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Poverty and Social imPact analySiS of increaSed natural GaS PriceS and Selected Social GuaranteeS
in ukraine
Kyiv - 2011
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This is an independent publication commissioned by UNDP. The views expressed in this publication are those of the author(s) and do not necessarily represent those of the United Nations Development Programme or any other UN agency.
ISBN ^^^^^© UNDP 2011All rights reserved.United Nations Development ProgrammeManufactured in Ukraine
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Team for the Preparation of the Publication
AuthorsOleksandra BetliyVeronika MovchanMykola Pugachov
Advisory GroupMarcin Swiecicki
CoordinationKaterina Rybalchenko
Editor of English versionGreg McTaggart
Editor of Ukrainian versionTetyana Luzhanska
Acknowledgements
This research has benefited from the valuable input by Dmytro Naumenko. The team of researchers was supported by the Blue Ribbon Analytical and Advisory Centre (BRAAC), a project funded by the EU, co-funded and implemented by UNDP in Ukraine. In particular, Andriy Zayika, BRAAC Communication Officer, managed outreach and communications activities related to this research.
This publication has been prepared within the UNDP Poverty and Social Impact Analysis (PSIA) initiative led by the Poverty Practice in the Bureau for Development Policy in cooperation with Poverty and Economic Policy (PEP) Research Network. We appreciate cooperation with the Ministry of Social Policy of Ukraine, which made this research possible.
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TAblE of ConTEnTs
LIST OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
LIST OF ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 1. UKRAINE’S SOCIO-ECONOMIC SITUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.1 DEMOGRAPHIC TRENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.2 MACROECONOMIC SITUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.3 FISCAL POLICY AND THE BUDGET SITUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.4 DEVELOPMENT OF LIVING STANDARDS OF UKRAINIANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.5 GAS MARKET IN UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2. METHODOLOGY OF THE STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.1 DATA REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.1.1 Households’ survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.2 MAIN METHODS OF RESEARCH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2.1 Poverty measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2.2 Approaches towards evaluating the efficiency of social welfare programmes . . . 32
2.2.3 Computable general equilibrium model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 3. WELFARE OF UKRAINIAN HOUSEHOLDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1 POVERTY: INCIDENCE AND DEPTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1.1 Official poverty lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1.2 Poverty rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.1.3 Poverty depth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.2 HOUSEHOLD INCOME STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.3 CONSUMPTION PATTERN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.1 Consumption structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.2 Energy consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 4. IMPACT OF GAS PRICE INCREASE ON POPULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.1 SCENARIOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.2 MACROECONOMIC IMPACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
4.3 IMPACT ON POVERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 5. IMPACT OF SELECTED SOCIAL WELFARE PROGRAMMES ON POVERTY IN UKRAINE . . . 61
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5.1 SOCIAL SUPPORT PROGRAMMES IN UKRAINE: OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.1.1 Brief overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.1.2 Family assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
5.1.3 Housing subsidies and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5.2 EVALUATION OF SOCIAL ALLOWANCES TO LOW-INCOME FAMILIES. . . . . . . . . . . . . . . . . . . 66
5.2.1 Coverage by the programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
5.2.2 Efficiency of the program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
5.2.3 Impact of the programme on poverty reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
5.3 EVALUATION OF HOUSING AND UTILITY SUBSIDIES TO HOUSEHOLDS . . . . . . . . . . . . . . . 70
5.3.1 Coverage by the programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
5.3.2 Efficiency of the program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
5.3.3 Impact of the programme on poverty reduction . . . . . . . . . . . . . . . . . . . . . . 755.3.4 Possible changes in the provision of housing and utility subsidy . . . . . . . . . . . . . . . 76
CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Conclusions and recommendations regarding the gas market . . . . . . . . . . . . . . . . . . . . . . . 78
Conclusions and recommendations regarding social protection system . . . . . . . . . . . . . . 79
BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
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lIsT of TAblEs
Table 1.1. Transfers from the State Budget to the Pension Fund, 2005-2010 ............................. 20
Table 1.2. Primary energy consumption in Ukraine by fuels, 2005-2009 ..................................... 25
Table 1.3. Gas balance of Ukraine, 2006-2010 ........................................................................................ 26
Table 2.1. Household breakdown by the number of members and existence of children, 2009, percent ......................................................................................................................................................... 31
Table 2.2. Advantages and disadvantages of three poverty measures ........................................ 34
Table 2.3. The structure of the SAM ........................................................................................................... 39
Table 2.4. Aggregate social accounting matrix for Ukraine with base year 2008, UAH billion ....40
Table 2.5. Elasticity parameters ................................................................................................................... 42
Table 3.1. Subsistence minimum levels, UAH per person, average per year ............................... 44
Table 3.2. Poverty incidence and structure of poverty ....................................................................... 46
Table 3.3. Inequality indicators estimated in terms of overall income, 2007–2009 ................. 48
Table 3.4. Poverty gap index and severity of poverty ......................................................................... 49
Table 3.5. Consumption of energy-related goods and services in 2009, poverty line: personal income below 75 percent of median .......................................................................................... 54
Table 3.6. Consumption of energy-related goods and services in 2009, poverty line: personal income below official subsistence minimum .......................................................................... 54
Table 4.1. Matrix of Scenarios ....................................................................................................................... 58
Table 4.2. Economy-wide effects of gas price increase: medium-term model, percent change over period ............................................................................................................................................. 60
Table 4.3. Economy-wide effects of gas price increase: long-term model, percent change over period ............................................................................................................................. 60
Table 4.4. Impact on poverty indicators, percent change over period ......................................... 62
Table 4.5. Welfare impact by households’ poverty level, percent change over period ........... 62
Table 4.6. Welfare impact by households’ location, percent change over period..................... 63
Table 4.7. Welfare impact by households’ skill level, percent change over period ................... 63
Table 4.8. Welfare impact by households’ size level, percent change over period ................... 64
Table 5.1. Coverage by low-income allowance, 2009 .......................................................................... 72
Table 5.2. Financing and size of the low-income families allowance, 2009 ................................ 72
Table 5.3. Beneficiaries of low-income family allowance by poverty and locality, 2009 ........ 73
Table 5.4. Targeting of low-income family benefits as a social welfare programme, 2009 ... 74
Table 5.5. Efficiency of low-income family benefits as a social welfare programme, 2009 ... 75
Table 5.6. Poverty measures before and after receiving low-income family assistance according to the poverty line ‘Subsistence minimum’, 2009 ................................................................ 76
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Table 5.7. Coverage by subsidies ................................................................................................................ 77
Table 5.8. Beneficiaries of housing and utility subsidy by poverty and locality, 2009............. 78
Table 5.9. Beneficiaries of liquefied gas and solid fuel subsidy by poverty and locality, 2009....79
Table 5.10. Targeting of utility subsidies, 2009......................................................................................... 79
Table 5.11. Efficiency of housing and utility subsidies as a social welfare programme, 2009 . 80
Table 5.12. Efficiency of liquefied gas and solid fuel subsidy as a social welfare programme, 2009 ................................................................................................................................................. 81
Table 5.13. Poverty measures before and after receiving housing and
utility subsidies against the poverty line ‘Subsistence minimum’, 2009........................................... 82
Table 5.14. Change in poverty status due to receiving housing and utility subsidy, 2009 (Percent of all households) ............................................................................................................................... 83
Table 5.15. Eligibility for the programme, 2009 ....................................................................................... 84
Table 5.16. Targeting to the poor, 2009, in per cent of all households ............................................ 84
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lIsT of fIGUREs
Figure 1.1. Total Population in Ukraine, 1990-2011, as of 1 January . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Figure 1.2. GNI per capita in PPP terms, Ukraine vs. Poland, 1990-2009 . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 1.3. Growth of real GDP, 1991-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 1.4. Growth of consumer price index, 1997-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 1.5. Labour market developments, 1991-2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Figure 1.6. Minimum wage and minimum pension, 2000-2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Figure 1.7. Distribution of workers by wage size, 2005-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Figure 1.8. Price for imported natural gas for Ukraine, 2004-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Figure 1.9. Gas prices in Ukraine by types of consumers, as of 1 January 2011 . . . . . . . . . . . . . . . . . . 27
Figure 2.1. Poverty measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Figure 2.2. Targeting versus universal social welfare programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Figure 3.1. Poverty lines and social standards, UAH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Figure 3.2. Income structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 3.3. Income structure by groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Figure 3.4. Per capita income by groups, UAH thousand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Figure 3.5. Expenditures structure by groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Figure 3.6. Per capita expenditures by groups, UAH thousand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Figure 3.7. Territorial structure of energy-related products and services consumption of households . . . .55
Figure 3.8. Structure of energy-related products and services consumption of households depending on income level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Figure 5.1. Expected share of expenditures on energy, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
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lIsT of AbbREVIATIons
CGE Computable general equilibrium
DASP Distributive Analysis Stata Package
EC European Commission
EU European Union
FGT Foster-Greer-Thorbecke class
GAMS General Algebraic Modelling System
GDP Gross domestic product
GNI Gross national income
GTS Gas transport system
HBS Household Budget Survey
IEA International Energy Agency
IER Institute for Economic Research and Policy Consulting
IMF International Monetary Fund
M&A Mergers and acquisitions
MEU Ministry of Economy of Ukraine
MPSGE Mathematical Programming System for General Equilibrium analysis
NERC National Electricity Regulation Commission of Ukraine
NJSC National Joint-Stock Company
OECD Organisation of Economic Cooperation and Development
p.p. Percentage point
PPP Purchasing power parity
PSIA Poverty and Social Impact Analysis
SAM Social Accounts Matrix
SPGI Severe poverty gap index
SSCU State Statistics Committee of Ukraine
SSSU State Statistics Service of Ukraine
TPES Total primary energy supply
UAH Ukrainian hryvnia
UGS Underground gas storages
UN United Nations
UNDP United Nations Development Programme
USD US dollar
USSR Union of Soviet Socialist Republics
UTS Unified Tariff Schedule
VAT Value-added tax
VET Vocational education and training
yoy Year-on-year
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eXecutive Summary
Over the last decade until the end of 2008, Ukraine had demonstrated robust economic growth, with average real GDP increasing by 6.9 percent annually. This growth was based on favourable external demand and on institutional changes launched, and partially implemented in the 1990s and early 2000s. However, stable growth rates undermined the incentives of central authorities to conduct necessary economic reforms and a lot of issues remained unresolved. They include, inter alia, incomplete social welfare reform, low energy efficiency, out-dated infrastructure, fiscal disequilibrium and an unattractive investment climate. As a result, the recent financial and economic crisis hit Ukraine very hard raising poverty issue with more attention.
