Ukraine - Poverty in Ukraine

Report No. 15602-UA Poverty in Ukraine June 27, 1996 Country Operations Division II Country Department IV Europe and Central Asia Region :~~~~~~~~~~~~~~~X  Currency Equivalents Currency Unit = Karbovanets (krb) krb 183,000 = US$ 1 as of June 1996 krb 150,000 = US$ 1 as of June 1995 Fiscal Year January 1 -- December 31 Abbreviations FSU Former Soviet Union GDP Gross Domestic Product ILO-CEET International Labor Office -- Central and Eastern European Team  Table of Contents Table of Contents i List of Text Boxes, Tables and Graphs ii Acknowledgements ill Chapter 1: Summary 1 Chapter 2: Macroeconomic Decline 5 Chapter 3: Patterns of Poverty 10 I. Measures of Poverty in Ukraine 10 II. A Profile of Poverty in Ukraine 15 III. Expenditure Patterns 15 IV. Transitory and Structural Poverty 19 V. Coping Mechanisms 21 Attachment 3.1: Sources of Information about Poverty in Ukraine 27 Attachment 3.2: A Proposed Poverty Monitoring System for Ukraine 28 Chapter 4: The Labor Market and Poverty in Ukraine 29 I. The Collapse in Real Wages 29 1I. Open Unemployment 32 III. Growing Hidden Unemployment 34 IV. Declining Labor Income and Household Well-being 36 V. The Role of the Informal Sector 38 VI. Can Economic Recovery "Cure" Poverty in Ukraine? 39 Chapter 5: Social Protection 42 I. A Medium-term Vision 42 II. The Present Reality 48 III. Next Steps 61 Bibliography 66 Statistical Appendix 68 i  List of Text Boxes, Tables and Graphs Text Box Title Page 2.1 A Worker Adjusts to Weak Labor Demand 7 2.2 A Pensioner Loses her Savings to Inflation 8 3.1 Perceptions of Poverty in Ukraine 11 3.2 Poverty Measures 12 3.3 Poverty Line Methodology for Ukraine 13 3.4 Poverty through Children's Eyes 16 3.5 Qualitative Differences in Rural and Urban Poverty 20 4.1 Age and Gender Discrimination in the Ukrainian Labor Market 40 5.1 Ukraine's Social Protection Programs 49 5.2 Public Perceptions of Social Assistance Generally 52 5.3 Public Perceptions of the Housing Subsidy Scheme 53 5.4 Chernobyl 60 Table 2.1 Ukraine's Macroeconomic Decline 6 3.1 Poverty Measures in Ukraine and their Sensitivity 14 3.2 Children and Poverty in Ukraine 16 3.3 The Elderly and Poverty in Ukraine 17 3.4 Household Dependency Ratio and Poverty in Ukraine 17 3.5 Location and Poverty 20 3.6 Poverty's Regional Dimension 21 3.7 Education and Poverty 22 3.8 Expenditure Patterns 24 4.1 Average Monthly Wage by Sector 1990-94 31 4.2 Loss of Working Time by Sector, 1994 35 4.3 Real Wage and Labor Shares in GDP and Household Income 37 4.4 Wage Differentials by Education Level 41 4.5 Can Renewed Growth "Cure" Poverty? 55 4.6 Ratio of Wage Income to Total Income for Poor Households 58 Graph 3.1 Distribution of Households by per capita Consumption 14 3.2 Age-Specific Poverty Headcount Indices 18 5.1 Ukraine's Social Protection System 48 5.2 Importance of Benefits in Reported Income 50 5.3 Share of Income to Various Groups 50 ii  Acknowledgements Profound thanks are owed the 2,024 Ukrainian families who participated in the household survey that underpins the quantitative analysis in this poverty assessment, and to the 500 families who participated in the anthropological study of poverty that puts qualitative flesh on the quantitative bones. By allowing interviewers into their lives, these families have made it possible to analyze poverty in Ukraine with a thoroughness and richness that was impossible in the past. The household survey, Ukraina 95, was conducted by the Kiev International Institute of Sociology. Vladimir Paniotto is Director of the Institute and the study. Other responsible staff include Natalia Kharchenko, Elena Popova, Valeriy Khmelko, Leonid Finkel, Grigory Naumovets, Alexandr Podoroshnii and Tamara Gruzbarg. An anthropological study of poverty in Ukraine was managed by Catherine Wanner, Pennsylvania State University; the paper summarizing the results was coauthored by Catherine Wanner and Nora Dudwick of the World Bank. The Kiev International Institute of Sociology helped organize a team of Ukrainian social scientists that included the following regional team leaders: Valentina Pavlenko (Kharkiv), Tamara Polskaia (Crimea), Igor Iaroshenko (Ivano-Frankivsk), Elena Martiakova (Donetsk) and Alexandr Podorozhnii (Kiev). Hafez Ghanem (EC4C2) is largely responsible for Chapter 2, Macroeconomic Decline and Poverty in Ukraine, and Jeanine Braithwaite (ESP) with the data management wizardry of Diane Steele (PRDPH) are responsible for Chapter 3, Poverty Patterns. Chapter 4, The Labor Market and Poverty in Ukraine was written largely by Peter Fallon (ESP) and Ella Libanova of the Council of Productive Resources, Kiev. Sanjeev Gupta (Chief), Elliott Harris, Alexanidros Mourmouras, Robert Gillingham and Tom Hoopengardner participated in a technical assistance mission from the Fiscal Affairs Department of the International Monetary Fund that strongly influenced Chapter 5, Social Protection and Poverty in Ukraine. Editorial assistance was provided by Fiona MacIntosh. The report benefitted greatly from constructive criticisms by internal peer reviewers Margaret Grosh (PRDPH) and Branko Milanovic (PRDTE) and from external peer reviewer Michael Cichon, International Labor Office. Kathie Krumm (ECAVP) and Sally Zeijlon (Consultant, Kiev Resident Mission) provided invaluable comments. The task manager of Poverty in Ukraine was Tom Hoopengardner (EC4MS). It was prepared under the supervision of Wafik Grais (Chief, EC4C2) and Basil Kavalsky (Director, EC4). iii   Chapter 1: Summary Macroeconomic Decline and Poverty in Ukraine (Chapter 2) 1.1. Poverty was not unknown in Ukraine and the other republics of the Soviet Union prior to its break-up, but Ukraine's macroeconomic decline has made poor people even poorer and it has caused millions of families that were not poor before the collapse to slide into poverty. Ukraine faced serious economic difficulties in the early 1990s: an energy price shock, evaporating military demand and dissolving trade relationships. The initial policy responses made things worse. Fiscal and monetary indiscipline led to 10,000 percent inflation in 1993. Limited price and trade liberalization and anemic privatization could not prevent output from declining precipitously, an estimated 47 percent between 1990 and 1995. Aggregate consumption fell an estimated 32 percent from 1991 to 1994. Economic policies subsequently improved, especially starting in the second half of 1994. By then, however, the damage to the Ukrainian economy was too great to reverse easily. Disagreements between Parliament and the Presidency have prevented the kinds of decisive policies that are needed to restore economic growth. 1.2. The macroeconomic collapse, together with the halting progress of economic reforms, adversely affected households in three ways. Weak labor demand resulted in a dramatic drop in the real wage, an estimated 63 percent between 1990 and 1993. Household fmancial savings were wiped out by hyperinflation. Social benefits declined in real terms, and in any case were badly targeted to help the truly needy. Rapid growth in the informal sector has only been able to cushion the impact of macroeconomic collapse on Ukrainian households to a limited extent. Poverty Patterns (Chapter 3) 1.3. It is difficult to analyze poverty in Ukraine using official data. This study relies on studies that were carried out specifically for this report, a household survey of income and expenditure, a labor sector study, and an anthropological study of poverty. Much more attention should be given to measuring and monitoring poverty in Ukraine. Attachment 3.2 on page 27 recommends implementation of a Poverty Monitoring System. 1.4. In order to measure poverty over time and among groups, it is convenient to define a poverty line in terms of per capita household consumption. The poverty line used in this report, krb 3.675 million (about $24) per person per month in June 1995, is based on the food component of Ukraine's Minimum Consumption Basket together with a non-food component based on household survey data. This poverty line is a convenient analytical tool, but it is not intended as an eligibility threshold for social assistance programs. Using a poverty line of krb 3.675 million, 29.5 percent of Ukrainian households were living in poverty in June 1995. Poverty is not quite as serious in Ukraine as in Russia, but it is much more serious than in Poland. Many Ukrainian housholds are close to the poverty line. A proportionate 20 percent 1  increase in per capita consumption would result in a 34 percent decline in the number of households below the poverty line. 1.5. The most important factor explaining the incidence of poverty in Ukraine is family composition. Poor households tend to have more children (unider age 15), and more elderly (over age 64), than households that are not poor. Households with no adults aged 15-64 account for nearly one-quarter of all poor households, and nearly 40 percent of such households are poor. 1.6. Age is an important factor in understanding poverty. In Ukraine, beyond age 60, the frequency of poverty increases with each successive age bracket. This contrasts with most other countries where information is available. The usual pattern is that the frequency of poverty decreases with increasing age. Note that the key variable is age, not status as an old-age pensioner. Many old-age pensioners are not elderly (2 out of 5 old-age pensioners are under 65 years of age), and only a subset of old-age pensioners (35 percent) are poor. Attempts to help poor people by raising all old-age pensions are likely to be both ineffective and inefficient. 1.7. As measured by the household survey, rural poverty is lower than urban poverty, probably because of easier access to land and food. However, the antlhropological study reveals very important qualitative differences in poverty between rural and urban areas. These qualitative differences are so important that one might conclude that rural poverty is more severe than urban poverty. There is also an important regional dimenision to poverty, with the frequency of poverty highest in the east (35 percent) and lowest in the soLith (26 percent). The regional dimension of poverty is likely to become more importanit over time. This argues for federal, not local, fundinig for social benefits. 1.8. Explicit unemployment is not yet an important deterninate of poverty in Ukraine - - the main labor force variable explaining differences in household economic well-being is the real wage. Many poor households do have working members, but they earn wages too low to keep the number of people in the household above the poverty line. Many other poor households have no members who participate in the work force. 1.9. The increases in the prices of housing and communal services that are now in progress, together with the targeted housing subsidy program that is intended to alleviate their impact on the poorest families, are likely to have a profound imrpact on patterns of poverty in Ukraine. The Labor Market and Poverty in Ukraine (Chapter 4) 10. A decline in real wages has been the primary labor market link between macroeconomic decline and poverty. The drop in real wages has been estimated at over 60 percent between 1990 and 1993. Taxes on labor totalling 52 percent of the wage bill mean that enterprises must pay much more for labor than the workers themnselves receive. This 2  discourages employment and pushes down wages, and it discourages informal, unregistered businesses from joining the formal sector. 11. Unemployment, even broadly defined, has been a less important link to household economic well-being than the real wage decline. This report estimates broadly defined unemployment in Ukraine in mid- 1995 at 5.3 percent, including 3.8 percent unemployment using the broad definition plus 1.5 percent unpaid leave and involuntary part time work. This is a large multiple of officially measured unemployment, which is still below 0.5 percent, but it is nevertheless low by comparison with other European countries. Official estimates of hidden unemployment exaggerate its magnitude because they are based on reports from enterprises. People who are on forced leave or involuntary part-time work cannot afford to remain idle, so they often engage in informal sector activities. 12. The rapid decline in the real wage, and to a lesser extent the decline in employment, resulted in a decline in wages as a fraction of houselhold incomne from 71 percent in 1990 to only 49 percent in 1993. SubseqLuently, as other forms of household income also fell, this fraction began to increase and it increased further in 1995 as some increase in real wages occured. By mid-1995, wages accounltecl for about 60 percent of household income. 13. This average disguises considerable variation in the importance of wages among households. Specifically, wages as a fraction of income tend to be lowest for households at the bottom of the income distribution. This pattern means that even a large increase in real wages in isolation would leave inany households in poverty. Stabilization, price and trade liberalization, and privatization policies that lead to economic growth and a resurgence in labor demand will be extremely importanit in alleviating poverty both directly via the real wage and indirectly via growth in non-wage incomiie. The impact of growth mlLst be complemented by reform of the social protection system. Social Protection and Poverty in Ukraiine (Chapter 5) 14. Because of the magnitude and depth of poverty in Ukraine, and because eventual resurgence in the labor market alone will not "cure" poverty, social protection reform cannot be delayed until the economic climate improves. A medium-termn vision of social protection in Ukraine would include three main elements: a means-tested incomiie subsidy that could evolve from the present targeted housing subsidy program; social insurance with the insurance function restored, financed by beneficiaries via a wage tax; and a social justice scheme for Chernobyl victims, financed by general revenues, with increased benefits for those still suiffering the most more than a decade after the tragedy. 15. The present situation provides a starting place toward this futuire vision. The means-tested housing and communal services subsidy is an improvemiient over the old, universal housing suibsidy, yet improvements in adminiistration and a strengthening of the means test is desirable. A strengthened, meanis-tested child allowance and new mleanis-tested benefits for the elderly coLIld help population groups where the incidence of poverty is greatest. Social service 3  programs are well intentioned, but they are being overwhelmed by the iieeds created by the general economic decline and they are dependent on weak local finances. The old-age pension system is a failure as social insurance because the contributions-benefits link has been lost to benefit compression, and it is a failure as social assistance because it is untargeted. Unemployment insurance has not yet demonstrated its value. Chernobyl benefits were designed to be financed by the entire Soviet Union, so Ukraine's efforts to finance them may not be sustainable. The Chernobyl Fund is financed by a 12 percent tax on labor that increases the cost of labor and pushes down wages. It is unclear whether Chernobyl benefits are achieving the goal of social justice for Chernobyl victims, since studies of beneficiaries have not yet been undertaken. 16. The first next step is to reach consensus among the populace generally, labor, business, the government and Parliamenit on a mediumll-termii visioIn of social protection in Ukraine. After careful analysis of budgetary concequences, the meanis-tested child allowance should be strengthened and a meanis-tested social assistance benefit for the elderly should be introduced, both with federal funding. Improving administration of the targeted hoLusinig and communal services subsidy and strengtheninig the means test should have high priority. Locally controlled social services are the best hope of the truly destitute. Consideration should be given to strengthening these programs and financing them federally. In the medium-termn, the goal for social assistance could be to convert the targeted housing and cecniiuntal services subsidy into a means-tested income subsidy. 