reduction in the availability of social services such as childcare. At the same time, although total investment has fallen drastically, the share of public investment in the social sectors has been relatively stable.

Decentralization is one of the most important systemic changes to have occurred in Russia since 1991, and the regions have become responsible for planning, delivering, and financing most public services. However, the rapid and often chaotic decentralization of fiscal responsibilities has resulted in a system of intergovernmental relations and finance that is fraught with inconsistencies, uncertainties, and problems. The increasing regional disparities in poverty result from the differential impact of restructuring on oblasts with different economic structures as well as the local responsibility for financing social assistance, which means that poorer oblasts are correspondingly less able to assist the relatively larger numbers of poor people within their jurisdiction. Local-revenue sharing measures are in force, but to date, this process has not provided poorer regions with adequate financing for the increased demand for social services.

Safety Net

The safety net in Russia is comprised of formal cash transfers (social insurance and assistance programs) as well as informal support from private plots of land and private transfers among households and individuals. Formal cash transfers are extensive and consist of pensions, unemployment benefits, family allowances, social assistance (a means-tested poverty benefit and local social services), sickness pay, and maternity benefits, as well as household subsidies for housing and utilities and health care. However, three out of 10 very poor households receive no public transfers whatsoever, and one out of five poor households receives no public assistance.

Some cash benefits have hovered around very low levels--the unemployment benefit is about 15 per cent of the average wage, and family allowances are from 1 to 8 percent of the average wage. These amounts are too low to lift recipient households above the poverty threshold. Local authorities are responsible for financing most public services (health, education, and local social assistance).

The pension system has maintained high levels of average pensions, but minimum pensions have often fallen below the subsistence level, and current projected expenditures are not affordable (due to a low official retirement age of 55 for women and 60 for men). Most unemployed people do not receive or take up benefits. For example, in 1992, fewer than 3 percent of households headed by an unemployed individual received the unemployment benefit.

In early 1994, the system of family allowances was simplified into a single benefit (with a few additional tiers for single mothers). Family allowances are available to all children, regardless of need, but actual program costs have fallen below projections, suggesting that either take-up has been low or that benefits are not being delivered. Although centrally financed, benefits are administered by enterprises.

In 1994, a regional program of social protection was adopted, as a result of which those people with incomes below the regional subsistence minimum are accorded the first priority for assistance. Local programs comprise in-kind benefits and services, and typically have three common components: an incomes test; in-kind benefits rather than cash transfers; and the local financing of assistance. Present local social assistance arrangements are highly personalized and administratively demanding, requiring individual interviews and home visits.

In May 1995, a draft federal law providing for the introduction of a poverty benefit for households and individuals with per capita incomes below the regionally specific subsistence minimum was adopted on the third reading. Although this law is certainly a significant step forward and broadly consistent with previous World Bank recommendations, there are still problems with the law as written and it is not clear whether Russia will be able to afford the cost of this new benefit. In particular, poor households face in effect a 100 percent marginal tax rate, so that the poor have no incentive to increase their work effort unless they can somehow be certain that the additional income will put them well over the poverty threshold, resulting in a "poverty trap." The "poverty trap" is worse for households with children, as the amount of social assistance available to families with two or more children may actually exceed the average wage. A tapered benefit, related to a given household's income shortfall, could help to alleviate these adverse incentive effects.

Public transfers are not well-targeted in Russia. Although family allowances are spread relatively evenly across income deciles, they are not particularly progressive. Even worse, pensions are clearly regressive. Local social assistance is concentrated on the highest income decile, and scholarships are focused on the non-poor. Unemployment benefits are better targeted.

Poverty Strategy

Stabilization and renewed economic growth are critical for poverty reduction in Russia as they increase access to income-earning opportunities. Sustained reductions in inflation are necessary to provide adequate social protection. The continuation of structural reforms and privatization could yield significant growth opportunities, although the extent and severity of poverty and increasing wage and income inequality suggest that many people may still remain in need.

Besides encouraging private-sector growth, the government needs to consider carefully the targeting and incentive effects of existing and proposed benefits. Poverty status in Russia is related to certain clearly observable attributes, such as the number and age of children, the presence of an unemployed family member, and which oblast they live in, but these correlations alone are not robust enough to design a comprehensive categorical approach to poverty reduction. Unfortunately, incomes testing is complicated by adverse incentive effects and poor administrative capacity. Means-tested benefits should be the option of last resort, after eliminating as many potential claimants as possible through alternative methods. For example, setting the minimum pension above the social assistance income threshold would mean that the elderly do not have to resort to social assistance. This is also especially the case for unemployment benefits, which are clearly too low.

Regional disparities could be better addressed through a system of revenue-sharing via matching block grants. Temporary employment schemes and earned income tax credits could help to address regional disparities in labor market opportunities and the problems of the working poor.

Statistical System

In 1993-94, the State Statistical Committee of the Russian Federation and the World Bank piloted a representative household survey, the Russian Longitudinal Monitoring Survey (RLMS). In stark contrast to official income and expenditure statistics based on the long-running family budget survey (FBS), the RLMS was based on a representative household sample and provided the basic information for the poverty profile. Goskomstat is presently trying to reform the FBS based on experience gained through the RLMS, and intends to introduce the revised approach from 1996. Further technical assistance and support is needed to ensure that the sample is representative and that the survey instruments reflect the needs of policymakers and analysts in Russia during the transition and in a market-oriented economy.

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