Years of economic growth, known as a best way to combat poverty, resulted in sharp reduction of the absolute poverty measured against administratively defined subsistence minimum level. Between 2001 and 2008 absolute poverty declined from 77.1 percent of households to 19.7 percent.1 Such rapid change was explained by increase in two major households’ income components. In particular, wages grew due to growth of labour productivity as well as administrative increase of minimum wage to the subsistence minimum level for working able individuals. Social assistance payments grew primarily due to increase in minimum old-age pension to subsistence minimum level set for people that lost ability to work as well as higher birth grants.
At the same time, relative poverty2 has remained stable at about 27 percent, which could reflect the stratification of households in terms of income, the same level of inequality, and the lack of structural changes. Consequently during the recent decade more people were able to afford basic basket of goods and services. However, nearly 27 percent of families could not purchase the set of goods and services, which are considered as necessary for the average household. The level of poverty among households with children remains a major problem, which is likely to be a result of an inefficient state policy for supporting such families.
During last decade poverty has declined more in urban areas being higher in rural areas. Such trends reflect the little effort the authorities towards improving the situation in rural areas, particularly, concerning the labour market, infrastructure, etc. Often, rural development is perceived by the Government as agricultural development, although these two concepts are very different.
Poor households tend to allocate a higher share of their expenditures to energy consumption than do non-poor. The analysis of households’ consumption patterns of energy-related products and services allows us to identify that about half of energy-related consumption is likely to be very sensitive to a gas price increase. In urban areas, the major price pass-through will go through centralized gas consumption and district heating, while in rural areas it will primarily be through centralized gas consumption. This channel of transmission is likely to cause the greatest problem for the poor population in time of gas price hikes since they extensively rely on this supply.
Until now, gas and other energy prices for households have been generously subsidized by the Government. However, suppressed energy prices lead to excessive use of gas and make investment in saving energy inefficient. In addition, Ukraine’s dependence on imported gas contributes to trade imbalances and growing pressure on the devaluation of the national currency. Thus, the issue of raising gas prices for the population remains critical in Ukraine.
1 The estimation of poverty incidence as well as the evaluation of efficiency of social welfare programs is based on the data from the Household Budget Survey, conducted by the State Statistics Service of Ukraine. 2 In the research relative poverty is measured against the line of 75 percent of conditional per capita expenditures.
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In particular, this step is also envisaged in an ambitious reform agenda announced in mid-2010 aimed at restoring stable high growth of the economy.
To evaluate the impact of the increase in gas prices on households’ welfare, we employ the computable general equilibrium model for Ukraine with a micro-simulation approach in line with Cockburn, Corong and Cororaton (2010). In particular, information about households’ expenditure and income patterns from national households’ surveys into Ukraine’s CGE model is integrated
According to the results of the medium-term model simulation, the overall welfare losses (measured as Equivalent Variation) arising from a 50 percent increase of import gas prices constitute about 5.5 percent of consumption, while the impact of internal price adjustment is more moderate staying at 3.4 percent of welfare loss. In the long-term model allowing for changes in capital endowment over time, the figures are about 10 percent and 5.7 percent of Ukrainian consumption, respectively. The shock would be transmitted through both output/employment and consumption channels.
The simulation of gas price shocks showed that all categories of households would experience a welfare loss due to higher gas prices. Absolute poverty incidence would increase by 8.7 percent over medium-term horizon and by 19.5 percent over long-term horizon due to external price shock. Internal price adjustments would cause increase in absolute poverty incidence by 1.5 percent and 4.5 percent, respectively.
Location seems to be a key factor in determining the variation in welfare responses of households. In the majority of scenarios urban households tend to experience higher losses than rural households. This can be explained by differences in their consumption structure. In particular, in urban areas the major items of energy-related consumption are centralized gas consumption and district heating, while in rural areas – primarily centralized gas consumption. High urban heating consumption is very important for determining the welfare impact of gas price shock.
Thus, the CGE simulation suggests that urban poor households should be in the focus of social welfare programs for mitigation of increased gas price shock.
While poor households are likely to be impacted by increase in gas prices, the question remains on the efficiency of social welfare system to protect poor. Overall, the Ukrainian social protection system provides a wide range of social benefits, but they are not sufficiently differentiated by recipients’ levels of income. Moreover, the system is focused on universal protection, precluding the targeting of the most vulnerable groups, and on categorical benefit schemes, which generate overlapping beneficiary categories, many of which do not provide support to those who are in need. However, the effective social welfare system should be aimed at ensuring households with minimum standards of living that are supposed to cover all the basic needs including basic nutrition and housing and utility expenditures. Thus, the country needs a well-targeted and efficient social protection system to mitigate the negative social shock on the poorest and the most vulnerable groups of society.
At the moment there could be defined two programmes that were initially introduced to help poor people. One is low-income family allowances, which are provided to poor households with income below the guaranteed minimum income (GMI). Another refers to housing and utility subsidy provided to individuals with spending for respective services above a specified threshold.3 Analysis of the efficiency of these two social welfare programs demonstrate that housing and utility subsidies help households in urban area, who could be most impacted by the gas shock, while the provision of the low-income family assistance does not significantly
3 Since 2010, households whose charges for housing and utility services exceed 15 percent of the ag-gregate household income are entitled to housing and utility subsidy (10 percent for the most vulner-able household categories)
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contribute to a decline in poverty. Overall, the efficiency of both programs remains low in combating poverty. The targeting of housing and utility subsidies is much lower than of low-income family assistance likely due to the absence of mean-testing eligibility criteria. Both programs are characterised by large under-coverage of poor. These results allow making specific policy recommendations regarding reform of social protection system in Ukraine.
To sum up, there could be made two major answers to the research question. First, increase in gas prices will result in welfare loss of all categories of households, with more profound impact on urban households. Second, the current social welfare programs are not very efficient in targeting the poorest households. Therefore, the reform of social welfare system is required to ensure the safety net for poor households in times of gas price hikes.
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InTRoDUCTIon
Over the last decade until the end of 2008, Ukraine had demonstrated robust economic growth, with average real GDP increasing by 6.9 percent annually. This growth was based on favourable external demand and on institutional changes launched, and partially implemented in the 1990s and early 2000s. However, stable growth rates undermined the incentives of central authorities to conduct necessary economic reforms and a lot of issues remained unresolved. They include, inter alia, incomplete social system reforms, low energy efficiency, out-dated infrastructure, fiscal disequilibrium and an unattractive investment climate. As a result, the recent financial and economic crisis hit Ukraine very hard.