17. There is an urgent need for a periodic actuaiial analysis of the pension system. Based on this kind of analysis, measures shoLuld be designed to-increase the ratio of contributors to beneficiaries over time (for example, by gradually raising the pension age) and to decrease the ratio of the average pension to the average wage (for example, by paying reduced pensions to those who claim theiri before age 65). As these measLures take hold, it will become possible to decompress the benefit structLure and restore a strong contributions-benefits link. The Employment Service should focus on paying benefits (its insurance function) rather than on training and job creation programs that have not been cost effective in other countries. The modernization of the health sector should take precedence over so- called "health insurance" that is not, in fact, social insurance at all. Wage tax financing of the health sector should be avoided. 18. Beneficiary studies are needed to make sure that Chei-nobyl victimiis are receiving the help they need. In the short-term, Chernobyl benefits and programs should be appropriated annually as part of the normal budget process, and the 12 percent wage tax should be added to general revenues. Over time, as economic growth permits, wage tax financinig of the Chernobyl Fund should be replaced by general revenues. 4  Chapter 2: Macroeconomic Decline and Poverty in Ukraine 2.1. Ukraine's recent macroeconomic collapse has made poor people even poorer and has caused millions of people who were not poor before the collapse to sink into poverty. Ukrainian families have been affected by the macroeconomic decline through a rapid decline in real wages, while rampant inflation has decimated their savings and caused the purchasing power of their social benefits to plummet. 2.2. Poverty was not completely unknown in Ukraine and the other republics prior to the breakup of the former Soviet Union, but its severity was limited by universal employment and a system of social benefits that provided heavily subsidized housing, food, transportation, and other services to most households. Nevertheless, the system created widespread under- employment, and price controls resulted in shortages of food and other consumer goods. The macroeconomic collapse in Ukraine over the last seven years has caused this situation to worsen dramatically, and poverty has now become an extremely serious problem. 2.3. By the late 1980s, Ukraine's economy was already seriously distorted. Ukraine consumed about six times more oil per equivalent unit of GDP than is typical in Western Europe and imported over half its energy needs. This left it vulnerable to the kind of energy price shock that the rest of the world experienced in 1973. With the breakup of the Soviet Union, Ukraine had to pay world market prices for its imports of energy products, the value of which rose from 2.5 percent of GDP in 1990 to 15.5 percent in 1994, despite a drop of 44 percent in the quantity imported during that period. Nearly a quarter of the country's enterprises produced military goods. Demand for industrial production weakened dramatically as the easing of tensions between East and West made it possible to reduce the maniufacture of armaments and as trading relationships, especially with Russia, disintegrated. Although Ukraine has favorable climatic and soil conditions for agriculture, by the late 1980s, unsustainable agricultural policies, especially for livestock products, had undermined the ability of the agricultural sector to expand to offset the general economic malaise of the 1990s. 2.4. The Ukrainian government's first response to these challenging economic circumstances was inadequate. None of the three key ingredients of reform in post-socialist economies -- macroeconomic stabilization, market liberalization, and privatization -- was seriously attempted. 2.5. The lack of effective stabilization policies was evident in the fact that in 1993 the fiscal deficit as a percent of GDP was in double digits for the third consecutive year, and the money supply grew by over 2,000 percent. The CPI inflation rate for Uk-raine averaged 47 percent per month in 1993, an annual rate of over 10,000 percent. The limited price and trade liberalization that was initially attempted had been reversed by the sumniner of 1993. By early 1994, the government exercised more or less the same degree of control over the economy as it had at the time of independence. The extent to which the privatization of the formal economy was attempted was also minimal, especially compared to what was happening in Russia and the 5  other post-socialist countries. In 1993, only 10 percent of Ukraine's formal sector assets were in private hands. 2.6. These policies led to disastrous economic outcomes (see Table 2.1). Between 1990 and 1993, recorded output dropped by some 26 percent. Officially measured agricultural production fell by 25 percent, industry contracted by 39 percent, and construction declined by 58 percent. Inevitably, consumption declined precipitously in real terms, an estimated 32 percent from 1991 to 1994. Table 2.1: Ukraine's Macroeconomic Decline 1991 1992 1993 1994 1995 Real GDP Growth Rates -8.4 -9.7 -14.2 -23.5 -11.8 (% ) I__ _ _ _ _ _ _ _ _ _ _ _ Real Industrial Growth -9.9 -22.2 -22.0 -29.9 -17 Rates (%) Real Agricultural -18.5 -6.9 5.5 -22.0 -9.0 Growth Rates (%) __ Fiscal Deficit as % of 13.6 29.3 11.8 8.2 5.2 GDP Growth Rate of Money 78 885 2,100 532 117 Supply (%) Growth Rate of CPI 82 2024 10,155 401 182 (Annual %, end of period to end of period) __ Index of Real Wages na 81 48 40 45 (1990 = 100) Real Consumption -6.5 -4.9 -6.7 -23.1 na Growth Rate (%) 2.7. In mid-1994, newly-elected President Kuchma committed himself to a program of economic renewal including tight fiscal and monetary policies, price and trade liberalization and privatization. Inflation fell from monthly rates of nearly 20 percent in early 1995 to about 5 percent in April through August of that year. Real GDP continued to decline, but the average 6  real wage rose by 16 percent during the first half of 1995. The dollar value of exports to non- FSU countries is estimated to have risen by around 40 percent during the first nine months of 1995. Privatization accelerated. 2.8. Yet these encouraging economic signals were not sufficient to generate a consensus between the Parliament and the government o0. the reform program. Subsequently, stabilization efforts weakened, and monthly inflation rose to 14.2 percent in September 1995 and 9.1 percent in October, a rate thai would cause prices to double in eight months if it persisted. 2.9. Cause for optimism reappeared early in 1996. The Government took corrective actions to stabilize the economy. Monetary policy was tightened, and fiscal policy was fortified by the introduction of increased cost recovery from housing and communal services and public transportation. The President underlined his commitment to privatization by vetoing a bill that would have interfered with the privatization of agro-industrial enterprises. All quotas and licenses on grain exports were eliminated, access to the commodity exchanges was liberalized, and the scope of minimum prices for exports was substantially redticed. 2.10. The halting progress of reforn in Ukraine has hiad important consequences for poverty, particularly with regard to how the decline in consumption has affected households. Families have been adversely affected by macroeconomic decline in three key ways. 2.11. Labor. Reduced labor demand and the drop in real wage levels has seriously eroded the purchasing power of households that depend on wage income for most of their purchasing power. Real wages declined by about 63 percent between 1990 and 1993. While open unemployment remains limited, disguised unemployinent in the form of forced leave and part-time work has become widespread. Box 2.1 describes the plight of onie worker. Box 2.1: A Worker Adjusts to Weak Labor Demand Nikolai Andreevich used to have ajob maintaining machinery in a factory in Kharkiv. After independence, the number of orders to the factory dropped sharply and the factory began to pay workers' salaries irregularly. As the family could not survive on his wife's salary alone, Nikolai decided to leave his job to find other work, even though he knew that it would he difficult because his skills were becoming redundant. At first, he travelled to other cities in Ukraine to buy locally produced goods and bring them back to Kharkiv to sell, and later he sold goods that someone else had imported from Turkey. But sales were slow and organized gangs made selling at the market difficult. Nikolai's last job was in construction and lasted for only five months. Now he is being retrained as a welder for gas and electric enterprises with help from the Employment Service. In order to find work, he expects to have to go away to Siberia, which will mean leaving his family behind. In the meantime, Nikolai Andreevich lives in one dormitory room with his wife and two children, sharing a communal kitchen and refrigerator with 10 other families. 7  2.12. Savings. Rampant inflation has shrunk the value of the stock of household savings. At the time of independence, households had on deposit at the State Savings Bank an average of about US$163. By 1993, the average deposit had declined in value to about US$2.40. Box 2.2 chronicles the impact of this on one pensioner. Box 2.2: A Pensioner Loses her Savings to Intlation When Nadezhda Grigor'evna retired from her job as a pharmacist in Kharkiv seven years ago, she thought that she and her husband, now dead, had provided well for her retirement and that she would live comfortably for the rest of her days. "I worked my whole life. For 42 years I was officially employed. My husband and I never had to deny ourselves anything. We had really exceptional savings. I was at peace. I thought, even if I don't have children, someone will help me when I'm old. Even if I get sick or something happens, I'll have the money to hire a caregiver or a nurse who could look after me." Yet, today she lives in a one-room apartment and barely survives on a steady diet of bread and inilk, virtually the only food she can afford on her pension of krb 2,748,000, or $16 a month. "Now--I'm a beggar (nishchaia). When I retired, I had 20,000 roubles in my savings account. With this money it would have been possible to buy four cars. But what the government did with it -- the government who we trusted with our money! They reindexed savings so that inflation ate it! That money is now not enough for bread and water. And still, they give a pension which doesn't even provide minimum survival." Nadezhda Grigor'evna's perception of loss may be somewhat exaggerated. Cars and many other goods were in short supply because their prices were kept so low that long queues developed. Yet there is no doubt that she is struggling today, and that there has been a tremendous decline in her economic well- being. 2.13. Late in 1994, the Government announced that balances in the State Savings Bank as of 1991 would be indexed up by 2100% to compensate partially for losses caused by the subsequent hyperinflation. This is much less than the loss. It would be impossible to offer even this partial compensation in cash without stoking inflation. Instead, the Government will issue Savings Bank Compensation Certificates that could be used like Privatization Certificates to acquire enterprise shares through privatization auctions. 2.14. Social benefits. Ukraine's system of universal social benefits was not well-suited to withstand massive economic failure. The wage bill, which is the tax base for the payroll tax that finances most benefits, declined even more than the real average wage because employment was declining slowly at the same time. Since compliance with the payroll tax has also declined, benefits have inevitably declined as well. People who are highly dependent on the social protection system have experienced significant declines in living standards. In principle, the benefits of social protection programs could be targeted to those most in need, thus ensuring that they receive a higher proportion of the total benefits of these programs. However, the authorities have not shown much enthusiasm for reform measures that would create groups of "winners" and "losers" by redistributing benefits. 8  2.15. Participating in the informal sector, which has grown consistently in the 1990s, has provided some relief to those poor families able to do so. For example, those households with access to personal plots of land have been able to grow food, which has significantly raised the consumption of these households.' Households estimate that food produced at home accounts for 18 percent of total food and non-food consumption. 2.16. Yet many Ukrainian families are suffering the consequences of the decline in the formal sector without benefiting at all from the informal sector. These families, whose only asset and resource is their labor, are dependent on a resurgence in labor demand for an improvement in their living conditions. This is discussed in detail in Chapters 3 and 4. However, some poor households (such as those consisting exclusively of the elderly or that include large numbers of dependents) are not well-placed to benefit from even a significant increase in wage income. Social protection reform is necessary to help these families, as discussed in Chapter 5. 'The Ministry of Statistics objects to the characterization of production on personal garden plots as 'informal" for two reasons: (a) "informal" can be misunderstood as "gray or 'shady" or even "illegal' or "criminal" in Ukrainian thinking; and (b) the Ministry argues that production on personal garden plots is, in fact, captured in official statistics. In this report, "informal" merely means economic activity pursued outside the framework of state- owned enterprises or officially registered private companies. Most informal sector activities would be considered entreprenuerial, not crirninal, in other countries, although the fact that most of them are not registered formally makes them illegal by definition. It seems unlikely that most agricultural production on personal garden plots is captured in official statistics. 9  Chapter 3: Poverty Patterns This chapter measures the frequency and depth of poverty in Ukraine, and constructs a profile of poverty using data from a household survey undertaken specifically for this poverty assessment. The quantitative measures of poverty and the poverty profile in this chapter (Sections I and II) reflect the situation in Ukraine during summer 1995. Summer and early autumn are arguably the best times of the year in terms of social welfare, since food is most readily available and household heat is not a problem (consu nptiGn patterns are covered in Section III). These seasonal factors may mean that the quantitative poverty measures in this chapter somewhat understate poverty and that some of the groups identified in the poverty profile are at times experieneing greater poverty than the survey revealed. The household survey was complemented by an anthropological study conducted during the winter of 1995-6 when food and heat increase household expenses. The household survey and anthropological study are described in Attachment 3.1 on page 27. Section IV of this chapter considers transitional and structural poverty, and Section V describes some of the ways in which Ukrainian families are coping with difficult economic circumstances. L. Measures of Poverty in Ukraine 3.1. Poverty is an important aspect of economic well-being in any e-lonomy. It is systematically measured and monitored in most countries in the world, including high-income countries. Ukraine is behind other European countries, and even neighboring countries, in the analysis of poverty. A proposal for improved poverty monitoring is presented in Attachment 3.2 on page 28. 3.2. Most countries measure poverty in terms of monetary indicators, since poverty is generally thought of in terms of low expenditures or low income. Yet poverty is a multi- dimensional phenomenon, and monetary indicators of well-being do not cover all of them. Access to social services, health and education are very important, for example. Statistics about poverty must be supplemented with an appreciation of how the poor live (see Box 3.1). 