Ineffective economic and social policies hindered the achievement of tangible results in reducing poverty in Ukraine. Even though the country managed to decrease absolute poverty, relative poverty, showing inequality, has remained stable at about 27 percent. The economic recession of 2009, which resulted in severe budget limitations, has further complicated the handling of the poverty issues and the pursuit of an active social policy to alleviate it.
The Ukrainian social protection system provides a wide range of social benefits, but they are not sufficiently differentiated by recipients’ levels of incomes. Moreover, the system is focused on universal protection, precluding the targeting of the most vulnerable groups, and on categorical benefit schemes, which generate overlapping beneficiary categories, many of which do not provide support to those who are in need. Fiscal constraints, which became binding during the recession, have once again emphasized the drawbacks of the system.
An ambitious reform agenda announced in mid-2010, and necessary to restore the stable, high growth of the economy, includes changes inevitably resulting in adverse social shocks. Increase in gas pricing for households are among these reforms. Until now, gas and other energy prices for households have been generously subsidized by the Government. However, suppressed energy prices lead to excessive use of gas and make investment in saving energy inefficient. In addition Ukraine’s dependence on imported gas contributes to trade imbalances and growing pressure on the devaluation of the national currency. Thus, the issue of raising gas prices for the population remains critical in Ukraine.
Basic needs, such as housing and utility services, depend on natural gas, since it is extensively used for heating, cooking, hot water production, and electricity generation. The minimum standards of living are supposed to be able to cover all the basic needs of a citizen including basic nutrition and housing expenditures. Thus, the country needs a well-targeted and efficient social protection system to mitigate the negative social shock on the poorest and the most vulnerable groups of society. The question is whether current social protection system could handle this problem appropriately.
The Report aims to answer these questions. To do so, several issues are tackled. First, the impact of gas price increases on welfare and poverty are simulated to understand the depth of the shock. Second, the existing social protection system is analysed focusing on two programmes, i.e. social assistance to low-income families and housing and utility subsidies to households to evaluate their efficiency and impact on poverty reduction, and thus to verity its absorption capacity in the case of adverse social shock. Combining the results of the assessment of the impact of gas price increases on poverty and the social programmes efficiency evaluation permits identification of the drawbacks/gaps in the existing social protection system to develop policy recommendations.
In particular, the simulation of gas price shocks showed that all categories of households would experience a welfare loss due to higher gas prices. However, the impact on urban households
14
would be particularly profound, and this category of households should be in the focus of social welfare programs for mitigation of increased gas price shock. Analysis of efficiency of two social welfare programs - social assistance to low-income families and housing and utility subsidies to households – demonstrated that the housing and utility subsidies to households programme helps households in urban area, who could be most impacted by the gas shock, while the provision of the low-income family assistance does not significantly contribute to a decline in poverty. Moreover, the efficiency of the housing and utility subsidies programme remains low. These results allowed making specific policy recommendations regarding reform of social protection system in Ukraine.
The document is organised as follows. Section 1 describes Ukraine’s general economic situation, including the poverty assessment. Section 2 focuses on the research methodology and the data used. In Section 3 welfare of Ukrainian households is analysed with a focus on poverty incidence, income and expenditures patterns. Section 4 discusses the results of simulation of the gas price increase using the computable general equilibrium model for Ukraine, in particular the impact of this shock on poverty. Ukraine’s system of social protection is outlined, and the efficiency of two programmes – social assistance to low-income families and housing and utility subsidies to households – is evaluated in Section 5. Conclusions and policy recommendations end the document.
15
sECTIon 1. UKRAInE’s soCIo-EConoMIC sITUATIon
1.1 DEMoGRAPHIC TREnDs
Successful social policy reforms, the development of stable, properly targeted social security system and a reduction in poverty would be impossible without examining demographic trends.
Ukraine’s population has been steadily diminishing over last two decades. According to the State Statistics Service of Ukraine (SSSU), Ukraine’s population in May 2011 was 45.7 million (12.5 percent less than the peak of 1993 (Figure 1.1)). The speed of depopulation was highest in the years of structural economic transformation and recession starting in 1994 and peaking in 2001. Since then the population decrease has slowed down but has not turned into growth. This is largely attributable to a natural decrease in population, due to both low fertility and high mortality rates.
figure 1.1. Total Population in Ukraine, 1990-2011, as of 1 January
42
44
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54
1990
1991
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1996
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1999
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2011
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
total population growth rate of population
million persons percent per annum
Source: State Statistics Service of Ukraine, www.ukrstat.gov.ua
Another reason for depopulation was negative net external migration. Roughly one quarter of total net reduction of Ukraine’s population could be attributed to outward migration. After a short period of net positive migration during the early 1990’s, the trend sharply reversed and the net migration has been negative till 2004. Since 2005, official statistics report positive net external migration.
The largest official stream of migration has been between the CIS countries and Ukraine, in particular between Russia and Ukraine. In the early years of transition, the flows had been especially high. People move to their relatives for permanent residence, or return home after the Soviet Union collapse destroyed their jobs. A lot of people deported during the Soviet times returned to Ukraine. Also, the early 1990s featured so called ethnical migration, e.g. emigration of the Jews to Israel, Germany, and the USA.
Later on, external labour migration has become dominant. According to survey conducted by the State Statistics Service of Ukraine together with the World Migration Organisation, World Bank and Open Ukraine Foundation in 2008, two major reasons for labour migration has been low wage in Ukraine and limited job opportunities.
16
The depopulation problem is likely to worsen in the future. According to UNDP “World Population Prospects”, under the medium fertility scenario Ukraine’s population will shrink to 43 million in 2020 and to 36 million in 2050.4 Depopulation – though at a lesser scale – is expected even under high fertility rate scenario estimates.
In Ukraine, depopulation is exacerbated by significantly aging population. The share of population above 60 (the official male pension age) will reach 36 percent of total population by 2050 as compared to 23 percent in 2010, while the share of population aged between 20 and 59 – the age cohort basically forming the country’s labour force – will shrink to 44 percent by 2050 (57 percent in 2010).
This significant and rapid change in the population’s age structure could have a number of economic implications, including:
• Changed consumption patterns, as different age groups have different consumption baskets. This change could affect development of certain industries and service sectors;
• Reduced national savings as older population tend to save less and spend more. Narrowed domestic financial base for investments could adversely affect growth prospects of the country;
• Increased social expenditure bill for the state, including medical care expenditures and spending of social funds; and
• Changed size, composition and productivity of the labour force, hampering output growth and undermining tax revenues. Moreover, changes in labour force could even potentially affect the speed of technological progress.
Due to depopulation and population ageing, the number of economically active persons has declined over last two decades to 22.0 million at the end of 2010. As a result, old dependency ratio has already increased and will continue growing exerting pressure on the sustainability of current pension system.
Modelling the dynamic effects of population decline and ageing shows that, ceteris paribus, the changed population size and structure could result in about a 15 percent reduction in GDP per capita by 2050 due to the reduced labour force and the increase in taxation necessary to ensure unchanged level of social payments.5
Implementation of pension reform would slow down the negative impact of population ageing on the economic situation in the country, but this reform should be radical enough to make visible changes. According to Lisenkova (2011), an increase in pension age for females to 60 years embedded in current pension reform will have only a minor positive effect on the sustainability of pension system, GDP per capita and public finances. At the same time, a gradual increase in pension age to 65 years for both sexes would have much greater positive impact. GDP per capita by 2050 would decline by about 7 percent compared with 15 percent in case if the pension age is not changed.
Summing up, demographic changes will play important changes in long-run development of the country, strongly affecting its social policies.
4 Medium fertility scenario. World Population Prospects, the 2010 Revision.Available here: http://esa.un.org/unpd/wpp/Excel-Data/population.htm 5 Lisenkova (2011)
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1.2 MACRoEConoMIC sITUATIon
A country’s economic might plays a key role in combating poverty and ensuring its citizens’ high living standards. In Ukraine, the difficulties of transitioning from a centrally planned to a market economy have significantly hampered the country’s economic performance and its wellbeing when compared to neighbouring countries. For instance, if Ukraine and Poland had similar levels of GNI per capita in PPP terms in 1990, by 2009 the gap between the countries had tripled (Figure 1.2).
figure 1.2. GnI per capita in PPP terms, Ukraine vs. Poland, 1990-2009
0
2000
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2009
Poland Ukraine
PPP, current international dollars
Source: World Bank Development Indicators, http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD
Factors explaining Ukraine’s lag in economic performance include lack of sovereign knowledge and experience, corruption and a patchy reform path, exacerbated by the on-going deterioration of physical infrastructure and human capital.