3.3. In order to measure poverty, it is useful to specify a level of per capita consumption2 below which households are considered poor -- a poverty line. A poverty line can be used to monitor the magnitude and depth of poverty over time and to make comparisons among different subgroups in the population. The goal is to contrast people who are below the poverty line with those who are above it in order to develop insight into the causes of poverty and ways to alleviate it. How a poverty line is defined is partly a question of policy, and it can never be completely objective. The question is not whether a particular poverty line is correct 2The poverty measures in this report are in terms of consumption, not income. Household consumption has been defined to include the value of food produced and consumed by the household and food items given to the household as gifts, or in payment for services rendered, or drawn out of storage by the household. Apart from the importance of "in-kind" consumption, survey respondents in all countries tend to disclose consumption much more fully than income -- consumption data are a more reliable guide to household economic well-being than income data. 10  Box 3.1: Perceptions of Poverty in Ukraine The households that participated in the anthropological study of poverty in Ukraine described themselves as either "poor' or 'destitute". The critical distinction is the extent to which basic human needs are met. People who describe themselves as poor are able to obtain food, although they say that the worst aspect of their lives is not having enough to eat. After paying for food and housing and, if they can, for communal services, people who perceive themselves as poor report that they cannot afford clothing, medicine or education-related expenses without an extra infusion of cash. People who describe themselves as destitute cite hunger as the worst aspect of their lives. Many of the destitute subsist solely on bread, milk and tea. The destitute are small in numbers, but their situation is desperate. People who identify themselves as destitute tend to be those without a support network, for example solitary pensioners and young single people. The quantitative poverty measures in this report are based on reported per capita consumption, rather than self-assessment. Yet self-assessment helps one understand what it means to be poor in Ukraine. in terms of some objective standard, it is whether a particular poverty line is useful. Box 3.2 describes two measures of poverty, the poverty headcount index and the poverty gap index, in terms of a poverty line. 3.4. Box 3.3 defines a poverty line for Ukraine in absolute terms, based on the food component of the Minimum Consumption Basket scaled up to reflect the nonfood expenditures of the poor. The poverty line so defined was krb 3.675 million as of June 1995. Based on this poverty line, the poverty headcount index was 29.5 percent of households and 31.7 percent of individuals in June 1995. The poverty headcount index for individuals is slightly higher than for households because poverty and household size are correlated, as explained in the section below on household composition and poverty. 3.5. For comparison, the poverty headcount index in Russia is slightly higher than in Ukraine -- 31 percent in 1994 -- yet the poverty line used in Russia, in physical equivalents, is slightly lower than the one defined here. This means that poverty in Russia is somewhat greater than in Ukraine. Both countries have poverty headcount indices much higher than in Poland, 14 percent, which uses a higher poverty line. 3.6. There is a tendency in some countries to use a poverty line as the threshold below which households become eligible for social programs designed to alleviate poverty. When this is done, families below the eligibility threshold are net beneficiaries, and people above it are net contributors. Mixing these two different concepts -- poverty measure versus eligibility threshold -- is very confusing. A poverty line that is high enough to measure poverty in an acceptable way may be so high that it is economically impossible for those who are above the poverty line 11  Box 3.2: Poverty Measures Poverty is a dimension of an economy that can be analyzed with the same rigor and thoroughness as production, trade, prices, or employment. Two variables useful in this analysis are defined below: Po (Poverty headcount index): The percentage of households (or individuals) whose per capita consumption is below the poverty line. Po = q / n where PO = head-count index q = number of families (or individuals) deemed poor n = population size The headcount index is simple, but it is insensitive to the distribution of income below the poverty line -- the headcount index does not reflect whether poverty is shallow (poor households tend to be only a little below the poverty line) or deep (poor households tend to be well below the poverty line). P, (Poverty gap index): the sum for all poor households (or individuals) of the percentage amount by which their per capita consumption falls short of the poverty line, divided by the population size. PI = (1/n) (z-y1)/z where PI = poverty gap index z = poverty line yi = the per capita income of poor household (or individual) i The poverty gap index reflects the depth of poverty, the extent to which the poor are well below the poverty line instead of close to it. to help everyone who is below it. By the same token, a social benefit eligibility threshold that is low enough to be affordable may understate and therefore misrepresent the seriousness of poverty. The poverty line defined for Ukraine in this chapter is intended to be used purely as an analytical tool and not as a social benefit eligibility threshold. 3.7. There is also a tendency to try to relate a poverty line to the size of the minimum or average wage. This also leads to confusion, because the poverty line is a household concept and the wage is an individual concept. Even if the average wage is higher than the poverty line, for example, a family can nevertheless be well below the poverty line in terms of per capita consumption if the ratio of children and elderly to active adults is high. On the other hand, a new labor force entrant who earns a wage that is less than the poverty line may not be poor if he or she lives in a household where there are other wage-earners. In fact, a high minimum wage discourages employment, and this may actually increase poverty rather than decrease it. 12  Box 3.3: Poverty Line Methodology for Ukraine A poverty line can be used to measure the frequency and depth of poverty over time and among groups. A collection (or "basket") of consumption goods and services is selected and quantities are specified for each of them. When prices are assigned to each element in the basket, the total value of the basket of goods and services can be calculated. The value of this basket can then be compared with the value of per capita consumption of different households in order to define which ones are poor. In most countries, the food items and quantities in the basket are based on nutritional requirements and content. An allowance is then added for non-food items. This methodology requires resolving three issues. First, there may be disagreement on what constitutes an appropriate food basket. Should the food items be barely sufficient for survival, or should there be a margin above this? Second, should the food items be chosen in a way that minimizes their cost at a particular point in time, or should they reflect actual consumption patterns? Third, what rule should be used for the non-food allowance -- judgement by poverty researchers or observed behavior? A detailed study of the food component of Ukraine's Minimum Consumption Basket a/ shows that it is more than sufficient for survival, and the food component of the Minimum Consumption Basket does not represent the lowest cost combination of foods necessary to achieve .ts nutritional content. However, it is "official", and it has been tracked careftlly over a long period of timne. Therefore, the poverty line in the World Bank poverty asscssment is based on the food component of the Minimum Consumption Basket. The question then becomes how to derive a non-food allowance. The non-food allowance in the Minimum Consumption Basket seems to be based on the goods and services thought to be necessary for an adequate standard of living in Ukraine a few years ago. In fact, the economic decline of the last few years means that most Ukrainians devote most of their expenditure to food, and the non-food allowance in the Minimum Consumption Basket no longer reflects actual expenditure patterns. Accordingly, the non-food allowance in the poverty line in the World Bank Poverty Assessment is based on observed behavior, as explained in the next paragraph. The value of the food component of the Minimum Consumption Basket was calculated as of June 25, 1995: krb 3,069,000 per month. The value of per capita food consumption for each of the 2,024 families in the household survey, Ukraina 95, was calculated. Per capita non-food consumption was measured for the one hundred households whose food consumption was closest to krb 3,069,000, and a geometric average was calculated of the ratio of food consumption to total consumption. The result was 83.5 percent. The poverty line used in the World Bank Poverty Assessment is krb 3,069,000 / .835 or krb 3,675,000 per month as of June 25, 1995. a/ David E. Sahn, et al, "Instuments for Social Policy Design: the Minimum Consumption Basket" (World Bank Human Resources Ukraine Note No. 1), October 18, 1993. 3.8. Many households are close to the poverty iine as defined above, as illustrated in Graph 3.1. This means that a general increase in consumption, assuming no significant change in distribution, will result in a substantial decline in measured poverty. Table 3.1 shows that an across-the-board increase in consumption of 10 or 20 percent would decrease the poverty headcount index by 18 or 34 percent respectively. The point is that many Ukrainians will climb out of poverty if economic reform is successful in restoring growth. 13  Graph 3.1: Distribution of Households by per capita Consumption, June 1995 Percent of Households 7% - 6% 5% 4%- 3% ~~~~~~~~~~~~~Over 20 2%- 1%_ 01Povert LiIne 0 5 10 15 20 25 krb million/month Table 3.1: Poverty Measures in Ukraine and their Sensitivity (Percent) Baseline | 10% Higher 20% Higher _________________________l ( Consumption Consumption P0 Head-count index 29.5 23.9 19.4 P, Poverty gap index (depth) 9.6 7.8 6.0 (Based on household data.) 3.9. The poverty gap index (P,), the measure of the depth of poverty defined in Box 3.2, confirms the impression that a relatively high fraction of Ukraine's poor have consumption levels that are relatively close to the poverty line. The poverty gap index was 9.6 percent in mid-1995, as compared with 11.7 percent in Russia in 1994 and 13.2 percent for Poland in 1993. The reason the poverty gap index is important is that it distinguishes among degrees of poverty -- a family that is barely below the poverty line adds only a little to the poverty gap index, but a family that is absolutely destitute adds a great deal. If policymakers rely exclusively on reducing the poverty headcount index (the percent of households or 14  individuals below the poverty line), they might focus on policies that raise people just below the poverty line to just above it without having any impact on people that are well below the poverty line. However, the poverty gap index, by rneasuiing the depth of poverty, concentrates attention on the truly destitute as well. 3.10. The concentration of households around the poverty line means that relatively modest improvements in the national economy have the potential to reduce poverty significantly. This could change somewhat over time when economic reform brings greater diversity to Ukraine. In the future, as the income distribution spreads out, a larger fraction of the poor might be concentrated farther from the poverty line. Nevertheless, growth is and will remain essential to the alleviation of poverty in Ukraine. 11. A Profile of Poverty in Ukraine3 3.11. A poverty profile answers two kinds of questions: (a) of those households and individuals that are poor, what proportion belong to certain groups; and (b) what household and individual characteristics are highly correlated with poverty? Both sides of this coin are important, and the answers to these questions complement each other. A poverty profile can examine poverty on a household basis or an individual basis. Some factors affecting poverty make more sense on a household basis (such as family composition), while other factors are more usefully considered on an individual basis (gender or age). A. Demographic Variables 3.12. Family composition. The frequency of poverty in Ukrainian households increases as the number of children or as the number of elderly increases, as shown in Tables 3.2 and 3.3. Box 3.4 describes the plight of one family with a respectable salary but four children. Many households in Ukraine are multi-generational, with active adults supporting both children and parents. Headcount indices for households with both children and the elderly are especially high. 3.13. A convenient way to combine these results about children and the elderly is to examine the relationship between the poverty headcount index and the dependency ratio, defined as the number of children under 15 years of age plus the number of elderly over 64 years of age divided by the number of adults aged 15-64. Table 3.4 shows that the poverty headcount index increases dramatically as the household dependency ratio increases. 3.14. Note in particular the last line of Table 3.4. Most of the households in the "no active adults" category consist of one or two elderly people. These households account for nearly one-quarter of all poor households in Ukraine, and nearly 40 percent of these households are poor. 3Additional statistics may be found in the Statistical Appendix at the end of this report. 15  Table 3.2: Children and Poverty in Ukraine (Percent) Number of Percent of all Percent of Poor Poverty Children under 15 Households Households Headcount Index years of age in Household 0 59 53 27 1 24 26 32 2 15 17 34 3 or more 3 4 48 Total 100 100 30 Box 3.4: Poverty through Children's Eyes Sergei's krb 15 million (about $80) per month salary as a military doctor might be sufficient to support himself and his wife Maria, but they must also support four children ages 9, 7, and 6 year old twins. They have only bread, butter and tea for breakfast arid supper and soup for lunch. Sergei and Maria cannot save enough to buy clothing for the children, so the children share. In the winter, the children cannot all go outside at the same time, because they do not each have a coat. The older children endure humiliation at school because of their clothing. This kind of humiliation breeds low self-esteem, and it sets the stage for poverty that persists from one generation to the next. Maria is apprehensive about next year when the twins are scheduled to enter school. 3.15. Age. The household-based data in the preceding section demonstrates that age is an important factor explaining poverty after a certain point is reached. Data on individuals reinforces this picture, as shown in Graph 3.2. In Ukraine, the age-specific headcount indices tend to decline until around age 60 for both men and women. This finding contrasts with results from other countries. In Russia, in particular, the age-specific headcount indices decline for each successive age bracket, meaning that the older people are, the lower the poverty headcount index for that age group. 3.16. One of the ways in which retirees can contribute to the economic well-being of the households in which they live is by farming on personal plots. To do so, however, they 16  Table 3.3: The Elderly and Poverty in Ukraine (Percent) Number of Elderly Percent of all Percent of Poor Poverty 65 years of age Households Households Headcount Index and older in Household 0 62 49 23 1 26 31 34 2 or more 12 20 49 Total 100 100 30 Table 3.4: Household Dependency Ratio and Poverty in Ukraine (Percent) Dependency Percent of all Percent of Poor Poverty Ratio a/ Households Households Headcount Index 0 (Household 28 15 16 consists exclusively of adults) 0.25-1.00 47 49 31 1.25-2.00 6 10 44 2.25 and over 1 2 67 No active adults 18 24 39 Total 100 100 30 a/ Children are under 15 years of age; adults are ages 15-64; elderly are 65 years of age and older. The household dependency ratio is the number of children plus elderly divided by the number of adults. 17  Graph 3.2: Age-specific Poverty Headcount Indices Poverty headcount index 60 : Males 2 Females 50 _ 40 - 30 20 1 0 15-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-74 75- Age group must have a combination of land, health, and transportation. Even if retirees are in good enough health to farm a personal plot, and even if they have access to land, their efforts to contribute to household consumption may be frustrated by the limited reach, especially in rural areas, of the public transportation system. Many elderly are not capable of carrying kilos of potatoes several kilometers to the nearest transportation, and this may discourage people from farming personal plots. The importance of farming personal garden plots is discussed further in the coping mechanisms section of Chapter 3 and the informal sector section of Chapter 4. 