Ukraine’s macroeconomic development can be tentatively divided into several periods:
Period 1: transition (1991-1995). During this period there was a sharp reduction in economic activity, the breakage of Soviet production and retail links, hyperinflation, deficits of basic products and a quick impoverishment of population. Labour adjustments were done mostly through wage arrears, hidden unemployment and in-kind payments. At the same time, liberalisation of prices and foreign trade regimes occurred.
Period 2: stabilisation (1996-1997). During this period some macroeconomic stabilisation was achieved, inflation curbed, and national currency was introduced. Mass privatisation was launched. However, the barter economy continued to proliferate, and incomes continued to reduce. To finance public spending, the Government started active domestic and external borrowings.
18
figure 1.3. Growth of real GDP, 1991-2012
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2011
F
2012
F
percent per annum
Source: State Statistics Service of Ukraine, consensus forecast (Ministry of Economy, 2011) Note: F – forecast
figure 1.4. Growth of consumer price index, 1997-2012
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1998
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F
2012
F
average percent per annum
Source: State Statistics Service of Ukraine, consensus forecast (Ministry of Economy, 2011) Note: F – forecast Information: Percentage increase in CPI (annual average) was 1527 percent in 1992, 4735 percent in 1993, 891 percent in 1994, 377 percent in 1995, and 80 percent in 1996.
Period 3: crisis 1 (1998-1999). In August 1998, Ukraine entered a currency and debt crisis. Its currency devalued more than twofold and it was forced to restructure its debts. At the same time, this crisis stimulated structural reforms. Mass privatisation was completed, stronger fiscal discipline was introduced and the first stage of economic reforms, particularly in the fields of energy, regulatory reform, public administration as well as land reform, was initialised.6
Period 4: recovery 1 (2000-2005). A better domestic institutional environment and a favourable external environment7 allowed real GDP recovery. Real wages and incomes started
6 Åslund (2002)7 Movchan (2002)
19
to grow and households’ final consumption started to increase. The financial sector achieved greater trust and foreign banks began to enter the market through M&A. Tax reform was started, reducing tax burden on personal income, though high payroll taxes undermined de-shadowing effect of the reform. Pension reform was launched. Negative external market shocks were compensated by strong domestic demand.
Period 5: overheating (2006-2007). A growing world economy and strong domestic demand saw the economy overheat. All prices began to soar. Credits were provided widely with little scrutiny. Stock market indices peaked. Foreign capital inflow was very high and a lot of capital was attracted in the form of credits boosting external debt. The Global Financial Crisis, which began in early 2007 in the USA had an adverse impact on foreign capital flow, but did not undermine the country’s boom moods. Against the background of economic upturn and an easing of social problems, the structural and institutional reforms necessary to secure sustainable long-term economic development were retarded.
Period 6: crisis 2 (2008-2009). The second wave of the world financial and economic crisis hit Ukraine hard in mid-2008 causing currency devaluation, capital outflow, and a credit crunch. Economic performance plunged, unemployment increased, and poverty increased again. Fiscal problems were aggravated, partly due to the high social promises made during the years of a flourishing economy.
Period 7: recovery 2 (2010-now). The country started to recover from the crisis. Real GDP growth revived though at a rather moderate rate and real wages and incomes have followed this trend. At the same time, unemployment has remained higher than pre-crisis, credit access has been much more restrained than before and the housing market has been flat. Moreover, fiscal problems remain acute. The Government launched a series of reforms to facilitate economic recovery and complete institutional restructuring. However, the actual path of reforms has remained patchy, hampering investments and undermining recovery.
As shown, Ukraine has never witnessed a period of stable development based on innovation and investment nor has it completed the transformational reforms launched after independence.
Both international organisations and national experts claim that, unless reforms are facilitated, the economy will continue to grow slowly, well below its potential, and inflation will remain high. According to the World Bank’s “Ukraine Economic Update”, real GDP recovery will remain fragile with a 4.5-5.0 percent growth rate in 2011-2012 and consumer prices will grow about 10 percent per annum.8 Similar rates are provided by Ukrainian organisations like the Institute for Economic Research and Policy Consulting,9 and Dragon Capital,10 and by a consensus forecast assembled by the Ministry of Economy of Ukraine11 (Figure 1.3 and Figure 1.4).
1.3 fIsCAl PolICY AnD THE bUDGET sITUATIon
The current systemic problems of Ukraine’s fiscal position include a distorted structure of fiscal expenditures, including populist policy spending, high centralisation of public finance, an inadequate model of dividing budget powers and the absence of a clear system of public financial control for fiscal expenditure. During recent years Ukraine’s fiscal policy has been marked by short-term planning and spontaneous changes as far as revenues and expenditures are concerned. It has also been aggravated by an inadequate tariff policy at communal level,
8 World Bank (2011) 9 IER (2011) 10 Dragon Capital (2011) 11 MEU (2011)
20
by a lack of necessary reforms to the social security system and by the absence of a clear and efficient system of state aid provision and public procurements.12
The fiscal problems had accumulated before the 2008 crisis. The authorities’ inability to limit social spending during the crisis resulted in an unbalanced fiscal system. The result has been an increase in the fiscal deficit and public debt.
Between 2005 and 2010, there had been a steady increase in recurrent social expenditures. In addition, since 2005, a considerable share of the expenditure of the Pension Fund has been financed by subsidies from the State Budget (Table 1.1) rather than by insurance contributions. Moreover, loans to the Pension Fund from the Single Treasury Account were actively used in that period, which allowed the Fund’s liquidity gap to be eliminated.13 With incomplete reforms of the system of social support, increases in social expenditure did not solve the problem of eliminating poverty but created a threat to the stability of the fiscal system as a whole.14
Table 1.1. Transfers from the state budget to the Pension fund, 2005-2010
2005 2006 2007 2008 2009 2010ЕTotal expenditure of the Pension Fund, percent GDP 14.8 13.7 14.1 15.1 18.1 17.8
Overall transfer from the State Budget,* percent GDP 5.2 4.5 3.5 4.2 4.8 6.0
Of which:
Transfer to cover the State’s specific pension obligations 1.5 3.2 3.5 4.2 3.3 3.5
Transfer to finance the Pension Fund’s deficit 3.7 1.3 - - 1.5 2.5Source: State Treasury reports Notes: *Without loans provided by the State Treasury; E – IER estimate
Growing fiscal expenditures have required funding. The tax burden (including deductions to social insurance funds) remains higher than the average of the new EU member states. This distorts economic competition and is a reason for the growth of the shadow economy, contributing to growing losses of fiscal receipts. The Tax Code passed in late 2010 provides for lower rates for the main taxes, but requires further refinement, especially in respect of taxation of small business.
The new version of the Budget Code15 passed in 2010 includes positive developments like increases in the level of financial support for local self-government functions by assigning them additional revenue sources and increasing the investment component in local budgets. At the same time, the problems of dividing functional powers among the different levels of authority, increasing the efficiency of fiscal funds at the local level and improving the methods of interregional financial equalisation were not addressed fully in the Code.
Since 2009, there has been a rapid growth in public borrowing in both external and domestic markets and, accordingly, a marked increase in public debt. At the end of April 2011, public debt reached USD 58 billion i.e. about 35 percent of GDP. Further increase in public debt creates risks of larger fiscal pressure, a destabilised balance of payments, and persistent, chronically high interest rates. These are the integral attributes of high fiscal deficits that will create obstacles to the recovery of investment and for the economy’s transition to a path of sustainable growth.
12 Burakovsky, Movchan (2011) 13 According to the Accounting Chamber of Ukraine, the outstanding loans granted to the Pension Fund from the single treasury account amounted to UAH 22.1 billion as of 1 January 2010.14 The share of such spending in the Consolidated Budget doubled to between 22-28% during the pe-riod 2005-2009 compared to its share between1999-2001.15 Law of Ukraine No. 2456 of 8 July 2010
21
1.4 DEVEloPMEnT of lIVInG sTAnDARDs of UKRAInIAns
The economic ups and downs resulted in rather harsh welfare situation for Ukrainians. During the 1990s real wages sharply declined against the background of economic downturn and high inflation. The labour market adjustment went mainly through a decline in real wages. Employment remained rather stable due to hidden employment (Figure 1.5). By the end of the 1990s wages arrears had increased substantially in both the private and public sectors. As a consequence, purchasing power of Ukrainians declined sharply.
figure 1.5. labour market developments, 1991-2010
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F
2012
F
employment real wage
index, 1990 = 100
Source: State Statistics Service of Ukraine, consensus forecast (Ministry of Economy, 2011), IER forecast Note: F – forecast
In 2000 wages finally started to recover against the background of economic recovery and government policies aimed at improving Ukrainians’ welfare. In particular, the government paid off wage arrears in the public sector. An additional factor contributing to wage growth was the gradual increase in the minimum wage. Between 2001 and 2008 real wages grew by 16.7 percent on average. By the end of 2008 they were almost at the level of 1990. During the same period labour productivity also increased. However, during the crisis of 2009 a labour adjustment occurred through wages, which declined by 9.2 percent in real terms.
In 2000 the government also paid off pension arrears. During the years of recovery, income of pensioners grew primarily due to increases in the minimum pension. Higher pensions and wages compensated for the impact of higher inflation on the poor.16 The average annual rate of consumer price growth was 14.1 percent during that period.
In 2004 and 2005 Ukraine’s authorities sharply increased social standards, primarily the minimum pensions. As a result, imbalances were observed (Figure 1.6). In particular, the minimum monthly pension was increased during 2004 from UAH 102.8 in January to
16 Burakovsky, Movchan (2011)
22
UAH284.6 in September due to the government’s populist decisions on the eve of elections.17 The minimum pension was increased again in 2005 to UAH 332 following the adoption of a law setting the minimum pension at the minimum subsistence level for those who had lost their capacity to work. As a result, the minimum wage was lower than the minimum pension during the period from September 2004 to September 2005. This was an economically unsound policy.
Since nominal pension increases were considerably higher than increases in consumer prices, real minimum pension payments went up by 290 percent in January 2005 when compared to January 2004. Thereafter the minimum pension remained relatively stable until the 2008 crisis set in. In late 2008 and early 2009, there was a decline in the real minimum pension because the country’s fiscal problems made any significant pension rise impossible. However, populist policies at the end of 2009 resulted in another swing upwards in minimum pensions.
figure 1.6. Minimum wage and minimum pension, 2000-2010
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Minimum pension payment (LHS) Minimum wage (LHS)
Real minimum pension payment (RHS) Real minimum wage (RHS)
UAH index, Jan 2000 = 100
Sources: Laws on the State Budget
Large increases in minimum pensions during the period of strong economic growth were not supported by reform of the entire pension system. This resulted in a considerable deficit of the Pension Fund since the labour remuneration fund, the base for calculating pension contributions, grew at a slower pace. As a result, the current pension system is extremely unstable, thereby creating additional economic risks for the poor people of the country.
Increases in minimum wages for those close to the subsistence minimum level contributed to a decline in the percentage of workers receiving wages lower than the minimum subsistence level.18 In particular, it declined from 26.5 percent in December 2005 to 13.4 percent by December 2008 (Figure 1.7).
17 In September 2004, the Cabinet of Ministers decided to increase the minimum pension payment. Accord-ingly, each pensioner whose pension was lower than the specified minimum pension payment obtained an additional payment. The minimum pension payment in this report is regarded as the minimum pension since no pensioner could receive a pension lower than the specified minimum pension payment. 18 See Section 3.1.1 for the description and discussion of subsistence minimum.
23
The percentage of persons receiving less than the minimum wage declined to 10.7 percent in December 2009 due to the introduction of legislation providing for the setting of the minimum wage at the minimum subsistence level for persons able to work in November 2009. As a result, due to legislative amendments there has been a slight decrease in the percentage of the working poor.
figure 1.7. Distribution of workers by wage size, 2005-2009
0
5
10
15
20
25
30
December 2005 December 2007 December 2008 June 2009 December 2009
below minimum wage between minimum wage and subsistence minimum**
percent
Source: State Statistics Service of Ukraine Notes: * Data is provided for staff members who worked 50 percent or more working hours** Subsistence minimum for working able persons
The largest fall in the percentage of workers, whose wages were lower than the minimum subsistence level occurred in budget-funded sectors, particularly education and health care. This can be explained by the stepped introduction of the Unified Tariff Scale (UTS) for labour remuneration in budget-funded sector institutions, approved by resolution of the Cabinet of Ministers.19 The UTS was partially implemented from September 2005: the salary of a Grade I employee was set at the minimum wage, but with less differentiation in wage levels between various employees. The UTS was fully implemented in September 2008, but only for two months. Owing to a decline in fiscal revenues in late 2008, the government decided to fix the UTS wage level for grade I for December 2008 and for the whole of 2009 at the November 2008 level, although the minimum wage was further increased step by step. The wage for the first tariff scale was only slightly increased in 2010 resulting in a further reduction in wage differentiation in the public sector. Wage differentiation was partially reviewed in 2011, when the Government clearly defined wages for the first seven tariff classes and a base wage for 8th-20th classes.
Increased wages and pensions accompanied by increases in other social payments, particularly a large rise in the maternity benefit contributed to people’s growing income. As a result, absolute poverty has declined during these years (Section 3). In particular, the poverty incidence measured against the minimum subsistence level has declined from 77.1 percent in 2001 to 17.8 percent in 2009.
19 Before the implementation of the Unified Rate Schedule, wages in the budget-funded sector were specified by Cabinet of Ministers’ resolutions that clearly set salary rates for various employees.
24
1.5 GAs MARKET In UKRAInEDuring the last decade Ukraine’s economy has remained heavily dependent on natural gas and coal as the major sources of total primary energy supply (TPES).20 These two types of fuels accounted for 69 percent of TPES in 2009. Natural gas occupies first place with 38 percent of the total energy consumed in the country (Table 1.2). Many years of low gas prices lead to the importance of this type of fuel in Ukraine’s energy balance. The share of gas consumption in Ukraine is higher than in comparison to European countries where gas share in primary energy consumption is close to 20 percent.
Nuclear energy is another significant source of energy in Ukraine’s energy balance, accounting for almost 17 percent of TPES. There are four large nuclear power plants. They generate almost 50 percent of the country’s total electricity. The share of renewable energy resources is relatively small and comprises about 2 percent of total primary energy consumption.
Table 1.2. Primary energy consumption in Ukraine by fuels, 2005-2009Million tonnes oil equivalent structure, percent
2005 2008 2009 2005 2008 2009Oil 13.9 15.3 14.1 9.9 11.5 12.5Natural gas 65.6 54.0 42.3 46.9 40.8 37.5Coal 37.4 40.3 35.0 26.8 30.4 31.1Nuclear energy 20.1 20.3 18.6 14.4 15.3 16.5Hydroelectricity and Renewables 2.8 2.6 2.7 2.0 2.0 2.4Total 139.8 132.5 112.7 100 100 100
Source: BP Statistical review of world energy
Between 2005 and 2009 the structure of primary energy consumption changed, largely driven by the continuous growth of imported gas prices, which more than doubled over the period (Figure 1.8). Natural gas consumption decreased from 47 percent to 37.5 percent of total primary consumption, while coal’s share increased by 4.3 percentage points over the period. The primary reason for this is the increased reliance of electricity generating companies on coal instead of gas in the production process. Measures promoting energy efficiency also helped to reduce gas consumption.
The economic crisis also contributed to further contraction in natural gas’s share of the energy balance in late 2008 and in 2009. The largest industrial gas consumers, primarily large chemical plants and steel mills, rapidly decreased their consumption against the background of collapsing demand and output volumes. Another factor in gas’s decline was reduced industrial demand for electricity, meaning there was no need to use any additional gas-based generation capacities. At the end of 2009 almost all electricity was generated by nuclear or coal-fired plants.
In terms of natural gas consumption and import, Ukraine is one of the largest countries among its peers. According to BP and IEA, in 2009 it was ranked 15th in gas consuming countries and 6th as a natural gas importer. Ukraine depends heavily on gas imports, primarily from Russia and Central Asian countries. According to the gas balance (Table 1.3), annual gas imports were about 50-55 billion cubic meters between 2006 and 2008. During the crisis industry’s demand for natural gas diminished and gas imports halved to 27 billion cubic meters in 2009. It returned to 36 billion cubic meters in 2010 reflecting output recovery.
20 This definition is used by International Energy Agency. Equivalent one that was used in the report is primary energy consumption.