3.17. Although there is significant overlap between the elderly and old-age pensioners, conclusions about the elderly cannot automatically be applied to old-age pensioners. Only 61 percent of old-age pensioners are 65 years of age and older, and only 35 percent of old-age pensioners are poor. Programs that attempt to help the elderly poor by helping old-age pensioners generally are likely to be expensive and inefficient, because much of the money will go to individuals and households that are not poor. In order to help those elderly people who are poor, implementing a means-tested elderly allowance for people over 64 years of age (similar to the means-tested child allowance) may make more sense than attempting to use the earnings- 18  related old-age pension system as a weapon in the fight against poverty, as discussed in Chapter 5. 3.18. Gender. In the future, as discussed in Chapter 4, gender may become a key variable in understanding poverty in Ukraine. For now, women have a slightly higher poverty headcount index (32 percent) than men (29 percent), but the differential is fairly small. This is in large part the consequence of defining poverty in terms of household per capita consumption, which ignores the distribution of consumption within households. With poverty defined this way, differentials between men and women can only arise to the extent that women and men do not share the same households. To the extent that the poverty headcount index for women is higher than for men, it may be because there are twice as many elderly women as elderly men, and 4/5 of the elderly poor are women. 3.19. Households headed by women4, excluding pensioners living alone, have a poverty headcount index of 29 percent, and account for 33 percent of all households. Single female- headed households are a small subset of this group (only 5 percent of all households); their poverty headcount index is 41 percent. B. Location 3.20. Rural/urban. In Ukraine, household survey data suggest that urban poverty is more frequent and deeper than rural poverty (Table 3.5).5 To a large extent, this reflects the importance of food that is produced on a household's family plot. More rural households have plots (59 percent) than urban households (29.5 percent) or semi-urban households (11 percent), and the average size of rural plots is slightly larger than urban plots (0.33 vs. 0.28 hectares). 3.21. Yet to conclude that urban poverty is much worse than rural poverty may be an oversimplification. The nature of poverty in the two kinds of locations is different. In urban areas, the availability of food is undoubtedly the worst problem; pcor urban households are food- poor. In rural areas, however, poor households are cash-poor. Buying bread, let alone clothing, winter heat, medicine, educational supplies or transportation may be out cf the question. The rural poor are better off in terms of food, but the urban poor are better off in terms of everything else. Rather than draw profound conclusions about the quantitative differences in rural and urban poverty, it may be more useful to think of qualitatively different types of poverty (see Box 3.5). 4A household is considered to be headed by the person who reports the highest income. A female-headed household is not necessarily a single-parent household. 5For this poverty profile, rural households are defined as those located in settlements of less than 10,000 people. Semi-urban households are located in communities sized 10,000 to 100,000 people. Urban households are located in towns with populations over 100,000. Defined in this way, most households in Ukraine are rural (48 percent) or urban (44 percent) rather than semi-urban (8 percent). 19  Table 3.5: Location and Poverty (Percent) Total Rural Semi-urban Urban < 10,000 10,001- > 100,000 100,000 PO (Head-count index) 30 27 28 33 PI (Poverty gap index) 10 9 9 11 (Based on household data.) Box 3.5: Qualitative Differences in Rural and Urban Poverty People in rural areas tend to perceive poverty in terms of actual starvation -- if they are not starving, they don't feel poor. Poverty defined this way reflects longstanding shortages of medical and educational services as well as acute shortages of all kinds of consumer goods in rural areas. Rural poor families who manage to produce a surplus of vegetables, meat and dairy products often barter them for other goods. Yet certain necessities cannot be obtained by barter, for example shoes, coal, school supplies or transportation. Urban respondents to the anthropological study looked beyond food to the quality and stability of housing, access to medical and educational services, and the possibility to partake of cultural events. Along with access to a garden plot, housing and communal service payments are by far the most significant factor determining how poor an urban family feels. Communal charges, the second greatest expense aftei food, are determined partly on the basis of the size of the apartment. Although a small apartment has the advantage of lower housing and communal services charges, it does not afford the possibility of using one's housing to generate income by renting out a room, selling a larger apratment and moving to a smaller one, or engaging in informal business. Furthermore, overcrowding contributes to strained family relationships, and lack of space severely restricts their ability to store food over the winter. 3.22. Regions. Overall, poverty is lowest in the South and highest in the East, reflecting the advantage of a more temperate climate in the South and the industrial slump the East (Table 3.6). The regional differences in poverty have implications for the way social protection programs are financed -- regional financing can lead to regional imbalances in benefits (as discussed in Chapter 5). Additionally, there may be some correlation among location, language preference, and poverty. Russian speakers tend to live in urban areas and towards the East, both locations with higher than average poverty headcount indices. It is therefore not surprising that households that chose to be interviewed in Russian had a slightly higher poverty headcount index than those interviewed in Ukrainian. 20  Table 3.6: Poverty's Regional Dimension (Percent) Region PO: Poverty Headcount P,: Poverty Gap Index Index South 26 8 West 28 8 Central 29 10 East 35 12 All Ukraine 30 10 (Based on hiouseholds.) South: Dnepropetrovsk, Zaporazh, Nikolayev, Odessa, and Kherson oblasts and Crimea. Central: Kiev City, Kiev, Vinnits, Zhitomir. Kirovograd, Poltavsk, Sumiy, Cherkassiy, and Chemigov oblasts. West: Volin, Trans-Carpathia, Ivano-Frankovsk, Lviv, Roven, Ternopol, Khmelnits, and Chernovits. East: Donetsk, Lugans, and Kharkiv. C. Unemployment and the Working Poor 3.23. Households with unemployed members or discouraged workers (those who have given up looking for a job) experience poverty with greater frequency than the general population, although there are relatively few such households. Households with one or more members without a job during the previous month had a poverty headcount index of 41 percent, while 38 percent of households with one or more discouraged workers were poor. Although officially registered unemployment is low in Ukraine, less than 1 percent, real wages have fallen drastically and many workers report arrears in wage payments and involuntary part-time work and unpaid leave. These problems are discussed in detail in Chapter 4. 3.24. Some poor households may be described as "working poor", since explicit unemployment is rare in Ukraine. Working poor households are those in which household members are working, but either have too many dependents to support adequately, work in low- wage occupations, are subject to involuntary leave without pay or part-time work, are paid irregularly, or any combination of these factors. 21  D. Education 3.25. Education correlates inversely with poverty. Adults who reported that they had no primary schooling whatsoever had the highest poverty rate (47 percent), while individuals who reported completing higher education had the lowest poverty rate (20 percent) (see Table 3.7). Enrollment ratios seem to be falling in Ukraine, with more and more young people dropping out of school before completion. Future surveys should therefore try to study the relationship between education and poverty in greater detail than was possible in Ukraina 95. Table 3.7: Education and Poverty (Percent) Educational level P0: Poverty Headcount Index Primary or less 37 Incomplete secondary 34 Secondary 31 Specialized secondary and incomplete 27 higher _________________ Higher 20 Total, all individuals reporting 30 education (Based onindividual data.) E. Health and Disabilities 3.26. Poverty is inversely correlated with self-perception of health. Poor Ukrainians consider themselves to be less healthy that other Ukrainians consider themselves to be. Adults who reported that they were not sick in the previous month were less likely to be poor (28 percent) than those who reported illness (34 percent). However, households with a disabled member (who receives a disability pension) had a poverty headcount index (32 percent) only slightly higher than average (30 percent). Fewer than 8 percent of households had a disabled member. Future surveys should carefully investigate the relationship between physical and economic well-being, because the results could be invaluable in redesigning the Ukrainian health sector. 22  F. Housing & Consumer Durables 3.27. Poor households have somewhat less living space than average, and they report feeling crowded and concerned about the safety and habitability of their dwellings. However, as in most FSU countries, household survey research suggests that the correlation between housing or ownership of most consumer durables and poverty is not very high. This is because under central planning, housing and consumer durables were allocated by non-price mechanisms -- usually a combination of queuing and favoritism. However, the anthropological study and other evidence suggests that there may be important differences, especially in quality of housing, between poor and nonpoor households. The reason is that poor households tend not to have money to make repairs when they become necessary. Also, a clear difference between poor and nonpoor households is that the poor cannot afford to repair consumer durables when they break. Many respondents to the anthropological study owned refrigerators or radios that didn't work, for example. This means that living conditions in apartments occupied by poor people may be much worse than living conditions in apartments occupied by better off families in the same building. 3.28. In some countries, it is possible to target social benefits according to neighborhood, or type of housing, because there is a very high correlation between these variables and economic well-being. If the differences are created by the inability to maintain housing, rather than location or type of housing, then targeting in this way becomes very difficult. III. Expenditure Patterns 3.29. Food dominated consumption in Ukraine in the summer of 1995 for two reasons. First, in-kind food consumption is extremely important. Second, the price of housing and communal services was extremely low. As a result, it appears that households spent most of their incomes on food, and the differences in consumption patterns between poor and non-poor households are small (Table 3.8). Within the food category, bread and potatoes are very important in the diet of poor people. As total consumption and consumption of food products declines, families substitute bread and potatoes for meat and meat products, fruit and other vegetables. 3.30. Families that describe themselves as poor and destitute in the anthropological study now report that their primary concern is to find enough to eat. It is not difficult to find people in Ukraine who face grinding, unrelenting hunger, people who spend 100 percent of their resources on food, mainly bread, and still do not have enough to eat. Paying for housing and communal services, clothing and medicine is out of the question for these people. 3.31. A massive increase in the prices of housing and communal services relative to wages and other prices that began at about the time of the household survey is now in progress. This is likely to have a significant impact over time on poverty patterns in Ukraine. The increase in the price of housing and communal services, and the targeted subsidy program that 23  Table 3.8: Expenditure Patterns (Percent) Total Poor Nonpoor Food 83.6 86.4 82.4 Nonfood goods 6.3 3.5 7.4 Housing and 4.4 5.6 4.0 communal services Services 2.5 1.8 2.8 Medical expenses 2.4 2.2 2.5 All other 0.4 0.2 0.4 is intended to cushion it for poor families, is discussed in Chapter 5. As this massive change proceeds, it is vital to measure, monitor and ameliorate its consequences for the poor. IV. Transitory and Structural Poverty 3.32. For some Ukraiman families, poverty is an intermittent phenomenon. As long as wages are paid on time, as long as illness or other adversity do not strike the family, it is possible for them to remain out of poverty. Yet if there is a disruption in income or an unusual expense, the family may face a real crisis. Seasonal changes in the availability of food may cause some families to slide into and out of poverty. Just as many households are just below the poverty line and could be lifted out by modest improvements in their situations, so too are many households just above the poverty line and could easily slide into poverty if the general economic decline continues or if their individual circumstance deteriorate because of illness or other adverse events. 3.33. For some families, poverty may be an enduring and unrelenting fact of life. A high dependency ratio may mean that the family remains in poverty even when the wage earners are paid regularly, or there may be chronic problems that drain the household's resources over a long period. 3.34. On the basis of only one household survey, it is impossible to measure the importance of transitory poverty relative to structural poverty. It is very important to make this distinction because the policies appropriate to each case are different. This argues for implementing the kind of poverty monitoring system described in Attachment 3.2. 24  V. Coping Mechanisms 3.35. Informal sector activities are pervasive in Ukraine, and have increased markedly during the last few years (Johnson, Kaufmann and Ustenko 1995, Yaramenko et al. 1995, Wanner and Dudwick, 1996). The informal sector is now estimated to account for as much as one-third of officially recorded national income (Kaufmann and Kaliberda 1995). The informal sector provides a means for accruing wealth for some, while playing a safety net function for many others. 3.36. From various studies, it seems that most households in Ukraine have some knowledge of or contact with informal sector activities (Yaremenko 1995; Johnson, Kaufmann, and Ustenko 1995). In the household survey and in Yaremenko's study, households were asked if they had heard of various kinds of informal sector activities, and further, if any household members participated in these activities. Predictably, many more people acknowledged that they had heard of a given activity than admitted any sort of direct participation. This is hardly surprising, since many informal sector activities are illegal or quasi-legal at best, and therefore respondents are unlikely to be completely candid with interviewers. The anthropological study (Wanner and Dudwick, 1996) was able to evince more discussion of informal sector activities with its more personalized approach. 3.37. People who are on forced leave without pay or involuntary part-time work, or who are being paid late or irregularly, simply can't afford to remain idle. The single most important informal sector activity for coping with economic adversity is the cultivation of a personal plot of land to grow vegetables and possibly support animals. Three-quarters of households report growing some crops, and households with private plots have a poverty headcount index of 25 percent compared with 37 percent for households that do not have access to land. 3.38. Many people engage in petty commerce that has become known as "hustling" (krutitisya).6 Hustling refers to the incessant motions of buying and selling, and also evokes the tremendous effort needed to work more than one job. Hustling is very difficult for many people who lived for decades under a Soviet system that disparaged entrepreneurship. Many Ukrainians consider selling something at a profit as "speculation", which they consider shameful or immoral. The ability and willingness to hustle is a key factor that determines who will fall into poverty and whether poverty will be temporary. 3.39. Sharing, borrowing and lending can be an effective coping mechanism, especially for households in which economic adversity is seasonal, intermittent or temporary. Ukraina 95 included several questions about these methods of coping with economic adversity. Poor households generally scored lower than non-poor households in terms of net inflow of gifts and assistance from family, friends, or acquaintances. Poor households have less ability to offer 6Literally, "krutitisya" translates "to spin oneself". In English, "hustle" captures the spirit more accurately. 25  hospitality and the resulting reduction in socializing means that poor households have smaller networks of help outside their families (Wanner and Dudwick, 1996). 3.40. To summarize, poverty in Ukraine has a strong demographic component, with families consisting of many children plus elderly supported by few active adults experiencing poverty with higher frequency than other families. Many "working poor" families will benefit directly from economic growth via the labor market (as discussed in Chapter 4). Yet significant numbers of poor (for example, those living in households consisting exclusively of one or two elderly), will be heavily dependent on increases in social benefits (as discussed in Chapter 5). 26  Attachment 3.1 Sources of Information about Poverty in Ukraine A. Ukraina 95 The quantitative poverty measures and correlates in this poverty assessment are based on data collected in June 1995 by the Kiev International Institute of Sociology (KIIS) with the collaboration of the World Bank and financing from a Japanese grant. In the survey, 122 "primary sampling units" were chosen at random, then 2380 households were chosen at random from within those primary sampling units. 2024 households participated in the survey, a response rate of 84 percent. Data on income, expenditure and household characteristics were generated by a household questionnaire for each household, an individual questionnaire for each adult, and a price questionnaire to measure prices at the times and places the questionnaires were administered. A detailed technical report about the survey is available from KIIS, and the raw data generated by the survey are available to responsible researchers. The survey will be repeated in 1996. The strength of the household survey is that it permits the analysis of quantitative data about poverty based on a nationally representative survey, the first nationally representative survey of income and expenditure ever carried out in Ukraine. Over time, it will become possible to measure changes and trends by comparing the results of future household surveys with this first one. B. Anthropological Study of Poverty in Ukraine Social scientists conducted interviews with 500 poor households from October 1995 to March 1996 in five regions of Ukraine. Fifty interviews in each region were conducted in urban areas and fifty were conducted in semi-urban or rural areas, with the exception of Crimea where they were nearly all conducted in rural areas. Interviewees were selected because people in the community knew they were living in poverty; they were not selected at random. The interviews were semi-structured -- interviewers followed an outline of subjects, but the questions were "open-ended". Most interviews lasted more than three hours, and in some cases the interviewers and interviewees met several times. The anthropological study's strength is that it qualitatively delineates the social, cultural, and economic factors contributing to poverty in Ukraine today and identifies patterns suggesting which social groups are likely to experience poverty temporarily and which ones run the risk of becoming part of a permanent underclass. The anthropological study also provides in-depth case studies of how individuals who have experienced a severe decline in living standards are coping with poverty, and portraits of the members of the population who have become destitute. The results of the study are summarized in "An Anthropological Study of Poverty in Ukraine" by Catherine Wanner and Nora Dudwick (see bibliography). 27  Attachment 3.2 A Proposed Poverty Monitoring System for Ukraine Ukraine spends about 18 percent of GDP on social protection, not counting education and health. Yet it is unclear to what extent the growing number of poor families in Ukraine benefit from social protection programs, or to what extent the various programs are well-targeted at poor families. There is a need for a systematic approach to monitoring poverty and the incidence of benefits over time. A poverty monitoring system for Ukraine could consist of a number of complementary elements. A "rolling" quarterly household survey of income and expenditure would make it possible to measure the incidence of social benefits and the impact of economic policy changes on family economic well-being both in the short term and over time. This survey could include special topics such as housing, education and health every few quarters rather than every quarter in order to keep the questionnaire short and to speed up the time required for analyzing any one quarter's results. The survey sample could be renewed gradually over time in order to provide some of the benefits of a "panel" study. (A survey of this type has now replaced the Family Budget Survey in Belarus.) Qualitative studies (like the anthropological study of povety in Ukraine used by this poverty assessment) could provide insight on topics of particular interest from time to time. Administrative data, for example from housing subsidy applications, clinics and schools could be systematically collected and analyzed. Data from these various sources could be pulled together by the Council of Ministries in cooperation with the Ministry of Statistics, Ministry of Social Protection, and Ministry of Labor in an annual poverty report. Alternatively, the poverty report could be done by the Office of the Presidency or even by an appropriate committee of Parliament. The annual poverty report could in principle supplant the UN's annual Human Development Report and future World Bank poverty assessments. The data and analysis flowing from the poverty monitoring system would provide an objective basis for measures to strengthen the social protection system. The creation and first five years of operation of the poverty monitoring system described here would cost less than $5 million, or about $1 million per year. This does not seem extravagant compared to Ukraine's annual social protection outlay, which is between 15 and 20 percent of GDP. International financing and technical assistance are available. 28  Chapter 4: The Labor Market 4.1. The severe economic decline described in Chapter 2 resulted in a rapid decline in purchasing power and standard of living for households dependent on wage income. The primary effect was a dramatic decline in real wages, more than 60 percent between 1990 and 1993 (Section l). The decline in employment has been much smaller than the decline in output, and open unemployment remains small by international standards (Section II). Hidden unemployment (meaning especially forced unpaid leave and involuntary part-time or intermittent work) began growing, but its importance should not be exaggerated (Section III). The labor market has been the most important link between macroeconomic decline and growing poverty (Section IV). 4.2. Employment in the informal sector (not captured in official statistics) has grown rapidly, but the growth in informal sector labor income hasn't made up for the decline in formal sector wages (Section V). As discussed in Chapter 3, part-time farming is an especially important informal sector activity for households with access to land. For some households, however, the informal sector has provided no relief at all. 4.3. Clearly, a resurgence in labor demand is required as one very important ingredient in the alleviation of poverty in Ukraine. Yet it is not a panacea. Even if growing labor demand pulls up the real wage significantly, many Ukrainian households will not escape poverty because they do not participate fully in the labor market or because they are so far below the poverty line (Section VI). Even a very strong resurgence in labor demand cannot avoid the need for reform of Ukraine's social protection system (Chapter 5). L. The Collapse in Real Wages 4.4. The most serious consequence of the recession has been a severe decline in the real average wage rate, 63 percent between 1990 and 1993. As wage rates were determined administratively in most of the economv for much of the period since 1990, this decline cannot be interpreted exclusively as a market response. but also as an administrative reaction to tightening budgetary constraints and runaway inflation. As a result of the declining real wage, household incomes have suffered greatly. 4.5. Before 1990, Ukraine had a system of wage controls typical of most centrally- planned economies. Essentially, there were two main instruments: control of the wage fund or wage bill as a macroeconomic stabilization measure that limited consumption growth; and control of wage rates and differentials. Once fixed at the national level by State authorities, the wage fund was allocated to enterprises where it was distributed to workers according to the pay scales or wage tariffs that applied in each sector. The government thus determined pay levels and differentials throughout the non-collective sector with the discretion to vary remuneration across sectors according to relevant economic and political objectives. 29  4.6. This system was temporarily suspended between April 1991 and November 1992, and enterprises were given autonomy under the Law on Enterprises in Ukraine to determine wages in a decentralized collective bargaining context, but with a continuation of the tariff system to set differentials by occupation and working conditions. The new system quickly ran into difficulties because the monopoly power possessed by many enterprises allowed them to accommodate wage demands (sometimes fueled by union pressures) by raising the prices of the fmal goods they produced. These tendencies were blamed for accelerating inflation and the system was dropped. 4.7. The period December 1992 to April 1995 was little more than a return to the old system of wage controls. Wage fund limits were enforced by the imposition of a 300 percent tax on excess expenditures, and the tariff system was reintroduced as the basis for fixing differentials. The only real difference from the old system lay in the introduction of a national minimum wage calculated at no less than the cost of a basket of 70 basic commodities with the political discretion to set a higher rate that acted as the floor to wages paid to the lowest occupational grade in any enterprise. The ratio of the lowest wage to the national minimum was, however, adjusted upwards over time (e.g. from 1.2 to 2 in June 1993) and the linkage of its lowest permissible value to the Minimum Consumption Basket was severed in January 1993. 4.8. At present, there are no controls pertaining to the private sector except for the need to pay the national minimum wage, and there has been some liberalization of the system as it applies outside the private sector in the second and third quarters of 1995. Although wage fund limits continue to be applied in the state-owned sector, the tax penalty for exceeding these limits has been reduced sharply to 30 percent. The tariff system has, however, been abolished except in the budget organizations (health, education, and culture) although civil service pay is, as in all countries, under government control. Even in the budget organizations, the wage rates of white collar personnel, e.g. doctors, nurses, school teachers, university professors etc., are matched against those of comparable occupations elsewhere in the state-owned sector. 4.9. In addition to basic wages, workers receive other monetary payments. Overtime is paid at double time, and payment-by-results or piece-rated work is set so that expected earmings are also double the normal rate. The level of bonus is determined within the enterprise, but before 1995, a ceiling was imposed at 50 percent of the basic wage. This ceiling was recently lifted, and bonuses could now be much higher if an enterprise exceeds its production norms. 4.10. Taxes on labor continue to create a large gap between the cost of labor as seen by enterprises and the compensation actually received by workers. Payroll taxes in Ukraine (sometimes called "mandatory contributions") are paid by both employers and employees. Labor taxes paid by employers are: (a) contributions to the Pension Fund (32.56 percent of the wage fund); (b) contributions to the Chernobyl fund (12 percent of the consumption fund); (c) contributions to the Social Insurance Fund (4.44 percent of the wage fund); and (d) contributions to the Employment Fund (2 percent of the Consumption fund). Employees also make payments to the Pension Fund (1 percent of the wage fund). The share of wages in national income was 30  32 percent in 1994, but after taking into account payroll taxes paid by employers, the share of labor costs in national income was about 48 percent. This is low for an economy in which wages constitute the bulk of labor income. Taxes on labor, especially for programs with no contribution-benefit link, contribute to poverty by discouraging employment and pushing down wages, as discussed in Chapter 5. 4.11. The nature of wage regulation in Ukraine has meant that wage differentials were very narrow according to skill levels within enterprises. Typically, the wage tariff system did not pennit the ratio of the highest to the lowest wage in an enterprise to exceed 2: 1, although in joint ventures it is believed that these controls were heavily evaded. Earnings differentials by education are extremely low by international standards. The Ukraina 95 survey suggests that the average wage differential between workers having completed higher education and those with only primary schooling was only 85 percent. Differentials of 200 percent or more are commonplace in many countries. Differentials across sectors did change, however, according to the criteria used in deternining wage funds (Table 4.1), with the biggest relative gains accruing to the financial sector and the biggest relative loss to agriculture. Table 4.1: Average Monthly Wage by Sector 1990-94 (Rubles, Karbovanets) 1990 1994 Ratio thousand 1994/1990 (thousands) Agriculture 968 3.72a/ Industry 278 1540 5.54 Construction 309 1977 6.40 Transport 2-T58 1471 f5.70 Wholesale & Retail Trade 225 1116 4.96 Health 164 1108 6.76 Education 176 1071 6.08 Financial Services ---- 366 3156 8.62 Government Administration 305 172 5.66 Total 249 1377 5.53 Source: Ministry of Statistics and Ukrainian Economic Trends, August, 1995 a/ There has been a shift in the composition of remuneration in the agricultural sector. Cash wages are lower, but income in kind is much higher. One cannot conclude that total agricultural remuneration has fared worse that remuneration generally. 31  II. Open Unemployment 4.12. Measured job loss in Ukraine (10 percent between 1992 and 1995) has been smaller than the decline in GDP (37 percent over the same period). The decline in employment was heavily concentrated in the industrial sector (mining, manufacturing and electricity) where the number of wage employees fell by about 19.9 percent from 7.1 million in 1990 to 5.9 million in 1993 -- over two-thirds of the measured decline in wage employment in the whole economy. More recent data covering only medium and large enterprises show that industrial employment fell by a further 12 percent between end-June 1994 and 1995, indicating an acceleration in job loss. Within industry, employment fell most in light industry and in engineering activities. 4.13. Open unemployment (excluding workers on unpaid administrative leave) is not particularly high in Ukraine by international standards. Recent surveys indicate that the actual unemployment rate, using standard international definitions, is not much above 5 percent, which is very low by European standards. 