25
figure 1.8. Price for imported natural gas for Ukraine, 2004-2011
269
258
223
180
130
95
5844
0
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150
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300
2004
2005
2006
2007
2008
2009
2010
2011
E
USD per 1000 cubic meters
Source: Gas contracts between Naftogas and Gasprom
Key gas consumers in Ukraine are industry and residential consumers. Due to the different price signals faced by them, their consumption patterns have differed over the last five years. Continual and quite dramatic increases in imported gas prices were passed on mostly to industrial consumers. Other large consumption group – residential consumers – reduced consumption at much lower degree, despite very significant administratively orchestrated increases in gas prices for households in 2006 and 2008.21
Table 1.3. Gas balance of Ukraine, 2006-2010billion cubic meters 2006 2007 2008 2009 2010
nG resources, total, incl.: 203.7 185.0 185.9 147.6 156.2
Production 21.7 20.7 21.0 21.3 20.5
Imports 52.1 50.6 54.6 26.8 36.5
Gas intake for transit 131.8 118.3 114.2 95.8 97.8
Stock variations, incl.: -1.9 -4.5 -3.9 3.6 1.4
Gas extraction from UGS* (net) - -4.5 -3.8 3.6 1.4
Gas extraction from GTS** (net) - -0.03 -0.15 0.04 0.03
nG distribution, total, incl.: 204.7 185.9 187.0 148.7 157.4
Consumption, total, incl.: 68.1 63.7 60.3 47.4 53.6
Industry 32.9 34.2 30.7 18.5 24.4
21 According to the State Statistics Service of Ukraine, gas prices for households grew by 80.6% Decem-ber –to-December in 2006, and by 54.1% in 2008, while no changes were registered in 2007, 2009 and 2010. These upward revisions have still left prices below market level. The impact of these price changes on the CPI has been noticeable explaining more than one third of aggregate CPI growth over the period.
26
billion cubic meters 2006 2007 2008 2009 2010
Steel industry 9.3 9.8 8.1 5.2 6.4
Electricity generators - 2.3 1.5 0.4 0.8
Residential consumers 35.2 29.4 29.6 28.9 29.2
Population and budget entities 21.4 17.9 18.5 17.8 18.7
District heating companies 12.8 10.5 10.0 10.1 9.5
Gas consumed by local gas distr. companies 1.0 1.1 1.1 1.0 1.0
Exports, total, incl.: 0.005 0.004 0.005 0.005 0.006
By NJSC ‘Naftogas’ 0.005 0.004 0.005 0.005 0.006
Gas transit through Ukraine 128.5 115.2 119.6 95.8 98.6
Technical gas (for GTS work) 8.1 7.0 7.1 5.5 5.3
Residuals*** -1.0 -0.9 -1.1 -1.1 -1.3Source: Energobusiness, Enerdata, NJS ‘Naftogas’ Notes: *UGS Underground gas storages **GTS Gas transport system *** Explained by other consumption and corrections
Lesser willingness of population and district heating companies to reduce gas consumption despite the constant growth of import gas prices and increase in domestic gas tariffs paid by households is explained by administrative interference into the pricing of gas. Specifically, these consumers enjoy discounted prices for natural gas, which minimises their motivation to decrease consumption. Inadequate prices for gas supplied to residential customers and the obligation of domestic gas producers to sell all gas to them creates disincentive to invest in energy saving or in the development of domestic gas production.
Domestic gas pricing policy has remained a sensitive issue for years. Social security motivation has resulted in a continuous gap between prices for different consumers and therefore a heavy cross-subsidy.
By mid-2010 the difference between gas prices for residential customers and industry was threefold (Figure 1.9). The price for district heating companies was also two and a half times lower than for industrial consumers. This gap allowed the Government to keep the prices for heating the population very low thus keeping utility bills steady over the years.
All the weight of imported gas price increases was transferred to industrial consumers and the public coffers. The only industry that received a discount from the Government was nitrogen fertilizers production. They strongly lobbied the Parliament and have a gas-biased cost structure (gas accounts almost 80 percent of ammonia production costs).
27
figure 1.9. Gas prices in Ukraine by types of consumers, as of 1 January 2011
0 500 1000 1500 2000 2500
Population**
District heat companies
Nitrogen fertilizersproducers
Budget entities andindustry
UAH per 1000 cubic meters
Source: NERC Notes: * Prices excluding VAT, extra charge, and transportation and supply costs ** Average price
On 8 July 2010 the Parliament adopted a Law on Principles of Natural Gas Market Operation. This envisages establishing a competitive gas market in Ukraine. According to the Law, activities of the market regulator – the National Electricity Regulatory Commission (NERC) — will be supported by the Law, making the regulator independent and more trustworthy. This is an important step towards transparency and the economic justification of regulating of the market. It is a momentous step for establishing fair pricing on gas market. Meanwhile, regulative decisions made by the NERC still remain politically motivated and dependent on Government.
The first steps towards reforming this antagonistic pricing system and abolishing cross-subsidies were made by the Government in 2010 under the pressure from the IMF. Since 1 August 2010 tariffs for natural gas for the population and district heating companies increased 50 percent. Such a step was one of the conditions of IMF approval for the new stand-by agreement. As a result, basic gas prices for households and district heating companies have increased to UAH 725 and 1,309 per thousand cubic meters respectively. Tariffs for industrial consumers and budget entities were also increased by 9.8 percent from 1 August 2010. The NERC has also increased tariffs for the transportation and supply of natural gas by regional distribution networks (oblgases) to UAH 142.3 for transportation and UAH 41.3 per thousand cubic meters for supply (these were also previously the subject of minimization). Meanwhile, distribution companies claim the tariff needed for cost-recovery (incl. necessary investments) are higher and constitute UAH 140-145 per thousand cubic meters for transportation and UAH 55 per thousand cubic meters for supply.
The last stand-by agreement with the IMF envisages another round of 50 percent gas prices increase for households and district heating companies in 2011. But currently it looks quite doubtful that such a move will be approved as was previously planned. During the last IMF mission to Ukraine the parties’ preliminarily agreed to decelerate gas price growth to mitigate the adverse social effects. Such a decision would further postpone gas price reform and preserve the long-term problems of the gas market.
28
sECTIon 2. METHoDoloGY of THE sTUDY
2.1 DATA REVIEW
2.1.1 Households’ survey An important element of the PSIA methodology consists of reliable information based on data from the Household Budget Survey (HBS) and one-time thematic household surveys. Sample household budget surveys have been conducted by the State Statistics Service of Ukraine (SSSU) on a quarterly basis since 1999 using international standards. One-time thematic surveys are held as appropriate using questionnaires during a quarterly household budget survey.
The survey is based on universally accepted international standards and generally corresponds to the socio-demographic and economic situation in Ukraine. It is a comprehensive study that objectively displays household incomes and expenditure and the impact of major processes going on in Ukraine’s socioeconomic development upon household living standards.
The HBS covers about 10,500 households quarterly. For example, the initial survey sample population size was 13,023 in 2009. During the year, 10,459 households took part in the survey (81.8 percent of selected addresses except for non-residential premises). Complete annual rotation of the household sample mandatorily applies. The territorial sample is valid for five years, built as a probability, stratified and multistage sample using a mechanism of probability-proportional-to-size sampling of territorial units.
The sampling is done in the following sequence:22
1) excluding the territories that cannot be surveyed;
2) excluding the population not subject to survey;
3) stratifying the universe;
4) sampling territorial units;
5) selecting households.
The sampling procedure consists of three stages in urban areas and of two stages in rural areas. Territorial sampling does not include any settlement situated in the exclusion zone (zone I) and in the unconditional (compulsory) evacuation zone (zone II) of the area radioactively contaminated by the Chernobyl disaster. Accordingly, the population living in the above-mentioned zones is also excluded from the population size of Ukraine and relevant oblasts. Besides, in calculating the population subject to the survey, the residential population does not include those in institutions – army conscripts; persons in places of confinement; persons residing in boarding homes, homes for elderly people, etc. The universe also does not represent marginal population groups (homeless, etc.).
The universe is stratified to make the sample adequately reflect major specific features of Ukraine’s administrative-territorial division (27 regions: 24 oblasts, the Autonomous Republic of Crimea, cities of Kyiv and Sevastopol) and to ensure selection from among household groups, more homogeneous in terms of their characteristics. The HBS universe consists of the set of Ukrainian non-institutional households in urban and rural areas. In the sampling process, pursuant to the above-mentioned objective, the universe is divided into strata that correspond, within each region’s boundaries, to: cities and city councils with population of
22 SSCU (2009)
29
100,000 and more (the region’s “cities” stratum), cities, urban-type settlements, city and village councils with population of less than 100,000 (the region’s “towns” stratum); and rural districts, i.e. administrative districts of rural areas (the region’s “districts” strata). Thus, there are 52 strata for urban areas and 490 for rural areas (according to the number of rural districts).