4.14. The official unemployment rate was only 0.35 percent as of October 1, 1995. Even after adjusting for the estimated difference between potential and actual labor supply, the revised figure is only around 0.38 percent. These official statistics underestimate the true extent of unemployment because they are entirely based upon employment exchange registrants, and exclude many people who would be considered unemployed by conventional international definitions. The major biases in the official unemployment rate are: a. Men aged 60 and above, women aged 55 and above, disabled persons, and workers who "voluntarily" quit their last jobs cannot be counted as unemployed under the 1991 Employment Law. b. Retrenched workers cannot claim unemployment benefits in the first three months after leaving the enterprise, and first-time jobseekers must wait 6 months after completing training before becoming eligible for benefits, so these two groups have no incentive to register at employment offices. This means that they are not counted among the unemployed. c. The ratio of the average unemployment benefit to the average wage was only 18.4 percent at the end of 1995, so the incentive to report to an employment office in order to remain registered is limited. d. Most enterprises bypass Employment Service Offices when recruiting workers (ILO-CEET, 1994), although notification is compulsory, thus reducing the attractiveness of Employment Service offices as a job search mechanism. 4.15. It is hardly surprising therefore that officially-estimated unemployment is so low. An alternative measure is to include registrants, whether or not they meet official unemployment 32  criteria, as a proportion of the labor force, but this only raises the estimated unemployment rate to a little over 0.5 percent. 4.16. Despite their shortcomings, official unemployment estimates can give a guide to the main direction of some labor market trends and the composition of the unemployed. The main trend is that unemployment is rising -- the number of registered unemployed increased over sixty-fold between July 1991 and April 1995. Although the large increase in registrations in the second half of 1991 and perhaps the first half of 1992 may be attributed to the introduction of unemployment benefits in July 1991, registered unemployment continued to rise until mid-1994. Women account for about 75 percent of the registered unemployed, but only for 52 percent of the labor force, and the latter figure overestimates female participation under conventional definitions of labor supply. It is unknown, however, to what extent this reflects a greater propensity to register at exchanges. Nearly one-half of the registered unemployed are aged 30 years or less, even though many persons in this age group have little incentive to register, and, in total they comprise only 37 percent of the labor force. 4.17. Surveys of households and individuals cannot as yet tell us much about unemployment trends. Unfortunately, surveys so far available are not strictly comparable as they are based on different samples. A rolling quarterly household survey of the type described in Attachment 3.2 would make it possible to track trends over time. Of the three surveys discussed here: Johnson, Kaufmann and Ustenko (1995) collected data on 1828 currently employed and separated workers in 1994 based on the records of 26 urban enterprises for 1991; Yaremenko et al (1995) analyzed information on 4454 individuals aged 15-70 years collected from households in five major cities in April 1994; and the Ukraina 95 household survey described in Attachment 3.2 collected information in June-July 1995 from a nationally representative sample of 2024 households. 4.18. The Johnson, Kaufmann and Ustenko survey suggests that the incidence of open unemployment in Ukraine is not far behind the 20 percent or so observed in much of Eastern Europe. This is not surprising, because the sample overrepresents separated workers who presumably have a higher incidence of unemployment than the population average. It does, however, exclude first-time jobseekers among whom the opposite presumption applies. Using the ILO definition of unemployment -- without work and seeking employment -- 14 percent of the sample was unemployed. 4.19. The other two surveys yield much lower estimates of open unemployment. Yaramenko reports an urban unemployment rate by the ILO definition of only 2.3 percent, but this is based on the entire adult sample and not on a conventional definition of labor supply. It is possible to obtain alternative estimates from these data under different assumptions. First, if non-employed pensioners, housekeepers and students are excluded the estimate based on the ILO definition rises to 3.2 percent. Second, the survey found 7.4 percent of adults employed but on leave. Obviously, some of these were enjoying normal leave and not forced unpaid leave of the kind discussed in Section III on hidden unemployment. If we assume that normal leave occupies 33  one month per year among the permanently employed -- about 4.9 percent of the sample -- then the unemployment rate could be adjusted upwards to 5.7 percent. 4.20. The Ukraina 95 household survey offers the most useful unemployment estimates as it is based on a sample of the entire population and not just major urban areas. The results give national unemployment estimates by the ILO definition varying between 2.3 and 3.0 percent depending on whether a reference period of 30 or 7 days is used. If discouraged jobseekers are included, i.e. those who would like to work, but are not actively searching, the estimated unemployment rates rise to 2.5 and 3.8 percent respectively. As in many other countries, the most vulnerable are those aged less than 25 years, where the unemployment rate ranges between 5.7 percent and 8.8 percent depending on the definition used. The poor are much more likely to experience unemployment than the non-poor, as the estimated unemployment rate including discouraged job seekers varies between 5.2 and 7.9 percent among the poor compared with only 2.5 to 2.9 percent among the non-poor. III. Growing Hidden Unemployment 4.21. Many workers who are still shown as employed in official statistics are actually on unpaid leave from their enterprises or working short hours. The true decline in worker activity induced by the recession is thus almost certainly much greater than indicated by official employment statistics. Nevertheless, it must be remembered that overmanning was a persistent feature of the centrally-planned economic system, and that to some extent, the growth in hidden unemployment represents a shift from a concealed labor surplus in enterprises to a more visible phenomenon. 4.22. Official statistics do not report hidden unemployment. However, they do give the loss of working days due to shortage of raw materials, energy and components and authorized and unauthorized absenteeism. By this measure, short-time working increased from an average of less than 1 day per worker in 1990 to over 14 days per worker in 1994 (Table 4.2). Most of this is explained by downtime and administrative initiatives with truancy and absenteeism only contributing a minor share. The industrial sector was the worst affected with high work losses also in construction, transport and catering. Within the industrial sector the incidence of short- time working seems to be linked to the rate of job loss with light industry and engineering particularly badly affected at 35.6 and 60 days lost per worker in January-September, 1994 respectively. Excluding truancy and voluntary absence with permission, about 4.1 percent of total working time was lost through a reduction in the working week in 1994. 4.23. An important reaction to the recession by Ukrainian enterprises is to place workers on "administrative leave". Typically this is unpaid, although in some cases a minimum wage income is provided from the firm's wage fund. Managers prefer to put workers on leave rather than fire them or cut working hours for several reasons. 4.24. First, they avoid paying severance pay. Under the Ukrainian Employment Law, employers must pay three months of severance pay to any worker released by them for economic 34  Table 4.2: Loss of Working Time by Sector January-September 1994 (Average Days Lost per Worker) Total Approved by Initiated by Employer Employer Agriculture 9.0 7.2 4.5 Industry 24.9 20.2 15.8 Construction 19.3 17.5 11.7 Other 9.6 8.7 5.1 Total 14.5 12.1 8.4 Source: Ministry of Statistics or organizational reasons, the monthly amount being equivalent to the average wage received by the worker over the previous three months. By putting workers on administrative leave, employers not only avoid severance pay, but may induce unwanted workers to leave voluntarily. This may partly explain the high level of "voluntary" departures discussed earlier. 4.25. Second, enterprise managers were encouraged to resort to this practice by the wage tax, or the "tax-based incomes policy", by which rising money wages could be taxed at a high rate if they exceeded a certain amount. This system is explained more fully below. By putting some workers on unpaid or partially paid leave, the wage bill is lowered, thus allowing workers who were actually working to be paid higher wages without incurring the wage tax penalty. 4.26. Third, from the workers' viewpoint, it would be rational to remain on administrative leave rather than to become unemployed because there would remain a possibility of re-employment, and they would retain access to at least some enterprises benefits such as healthcare, housing, kindergartens and the use of social amenities. Quitting would also result in loss of severance pay, forgoing opportunities to receive shares should the enterprise be privatized, and unfavorable treatment with respect to unemployment benefits. 4.27. The Ukrainian Labor Flexibility Surveys (ULFS) of enterprises in manufacturing and energy conducted by ILO-CEET show that unpaid and partially paid administrative leave increased considerably in 1993-94. In March 1993, 24.1 percent of all factories had some workers on administrative leave, but by March 1994, this proportion had risen to 42.5 percent with a further rise to 44.5 percent in March 1995. 11.4 percent of the workforce was on unpaid 35  leave in March 1994 and 15.2 percent in March 1995. These numbers refer only to full-time administrative leave, and do not include workers put on short-time work or sent on prolonged holidays. 4.28. The situation does not seem to have worsened further in 1995. Official statistics on unpaid leave show that the proportion of workers who experienced unpaid administrative leave actually declined from 18.9 percent of employment in January-September, 1994 to 14 percent in the same part of 1995. Unfortunately, there is no information on the duration of leave periods, which means that one cannot infer that total time spent on unpaid leave had fallen. Nevertheless, this may be consistent with the increase in retrenchments experienced in 1995, as increased separations would reduce the amount of unpaid leave. 4.29. Despite growth in short-time working and unpaid leave since the early 1990s, there is still a considerable surplus labor in enterprises. In early 1994, the ILO-CEET survey found that over 43 percent of firms reported that they could produce the same level of output with fewer workers. This was widely reported across the industrial spectrum, although particularly marked in chemicals, energy, engineering and light industry. Larger firms were more likely to report that they could cut employment without affecting output -- over 60 percent of enterprises with over 1000 employees could work with fewer workers, but only 30 percent of enterprises with less than 250 employees. There was no simple correlation between the relative size of the surplus and the type of ownership across enterprises, although, on average, closed joint stock establishment were the most inclined to report surpluses (50 percent surplus) and state-owned enterprises (40 percent) the least inclined. 4.30. According to the Ukraina 95 household survey, the overall level of unemployment in Ukraine (including open and hidden unemployment) in mid-1995 may be estimated at about 5.3 percent, as follows: 3.8 percent unemployment using the broad definition plus 1.5 percent unpaid leave and involuntary part-time work. The survey indicates that the degree of hidden unemployment suggested by official statistics is exaggerated. Other surveys confirm this. This is almost certainly because workers on forced leave or involuntary part-time work are active in other jobs and/or informal activities. The degree of underutilization of labor is, of course, much higher given large and persistent labor surpluses within enterprises. IV. Declining Labor Income and Household Well-being 4.31. After some decline in 1990-92, real wages fell sharply in 1993 by over 55 percent (Table 4.3) in the face of 10,000 percent inflation. The effect of the state-managed incomes policy was to drive average real wage rates down more quickly than real GDP, and by 1994 the average wage had fallen below the official minimum subsistence level (ILO (1994)). Although labor costs also declined as a proportion of GDP in 1993, the impact was less pronounced because the share of non-wage payments to labor and payroll taxes increased. In 1994, the real wage decline slowed, and preliminary data indicate that real wages recovered slightly by mid-1995. 36  4.32. The importance of wages in household income shows a clear pattern. The drastic real wage decline in 1990-93 led to a fall in the share of wages in household income from nearly 71 percent in 1990 to 48.6 percent in 1993. This information is based on the Ukrainian Family Budget Survey (FBS), which does not provide representative data. However, data from the Ukraina 95 household survey also underscore the declining importance of wages in total household income. On average, wages in cash and in-kind were about 54 percent of total household income.7 Table 4.3: Real Wage and Labor Shares in GDP and Household Income l 1990 l1992 1993 1994 1995 Real Wage ndex 82 38.4 (1990= 100) Real GDP Index 100 74.9 54.7 32.8 28.9 (1990= 100) Share of Labor 4 43 4 40 48 48 costs in GDP (percent) Share of wages in 70.0aW 67.9 53.T 60.2 61.901 household income (percent) Sources: Ukrainian Economic Trends, August and November, 1995. a/ Staff estimate. b/ Month of October 1995. 71ncome was defined as the sum of all paid work reported by adult respondents (including the respondent's self- evaluation of payments in kind) and of all cash transfers, plus net agricultural income. In Ukraine, as everywhere, people are much more candid about their consumption than about their income. In most household income and expenditure surveys, in both rich and poor countries, reported consumption is significantly higher than reported income. It is particularly difficult to measure private cash transfers and private remittances from abroad, from agricultural activities, and from "hustling". In Ukraina 95, reported income was only half of reported consumption. The consumption data is much more reliable than the income data. This means that analysis based on income data from the study should be interpreted very cautiously. 37  3.33. An additional factor is that Ukrainian workers do not always get paid on time. While the real wage declines reported above tend to overstate the true real decline in worker remuneration because other labor payments declined less, slippage in paying workers creates the opposite bias in the statistics as this practice seems to have become more prevalent. The Ukrainian Labor Flexibility Enterprise Survey of 1995 (ULFES) found that two-thirds of all factories covered by the survey reported such difficulties. Over 60 percent of all factories had not paid contractually agreed wages, sometimes in all and sometimes in part, and the average time slippage was 3.5 weeks. Large establishments had more difficulty with payment than smaller enterprises, and payment difficulties were especially prevalent in enterprises that had cut employment levels. Similar conclusions were reached in the ULFES for 1993-94, and issues of wage arrears were at the center of recent coal strikes. V. The Role of the Informal Sector 4.34. Some Ukrainian households have been able to cushion themselves from the worst effects of falling real wages and broadly defined unemployment by participating in the informal sector. Most informal sector income derives from people farming on their own small plots of land. Results from the Ukraina 95 household survey indicate that 9.8 percent of household cash income originates from informal sources, out of which 8 percent of total cash income is derived from the cultivation of small plots. More than one-third of the survey respondents reported that they were doing part-time cultivation in combination with other jobs and activities. More than half of all urban households now own or have access to small plots of land on which they typically cultivate food for their own consumption. Thus, it may be that agricultural production on personal plots is already close to its full potential, unless more land is placed in private hands. 