The sample size is divided by stratum with due account of the condition that homogenous reliability of the evaluation of specified indicators by region must be secured.
Territorial units within strata are sampled on the probability-proportional-to-size basis. Households are sampled within the sampled territorial units according to the patterned sampling procedure.
Statistical data obtained from various HBS rounds are consistent and can be combined in a reliable way. The key concepts and definitions used in HBS are generally consistent with the similar concepts and definitions applied in the system of national accounts and in sectoral statistics such as demographic statistics, labour statistics, social statistics, agricultural statistics, price, trade and service statistics.
Data from demographic statistics, population census, social statistics and agricultural statistics are used in HBS sampling as well as in data processing and indicator evaluations.
Users have access to all the information obtained from the survey but subject to restrictions related to complying with primary information confidentiality requirements. The survey is representative for all of Ukraine. In particular, it contains sampling weights, which facilitate the estimate of different para-meters for all of Ukraine. The analysis presented in Sections 3 and 4 is based on these sample weights.
The survey contains information on the demographic characteristics of households, including the number of household members, children, working and non-working adults. Basic information on the household head is also provided. Respondents also report aggregate and detailed information on income and expenditures. This information could be used for estimating poverty measures and the structure of income and expenditures by components. The survey also contains information on the worth of values and benefits received by households. This allows for estimating the impact of different social welfare programmes on poverty.
The average household size in Ukraine was 2.6 persons in 2008 and 2009 (2.74 in rural areas and 2.54 in urban areas). Information on household breakdown by the number of members and by the existence of children is given by Table 2.1.
Table 2.1. Household breakdown by the number of members and existence of children, 2009, percent
Indicators All householdsIncluding residing in
urban areas rural areasAll households 100.0 100.0 100.0including consisting of:1 person 23.2 22.2 25.32 persons 28.6 30.0 25.63 persons 25.2 27.6 19.74 or more persons 23.0 20.2 29.4Percentage of households having children under 18 37.8 38.0 37.2
Source: Statistical Yearbook of Ukraine 2009, p. 403
HBS, like similar surveys in other countries, does not (and principally cannot) cover either the best-off or the worst-off (first of all homeless) population groups. However, they provide unbiased information on the country’s general situation.
30
HBS outcomes are used as sources to inform the system of national accounts, social statistics, agricultural statistics, price, trade and service statistics, and the poverty monitoring coordinated by the Ministry of Social Policy of Ukraine. The survey programme also includes a system of indicators considering economic transition to market relations and a new technology for information collection and processing thereby greatly expanding the capacity for comprehensive data analysis.
The PSIA results presented in this report are mainly based on quantitative HBS analysis. This allows both efficient assessment of direct outcomes and forecasting of possible outcomes grounded on the linkage between the macro- and micro-level of data. Information support is built on micro-level data of the national sample household budget survey.23 Data obtained from household budget surveys largely meet the PSIA methodology requirements concerning data for quantitative analysis including micro-level data. This offers great potential for selecting and applying the most efficient PSIA approaches such as those using quantitative analysis methods based on a combination of macro- and micro-level data and models.
2.2 MAIn METHoDs of REsEARCH
2.2.1 Poverty measuresPoverty is commonly defined as the inability of individuals to achieve acceptable standards of living and adequate participation in society. There can be income poverty and human poverty. The latter refers to the limited possibilities of individuals for human development and, thus, is out of scope of research in this paper.
Income poverty, by definition, is connected to income and expenditure needs. In order to measure, compare and assess poverty in an objective manner, various socio-economic thresholds, the so-called ’poverty lines‘, are commonly used. Poverty lines try to capture a predefined level of income distribution, below which individuals are considered as `poor´ and would qualify for special attention.
When defining poverty lines, researchers and politicians look at two aspects of poverty. These are the absolute and relative components, the definitions of which are very controversial. The definition of absolute poverty is based on comparing an individual’s income with a minimum basket of goods and services. Therefore, the household (an individual) is considered to be in absolute poverty if it cannot afford the basic needs for food, clothing and housing. The minimum consumption basket is defined using basic physiological, social and cultural standards.
At the same time, relative poverty is defined as the inability of households to support the lifestyle, which is typical for a given society, due to insufficient funds. Therefore, people in relative poverty are those, who cannot afford benefits, which are considered necessary by most people: adequate housing, food, clothing, health, etc. Therefore, relative poverty reflects the mismatch of some households to average ones. As a result, relative poverty lines are usually measured in relation to the population’s income.
Taking into account the different components of poverty, various thresholds were developed. The World Bank for instance seems to be mostly concerned with absolute poverty, so its poverty lines to assess the dimensions of a country’s poverty include:24
- Poverty line `80 percent food´. More than 80 percent of household expenditures are spent on food. This measure is suitable for developing rather than transition economies. Ukraine
23 SSCU (2008) 24 See also the World Bank (2005)
31
is already on the path where this measure cannot be applied for estimating the poverty incidence.
- Poverty line `5.05 PPP US dollars a day´. A household spends less than 5.05 US dollars by purchasing parity per day. This is a global poverty threshold used by the World Bank for international comparisons.
- Poverty line `calorie based´. Per capita expenditures are lower than the cost of the World Bank’s calorie basket plus allowances for non-food goods and services. The food share in consumption is close to 70 percent, leaving 30 percent for non-food items.
At the same time, many countries introduce another type of absolute poverty line, which is the value of a minimum consumption basket. Usually, it is a subsistence minimum, which should cover the cost of a minimum set of goods and services. Such a poverty line is defined in Ukraine, even though it is used for social welfare policies only at very limited extent (Section 3.1.1).
Because absolute poverty has been widely eradicated in Western Europe, most countries in the EU are using relative poverty thresholds. The most common is:
- Poverty line `60 percent of median´. Per capita expenditures are lower than 60 percent of median equivalent expenditures. This threshold takes into account the development of incomes (including wages) in an economy. This poverty line is one of those used by the European Commission.
Here, equivalent total expenditures are calculated as household expenditures divided by equivalent household size according to the modified OECD scale, which gives a weight of 1.0 to the first adult, 0.5 to other persons aged 14 and over and 0.3 to each child aged less than 14.25 This equivalent scale takes into account variations in needs (for example for food) across different age groups as well as economies of scale in household consumption (an apartment that is heated for one individual is automatically warm for a second individual).
In Ukraine, the relative poverty line is officially defined as:
- Poverty line `75 percent of median´. Conditional per capita expenditures are lower than 75 percent of median expenditures by the population.26 This is the official threshold defined by the Order of different Ukrainian ministries.27 The advantage of this measure is that it takes into account the income distribution in the country and economies of scale in consumption.
Therefore, different countries use either absolute or relative poverty lines, or combinations of the two for defining target groups for social welfare programmes. In addition, for some programmes, the poverty lines for defining people in severe poverty are also defined. The analysis of poverty should be made on the basis of both absolute and relative poverty lines, which allow evaluation of:
- The poverty incidence and poverty gap for both poverty components and analysis of their differences;
- The characteristics of poor households according to selected criteria;
- The impact of economic factors and the efficiency of social welfare programmes.
25 See ‘Laeken’ indicators for more details.26 See Section 3.1.1 for more information on this poverty threshold.27 The Methodology of complex estimation of poverty is approved by the Ministry of Labour and Social Policy of Ukraine, the Ministry of Finance of Ukraine, the Ministry of Economy of Ukraine, etc.
32
2.2.2 Approaches towards evaluating the efficiency of social welfare programmes The major aim of any social welfare programme is helping poor individuals by lifting their income to at least the poverty line. However, reductions in the poverty incidence are not always the best measure of evaluating the programme’s efficiency. In particular, it ignores the differences in well-being between different poor households. As a result, the poverty incidence could remain the same even though the poor may have become poorer. Other poverty measures, which should be taken into account while evaluating the social welfare programmes, are the decline in severe poverty and the poverty gap.28
The poverty gap is estimated as the sum of the shortfalls of income of poor individuals from the poverty line (Figure 2.1). The poverty gap shows the transfer needed to eliminate poverty. At the same time, this measure disregards the difference in the severity of poverty, which could be measured as a squared poverty gap index. This index takes into account the inequality between the poor, but is difficult to interpret.
All aforementioned measures belong to the Foster-Greer-Thorbecke (FGT) class. In particular, the formula for their estimation can be represented as:
∑=−=
q
i i zyznP1
]/)[()/1()( αα , ( 0≥α )
where n is the number of households; yi is the measure of income for the i-th household; z represents the poverty line; q is the number of poor households; and α is a measure of the sensitivity of the index to poverty.