4.35. The 1.8 percent of household cash income that comes from other informal activities is almost certainly an underestimate as such activities are mostly illegal and are, therefore, difficult to measure. The main types of illegal labor activities are: providing legitimate works and services but concealing that income for tax purposes; receiving payment for works and services that by law should be provided free; receiving additional payment above controlled prices; and carrying out criminal activities. 4.36. To the extent that many informal enterprises are illegal, it seems unlikely that they will try to grow by employing large numbers of workers or by investing substantial amounts in plant and equipment, both of which would increase the likelihood of the enterprise receiving unwelcome attention from tax authorities. For both legal and illegal informal enterprises alike, labor taxation is a disincentive to hire workers. 4.37. In addition, informal activities were proscribed or discouraged over a very long period of time during the central planning era, with the result that much of the population has little experience with these areas. As with any economic activity, informal manufacturing and services have a learning curve and take time to develop. Therefore, there is likely to be little growth in these informal sectors in the short to medium term. 38  4.38. Clearly, it is in Ukraine's interest to legitimize and formalize informal sector activities and to eliminate obstacles to their success (such as high labor taxation). Nevertheless, even very rapid informal sector growth has not offset the very large decline in household well- being caused by the decline in the formal sector, given that the recent growth in the informal sector has been from a very small base. It is particularly worrying that, according to the Ukraina 95 household survey and the anthropological study, these activities are less important among the poorest groups. While participating in the informal sector has helped some households to avoid poverty or to mitigate its consequences, this is unlikely to be a source of a major resurgence in labor demand and thus in living standards without concomitant formal sector growth and social protection reform. VI. Can Economic Recovery "Cure" Poverty in Ukraine? 4.39. Economic recovery would benefit the poor directly through the labor market and indirectly through the social protection system. Wages are the most important component of household income -- over 60 percent in 1995 -- and therefore represent the strongest potential linkage between GDP and household welfare. In view of recent moves to free wage-setting from state intervention, this linkage between an economic and a wage revival should be relatively automatic. The impact of wage increases on households thus gives a useful indicator of how much poverty would automatically be erased by an economic recovery. 4.40. As the economy strengthens, the revenue available for social protection (especially receipts from taxes on labor) will strengthen also, creating the possibility to increase social benefits. However, one cannot assume that benefits will automatically go up as fast as wages. In fact, in the case of pensions (the most important benefit), it is extremely unlikely that it will be possible to raise the average pension as fast as the average wage. 4.41. It is therefore useful to investigate the strength of the direct wage effect alone in alleviating poverty, assuming no change in nonwage income. A revival in real wages from their present low level would reduce the incidence of poverty by raising the incomes of some poor households sufficiently to pull them across the poverty line. The strength of this effect would depend on the composition of household income among poor households, the distances between the incomes of wage-earning poor households and the poverty line, and the size and nature of a wage revival. If, for example, most poor households do not receive wage incomes, then the impact of even a major expansion in wages on poverty must be small. Similarly, a wage revival that benefited highly-educated workers at the expense of others, may do little for the poor if they have low education levels. 4.42. An increase in the real wage rate is only one way in which a stronger labor market could, in theory, improve household income. It is possible, in principle, for more people to be drawn into the labor force, and for workers to be paid for more hours. Yet Section II of this chapter already discussed that labor force participation remains high, open unemployment is low, and hidden unemployment is also relatively modest. This chapter estimated total unemployment, including hidden unemployment, at 5.3 percent, which is rather low by 39  Box 4.1: Age and Gender Discrimination in the Ukrainian Labor Market The anthropological study offers insight into problems that are not unique to Ukraine, age and gender discrimination. People over forty are sometimes considered contaminated with "Soviet thinking". In many cases job candidates are candidly told that their applications will not be considered because they are over 40 years old, and sometimes the threshold is as low as 35. Older women suffer from age discrimination, but younger women complain of gender discrimination and sexual harassment. Employers frequently will not consider a woman in her child-bearing years because there is an entrenched fear that she will soon go on maternity leave for an extended period. If a woman already has children, prospective employers may assume that she will be absent frequently to care for them when they are sick. Women may face discrimination in i-iformal sectcr activities as well. Women who try to start their own businesses may find it difficuli to obtain micro-credit, reliable suppliers, and business contacts (although these things are also very difficult for men.) When the informal sector shades into illegal arrangements, women may be especially vulnerable to criminal extortion. On the other hand, young women who do get hired often complain of sexual harassment. Employers reportedly feel licensed to make sexual demands on their female employees knowing that the women understand that their alterative is losing their jobs in a terribly weak labor market and sinking into poverty. The household survey does not provide useful data about gender discrimination. Poverty is defined in terms of per capita household consumption. This means that, to the extent that men and women live in the same households, their poverty status will be the same. Chapter 3 found small differences in the poverty headcount indices for women and men. These differences are probably explained by that fact that women in Ukraine outlive men by an average of about ten years, and age correlates with poverty. In fact, 9 percent of all poor households consist of an elderly woman over 64 years of age living alone, and less than 1 percent of all poor households consist of an elderly man living alone. Older women tend to be poor, but older men tend to be dead. Dealing with discrimination is a difficult issue in market economies. While it's clear that society as a whole suffers when discrimination is allowed to flourish, solutions are difficult to implement. It is important to have a firm legal foundation for equal opportunity, and also enforcement mechanisms such as legal procedures so that individuals can seek redress. Removing barriers to free entry into business can also have an important impact. Perhaps the most effective antidote to discrimination is a growing economy with high labor demand. In such an environment, discrimination becomes very costly to employers. comparison to western Europe. The conclusion is that the wage effect will be much stronger than the employment effect. It is easy to imagine a doubling of the real wage. It is not easy to imagine an increase in employment of more than 5 or 10 percent. 4.43. In addition to higher average wage rates and somewhat greater paid hours, economic growth is likely to entail widening wage differentials between skilled and unskilled or 40  educated and uneducated workers -- wage decompression. Wage decompression seems Table 4.4: Ratio of Wage Income to a likely consequence of wage liberalization, Total Income as past state intervention had the effect of for Poor Households reducing wage differentials by skill and (percent) education. By comparison with other European countries, wage differentials in Ukraine are very small, so it seems Ratio of wage to Percent of poor appropriate to think of wage decompression total income households as the normalization of an unusual situation, 0 58 and not something to be resisted. l 0-20 2 4.44. A conclusion from the Ukraina 21 - 405 95 household survey is that wage growth alone, with no corresponding growth in 41 - 60 7 benefits at all, would have a significant effect 61 - 80 10 on poverty, but it cannot eradicate poverty because many households below the poverty 81 - 100 18 line report no wage income whatever. l Table 4.6 shows that 58 percent of poor Total 100 households report no wage income, so they obviously don't benefit directly from an increase in wages by itself or suffer from wage decompression. 4.45. In the real world, one would expect an increase in real wages to be accompanied by an increase in social benefits and other sources of income. Even households that receive no wage income will benefit from an increase in wages to the extent that benefits rise. However, the linkage is not automatic. As Chapter 5 suggests, it may not even be possible to maintain the ratio of average benefits to average wages. It seems likely that the ratio of benefits and other non-wage income to wages will decline over time. The possibility of renewed economic growth cannot substitute for social protection reform. 41  Chapter 5: Social Protection in Ukraine 5.1. Chapter 4 concluded that wage growth alone will have an important impact on poverty, but that social protection is also very important. This chapter discusses the goals that social protection should attempt to achieve in the next five or ten years (Section I). It contrasts the present reality with this future vision in order to identify options for reforming the social protection system in Ukraine in ways that would achieve those goals (Section II), and identifies next steps in order to move from today's reality to tomorrow's vision (Section III).8 5.2. For presentational purposes, it is useful to divide the social protection system into three areas: social assistance, social insurance, and social justice. Providing social assistance means increasing the consumption of economically weak households by decreasing the consumption of economically stronger households in order to alleviate poverty. Poorer households are net beneficiaries; richer households are net contributors. Providing social insurance means protecting people against "insurable events" -- events that are predictable for society as a whole but are difficult to predict for individuals. Examples are surviving to old age and unemployment. Benefits are closely linked to contributions. Social insurance programs may help to prevent beneficiaries from falling into poverty, but this is not the main reason for their existence. Ensuring social justice means compensating people for such adverse events as the Chernobyl disaster. Alleviating poverty is not necessarily a goal in these cases, and there is no contributions-benefits link. Social assistance, social insurance, and social justice programs are closely related in that they serve overlapping groups and draw on the same sources of revenue. I. Social Protection in Ukraine: a Medium-term Vision 5.3. Social protection reform is extremely difficult politically because changes in benefits inevitably create groups of "losers" and "winners". If an important goal of reform is to reduce the number of beneficiaries or to redistribute benefits in order to help the truly needy, then the number of people who perceive themselves to be "losers" may be greater than the number of "winners". One way to deal with this problem is to create a medium-term vision of social protection, to demonstrate that this vision results in a better, more equitable distribution of benefits than the existing system, and only then to focus on immediate steps toward that future vision. This section presents one possible vision of social protection in Ukraine in order to illustrate what it's ingredients might he. The best system for Ukraine, obviously, must be designed by Ukraine. A. Medium-term Vision of Social Assistance: A Means-tested Income Subsidy 5.4. Ukrainian policymakers may wish to think in terms of using an integrated, means- tested income subsidy as the primary cash transfer system for providing social assistance in the 'Options for the short term (12 to 18 months) are considered in "Ukraine: Short-term Options for Strengthening Social Safety Nets", Fiscal Affairs Department, IMF, March 1996. 42  future. The income subsidy program could be supplemented by federally financed but locally designed and administered programs of social services for people with special needs. 5.5. A means-tested income subsidy would supplement the purchasing power of poor families simply because they were poor. Groups that have traditionally received social assistance from the state, such as the elderly, working families with children, the long-term unemployed, and invalids, would not automatically receive the subsidy unless they had incomes lower than a threshold specified in the means test. Thus, the subsidy would only be received by the truly needy. The recipients of the income subsidy would decide how to use the money. For some, food might be the highest priority, whereas for others, medicine or housing might be the top priority. 5.6. A well-designed means-tested income subsidy program should raise the living standards of the poor, should avoid creating work disincentives, and should be financially sustainable. There are trade-offs among these three objectives. For example, setting a high eligibility threshold ensures that everyone who needs help receives it. Yet the higher the threshold is set and therefore the more people who are covered, the more expensive the program becomes. Regardless of how the benefit is financed (by income or wage taxes, consumption taxes, import duties or even business taxes), its specific purpose is to shift consumption from relatively better off families to relatively worse off families. If the eligibility cut-off point is set relatively high, then there will be commensurate.y fewer people with consumption above the cut- off who are net contributors who will each have to bear a higher burden than if the eligibility cut-off were set lower. 5.7. A particularly difficult choice must be made about the eligibility threshold relative to the poverty line. If a high poverty line has been chosen (for example, one that categorizes over 40 percent of the population as poor), it may be financially impossible to help everyone who is below the poverty line or to raise everyone below the line out of poverty. Politically, it may be easier to define an affordable poverty line and to help everyone who is below it than to define an overly generous poverty line and then to be unable to help all those who fall below it. 5.8. Another trade-off involves the rate at which the benefit is phased out as household income increases. If the program is designed so that the benefit declines by krb 100,000 for every additional krb 100,000 that the household earns, for example, then it removes all incentive to earn additional income. On the other hand, an income subsidy that tapers out only gradually as household income rises is very costly. 5.9. As an intermediate phase, after careful analysis of budgetary impact, the means- tested child benefit could be significantly strengthened and a new, means-tested benefit for the elderly (somewhat similar to the old means-tested supplemental pension benefit) could be implemented. In this intermediate phase, there would be three important means-tested social assistance benefits, all financed from general revenues, not the tax on labor: the means-tested housing allowance, the means-tested child benefit, and the means-tested benefit for the elderly. 43  In the medium term, these three programs would be combined into the unified means-tested income subsidy. 5.10. A means-tested income subsidy program of the kind suggested for the medium term could be supplemented by locally designed and administered social service programs. The local program would identify poor people who are not in a position to take advantage of a cash benefit because they are confined to their homes by illness or infirmity, for example, and would provide them with "home helps" and other social services that cannot be provided by a simple cash handout. Only locally controlled programs can identify and help such people. The anthropological study of poverty in Ukraine revealed a tremendous amount of skepticism among the population about formal institutions of all kinds but particularly about govermnent institutions and programs. Giving local authorities the responsibility for planning and administering social services might help to reassure the population that these services are not being dispensed on the basis of corruption or favoritism. 5.11. Social assistance should be federally funded. As discussed in Chapter 3, there is already a regional dimension to poverty in Ukraine, and the regional dimension is likely to grow in importance as large-scale lay-offs hit areas where declining industries are located. "One-company towns" are an important special case. Federal funding of social assistance avoids a situation in which poor regions that need social assistance the most are unable to afford it. B. Medium-term Vision of Social Insurance: Restoring the Insurance Function 5.12. Ukraine's draft social insurance law, submitted to Parliament in 1995, is intended to serve as an umbrella for separate pieces of legislation covering pensions, unemployment insurance, temporary disability (sickness) benefit, occupational injury and disease insurance, and health insurance. Old-age pensions, unemployment insurance and health insurance are considered here. 5.13. Old-age pensions. The previous section on social assistance suggested creating a means-tested benefit for the elderly (somewhat similar to the means-tested child benefit), and then integrating it into a means-tested income subsidy. If this were done, the old-age pension system could be devoted exclusively to its insurance function, that of paying an actuarially sound return on contributions to people who survive into old age. It seems very unlikely that, in the foreseeable future, the Ukrainian government will be willing to abolish the state pension scheme with mandatory participation, which is currently the foundation of the old-age pension system, and, therefore, this is recommended only as a long-run possibility. 5.14. However, an important issue is whether this central pillar of the pension system should continue to be pay-as-you-go, meaning that present contributors pay for present beneficiaries, with no saving for the future, or whether it should be a system in which present contributors save for their own future pensions. In the abstract, the latter system seems very attractive, because the contributions-benefits link can be very close. Yet there is a problem in 44  making a transition from the first kind of system to the second, because present contributors must pay enough, first, to support present beneficiaries in pay-as-you-go fashion and, second, to build investment value to pay for their own future pensions -- the "double-pay" problem. 5.15. Whether or not Ukraine continues with a pay-as-you-go system or moves to a system that relies on built-up investment value, the link between contributions and benefits can and should be very close. With a strong contributions-benefits link, it is perfectly appropriate for the mandatory pillar of the old-age pension system to be financed by a wage tax via the Pension Fund. A strong contributions-benefits link makes contributions more like deposits made into a savings account and less like a pure tax. This reduces the distortions in the labor market that wage tax financing might otherwise cause. In order to reinforce the contributions-benefits link, pension accounts could be personalized. The Pension Fund would track the contributions made on behalf of workers during their entire working life, and the benefits they receive once they reach old age. 5.16. Even with a strong contributions-benefits link, it is important to keep the wage tax at manageable levels. In the absence of tax increases, the aging of the population means that either an increase in the ratio of contributors to beneficiaries or a decrease in the ratio of average benefit to average wage will be needed. Several different ways to achieve these goals are considered in the "Next Steps" section below. 5.17. Some Ukrainians are now advocating expanding the old-age pension system to include private and voluntary elements, for example following the Chilean model. With the continuing decline of the Ukrainian economy and the painfully slow development of financial markets, such ideas should be considered as long-term possibilities whose realization should await the restoration of a financially healthy mandatory state system. The medium term benefits for older Ukrainians would consist of the means-tested social assistance benefit for people over 64 years of age that is described above as a first "pillar", together with a financially sustainable pay-as-you-go mandatory state system. In the long run, benefits for older Ukrainians could consist of the social assistance benefit as a first pillar, a mandatory, vested, privately managed second pillar, and a third private, voluntary third pillar, as discussed in the World Bank report "Averting the Old-age Crisis". 5.18. Unemployment insurance. In a market economy, the primary goal of an employment service is to pay benefits to the unemployed. In the medium term, it might be possible to provide unemployment benefits that would be equal to a substantial fraction of the unemployed worker's former wages, perhaps 50 percent, for a period of nine to 12 months. When these benefits expire, the unemployed would be eligible for means-tested social assistance of the kind described in the social assistance section above. 5.19. The Employment Service could serve as an information clearinghouse on job openings and available candidates. Yet it is undesirable for the Employment Service to have a monopoly on vacancy information. In most countries, vacancies are usually advertised and filled without the intervention of the Employment Service or its equivalent. 45  5.20. In some countries, employment services have attempted to reduce the unemployment rate by means of various kinds of "job creation" programs. The preponderance of evidence is that these programs do not work and that they work particularly badly in economies where labor demand is low. It would be unfortunate if Ukraine learned nothing from the mistakes of other countries. The Employment Service in Ukraine should not devote substantial resources to "job creation." 5.21. Health insurance. "Health insurance" usually means a system in which a wage tax finances the health care establishment, including state medical facilities and personnel and sometimes also private facilities and personnel. If this is what is meant, then "health insurance" is a misnomer because it is not social insurance. There is no contributions-benefits link -- two people with the same illness receive the same benefit no matter how much they each contributed (even in actuarial terms). Schemes of this kind are best seen as health care financing mechanisms that insulate state expenditures from the national budget and from budgetary review and competition with other state expenditures. Typically they are an attempt to guarantee and increase the incomes of health care professionals. 5.22. The need for reform of health care finance in Ukraine is less urgent than the need for reforms in the organization of the health sector generally. There is a need to redirect resources from curative to preventive measures, to concentrate resources on providing a basic package of health services that has been demonstrated to be cost-effective, to reduce the number and length of hospital stays, and to encourage the private sector's contribution to pharmaceuticals production and distribution and in providing health care generally. Most patients should bear at least part of the costs of their own care. 5.23. Because workers do not need more health care than other people (except, of course, for occupational diseases and irJurie6, which are provided for separately), it is appropriate to finance health care out of general revenues rather than through a payroll tax. 5.24. The need for health care is highly correlated with age. In Ukraine, poverty and age are also correlated. Therefore, a case can be made that elderly sick people should bear a smaller share of their health care expenses than is borne by others. Yet most elderly people are not poor. This is an argument for introducing a special copayment rate with eligibility determined by a means test. 5.25. Thus, the medium-term vision that emerges is a mixed public/private system in which health care is financed from general revenues and a fraction of health care costs are born by beneficiaries. C. Medium-term Vision: Social Justice 5.26. Ukraine has a well-developed sense of social justice -- society (meaning the taxpayer) compensates special categories of people for special problems. Two kinds of social justice programs are considered in this report: Chemobyl benefits and "privileges". Privileges 46  are not part of the medium-term vision presented here; they are discussed in the "present reality" and "next steps" sections below. 5.27. April 26, 1996 marked the tenth anniversary of the Chernobyl nuclear accident. There is an almost universal feeling in Ukraine that people who lived near Chernobyl and people who bore the burden of containing the radiation should be compensated for the damage done to their lives on the principle of social justice. As Ukrainians look back ten years at the aftermath of the accident, it is a singularly appropriate time to look ahead five or ten years, to consider a medium-term vision of how Chernobyl benefits and programs should serve social justice in the future. 5.28. There are three issues involved in creating a medium-term vision of Chernobyl benefits: (i) the way in which benefits are financed; (ii) the magnitude of the resource transfer to beneficiaries from non-beneficiaries; and (iii) the distribution of the benefits among beneficiaries. 5.29. Financing. There are two possible sources of financing for Chernobyl benefits. First, it can be argued that these benefits are a general obligation of society as a whole, and thus they should be financed from general revenues. Second, it can be argued that the Chernobyl accident was a consequence and cost of Ukraine's voracious demand for energy, which, at the time of the accident, was six times the average in Western Europe. In this case, one might argue that the cost of compensating Chernobyl victims should be reflected in the cost of electricity. Financing Chernobyl benefits by means of a wage tax, as at present, does an injustice to Ukrainian workers, as discussed in the "Present Reality" section below; wage tax financing is not part of the medium-term vision presented here. 5.30. Magnitude. While there is a consensus in Ukraine that society has a special obligation to the victims of Chernobyl, it is also agreed that the obligation is not unlimited. The very sensitive question that must be answered in order to create a medium-term vision is "How much is enough?" Too little spending on Chernobyl benefits does an injustice to victims, but too much spending is unjust to non-victims who must pay for the benefits. 5.31. "How much is enough?" is a political question, not an economic one. It should be answered by means of a political process. If benefits were financed from general revenues, as suggested above, then it would seem natural to answer the question through an annual budgetary process. 5.32. The distribution of benefits among beneficiaries. Five years from now, 15 years will have passed since the accident. During those 15 years, not all Chernobyl victims will have experienced the same degree of economic success or failure. There will be some whose lives have been destroyed by Chernobyl and who will never recover. Others may have "bounced back" from adversity, so that they are no better or worse off 15 years after the accident, and there may even be people who are better off than they were at the time of the accident. Social justice would seem to require treating victims differently depending on their circumstances. 47  Consideration should, therefore, be given to subjecting some part of Chernobyl benefits to a means test, so that people victimized in the worst way get the best treatment. H. Social Protection in Ukraine: the Present Reality 5.33. Ukraine's social protection system is described in summary form in Graph 5.1 and in greater detail in Box 5. 1.9 Although Ukraine has a bewildering assortrnent of benefits, these benefits are not reaching the poor effectively and efficiently. Based on responses to the Ukraina 95 survey and to the anthropological study, benefits are inadequate, take-up rates are low, and the process of applying for benefits is time-consuming, costly and personally distressing. Graph 5.1: Ukraine's Social Protection System (1996 Budget) Other Govt Spending . __ Ch i ~~~~~~~~I d/mate rn i X. .... ........ -- Chernobyl / 000\0000000i;00 00 000 tt0 tt / $- hiCklousimng ~~~~~~~~~~~~.:....::....:.. .Sickness K K Un employmen ' . ... ... ..... .. Untarg. subs. Pensions GDP Social Protection 9This chapter presents characteristics of present programs that relate most closely to the future vision just presented. Eligibility criteria and other details of these programs and the myriad other programs not covered here are described in 'The Ukrainian Challenge: Reforming labour market and Social Policy", ILO-CEET, 1994; in 'Report on the Social Insurance Strategy", Ministry of Labor of Ukraine, 1995; and in "System of Social Aid to the Population of Ukraine", Ministry of Social Protection of Ukraine, 1995. 48  Box 5.1: Ukraine's Social Protection Programs A. Social assistance 1. Family benefits a. Maternity allowance b. Childbirth grant c. Childcare allowance (children < 3 years old) d. Allowance for parents of >2 children e. Allowance for care of disabled children f. Child allowance (children < 16 (or 18 if students)) g. Childcare allowance for single parents h. Childcare allowance for servicemen on active duty i. Childcare allowance for children under guardiarship j. Temporary allowance for children whose fathers evade alimony k. Compensations for children and parents who suffered from Chernobyl 1. Educational facilities for disabled children 2. Social services for the elderly, single unable-bodied citizens and invalids 3. System for granting privileges (housing and municipal services fees, transportation, fuel, medicines, etc.) of private socially vulnerable groups of the population (invalids, veterans of war and labor, and others) 4. Long service allowances for employed Chernobyl victims 5. Monthly compensation for care of the disabled or people > 80 years old 6. Privileges in food purchase for Chemobyl victims 7. Funeral aid 8. Monthly target aid to minimum-income unable-bodied citizens 9. Social pensions 10. Housing subsidies (implicit and explicit) 11. Other commodity subsidies (especially transportation) B. Social insurance 1. Old age and disability pensions 2. Social Insurance Fund benefits 3. Unemployment benefits Not included in this definition are veterans benefits, which may be thought of as deferred compensation, and health benefits. 5.34. A well-targeted benefit system would reach most of the poor (high coverage), and only the poor (low leakage). The nature of poverty in Ukraine has changed dramatically over the last few years, so it is not surprising that a system designed to fit past conditions has low coverage and high leakage. In mid-1995, nearly one-quarter of poor households received no public transfers at all, and over 2/3 of all benefits went to non-poor households. It is as though the highest-income 90 percent of the population is subsidizing the lowest-income 90 percent of the population, with tremendous churning in the middle. 49  8 0)~~~~~~~~~~~~~U X... ..... ...1 .~~~~~~~~~~~~~~~ ~~~~ ~~~~~~~~~~~~~~~~ .... . . ... .1 ... .4 }.5.X .. ...... _ d ................ F ooIo... . $0 000 |~ ~ X 0, 0 > % ~ ~ 0 o CO : 2SSl; E. . . ,. , , g no O i 0. , .... . ,.. M i C - .. t - i-f;002 ;020>s cO ............. CT ; i t