The meaning of FGT measures depends on the value of α:
-a = 0 for estimating the poverty incidence, which is a share of households with per capita income below poverty line, as it turns formula to P(0) = q/n;
-a = 1 for estimating the poverty gap index;
-a = 2 for estimating the severity of poverty index (SPGI).
The poverty incidence, or headcount ratio, is the most popular poverty measure due to its simplicity. However, it does not reflect the differences in living standards of poor individuals. Table 2.2 summarizes the advantages and disadvantages of the three poverty measures.
Table 2.2. Advantages and disadvantages of three poverty measuresMeaning Advantages Disadvantages
Poverty incidence (headcount ratio)
Share of households below the poverty line
- simple to construct- easy to understand
- ignores differences in welfare of poor households (assumes that all poor are in the same situation)
- does not change if households below poverty line become relatively poorer or richer
Poverty gap index
Sum of shortfalls of in-come of poor house-holds below poverty line
- shows how much needs to be transferred to the poor to bring their expen-ditures up to poverty line
- does not take into account the inequality of poor households
Severity of poverty
Squared poverty gap, which shows the trend in severe poverty by taking into account inequality
- takes inequality among the poor into account - difficult to interpret
Source: based on World Bank (b)
28 See World Bank(b)
33
Figure 2.1 below shows the difference between the measures. In particular, the grey area represents the poverty gap, the sum of transfers needed to lift all poor individuals out of poverty. However, if the state has only a limited amount of money, then it should stipulate clearly the policy goal. In particular, if some income would be shifted from household B to A so that A will be lifted out of poverty, the poverty incidence would improve, while households would be in more severe poverty. Thus, in this case, the poverty incidence would be a wrong measure to indicate poverty trends as in this case the poverty gap would have increased. At the same time, if a transfer is made from B to C, then both might remain in poverty, while the severity of poverty would increase as household B becomes even poorer than before. Therefore, when evaluating the efficiency of social assistance programmes, there is a need to look at their impact on all poverty measures.
figure 2.1. Poverty measures
Income
Poverty gap
Poverty line
HouseholdsB С A
Source: Handrich, Betliy (2008)
The efficiency of social assistance programmes varies due to the differences in their design. Some programmes are provided universally to every citizen through lower tariffs, while others are targeted only at the poor. Targeted social assistance is aimed at achieving greater poverty reduction with less state spending. According to the World Bank (2000), universal benefits and subsidies are less efficient and more expensive than targeted assistance (Figure 2.2). However, it should be noted that efficient targeting leads to administrative costs, particularly for antifraud measures.
According to the World Bank (2000), social welfare programmes’ efficiency could be measured against such criteria as:
- Coverage – the extent to which poor individuals are covered by the programme;- Targeting – the share of the subsidy that goes to the poor;- Predictability of benefits to the poor, which depends on the level of corruption as well
as fraudulent behaviour of beneficiaries;- Price distortions due to the provision of the assistance or subsidy;- Administrative simplicity.
34
These criteria reveal two major errors caused by providing assistance to the poor:29
- Under-coverage – the share of the poor not receiving assistance (an error of exclusion);- leakage – the share of non-poor benefiting from the social assistance programme (an
error of inclusion).
figure 2.2. Targeting versus universal social welfare programmes
Finalincomeaftertransfers
Income before transfersz
z
Universaltransfer
Targeted transfersto the poor
Poverty line
Universal transfers to the poor exceeding needs
Universal transfers to the non-poor
Source: Handrich, Betliy (2008)
Therefore, any social welfare programme should ensure that benefits associated with additional reductions in poverty are not lower than the additional costs associated with their provision. It is a very important and difficult task to define the proper parameters of a programme.
The estimation of poverty measures is typically conducted on the basis of the HBS. Evidence suggests that it is better to apply the indicator of expenditures, rather than income, as people tend to underreport their income.
In this paper the matching method for estimating the impact of different social assistance programmes on poverty is applied.30 In particular, ex-ante simulations are made. These are possible as the HBS contains clear data on the amount of subsidies, allowances and benefits every household receives. Therefore, to estimate the impact of a programme, one could estimate the poverty incidence and FGT poverty measures based on the expenditures net of particular types of assistance, subsidy or allowance. In particular, for this, expenditures for estimating poverty measures are defined as:
Exp_net = totalexp - assistance, where totalexp – total expenditures of household, assistance is a reported value of received assistance.
In our case, the latter is a) value of low-income family assistance and b) value of housing and utility subsidy received by a particular household.
29 Handrich, Betliy (2008)30 Number of households were lifted from the poverty due to participating in the social assistance programme was assessed.
35
Besides, the Distributive Analysis Stata Package (DASP) could be also used for estimating poverty measures and the efficiency of social policy. In this paper, DASP is used for the non-parametric estimation of the expected share of energy spending in total expenditures.
2.2.3 Computable general equilibrium modelTo evaluate the impact of the increase in gas prices on households’ welfare, we employ the computable general equilibrium model for Ukraine. The model used in this study is the single-country model developed in the framework of the project “Analysis of the Economic Impact of Ukraine’s WTO Accession” conducted by Copenhagen Economics, Denmark; Institute for East European Studies Munich, Germany; and Institute for Economic Research and Policy Consulting, Ukraine, in 2005 (Copenhagen Economics et al., 2005), and then elaborated to meet the needs of this study. Below an overview of the model is provided.
The CGE model is based on the social accounting matrix (SAM) for Ukraine (Table 2.3). The SAM is “…a square matrix in which each account is represented by a row and a column. Each cell shows the payment from the account of its column to the account of its row. Thus, the incomes of an account appear along its row and its expenditures along its column” (Lofgren et al, 2002). In simple words, the SAM shows “how sectoral value added accrues to production factors and their institutional owners; how these incomes, corrected for net current transfers, are spent; and how expenditures on commodities lead to sectoral production and value added” (Keuning and de Ruijter, 1988). Key utility of the SAM is that it provides “a comprehensive and consistent record of the interrelations of an economy at the level of individual production sectors, factors, and general public and foreign institutions” (Reinert and Roland-Holst, 1997).
The year 2008 is chosen as the base year.31 The SAM predominantly relies on information provided by the State Statistics Service of Ukraine, in particular input-output tables in consumer and basic prices, matrices for imports, trade and transportation margins, and for taxes and subsidies. Also, the National Accounts for Ukraine for 2008 were used to calculate the transfers between institutional agents in the SAM. Information about households has been derived from the Household Budget Survey discussed in Section 2.1.1. The aggregate SAM for Ukraine is presented in Table 2.4.
31 The choice of the base year has been determined by data availability at the beginning of the study. Then, the most recent available input-output tables in basic and consumer prices were for the year 2008.
36
Tabl
e 2.
3. T
he s
truc
ture
of t
he s
AM
Activities
Commodities
Factors
Households
Government
Savings-investments
Rest of the World
Acco
unts
/ Tr
ansa
ctio
nsa
bc
de
fh
Tota
l
Activ
ities
aAg
greg
ate
dom
estic
sup
ply
Expo
rts
sect
or in
com
e (A
ggre
gate
ou
tput
)
Com
mod
ities
bIn
term
edia
te
dem
and
Priv
ate
cons
umpt
ion
Publ
ic
cons
umpt
ion
Inve
stm
ents
Agg
rega
te
dem
and
Fact
ors
cVa
lue
adde
d
Fact
or
inco
me
from
ab
road
fact
or in
com
e
Hou
seho
lds
dFa
ctor
inco
me
of h
ouse
hold
s
Tran
sfer
s be
twee
n ho
useh
olds
Tran
sfer
s to
ho
useh
olds
fr
om
Gov
ernm
ent
Tran
sfer
s to
ho
useh
olds
fr
om
abro
ad
Hou
seho
lds
inco
me
Gov
ernm
ent
eD
irect
taxe
sIn
dire
ct ta
xes
Fact
or
inco
me
of
gove
rnm
ent
Tran
sfer
s to
G
over
nmen
t fr
om
hous
ehol
ds
Tran
sfer
s to
gove
rnm
ent
from
abr
oad
Gov
ernm
ent
inco
me
Savi
ngs-
inve
stm
ents
fH
ouse
hold
s’ sa
ving
sG
over
nmen
t sa
ving
sCA
bal
ance
savi
ngs
Rest
of t
he W
orld
hIm
port
sG
over
nmen
t tr
ansf
ers
to
abro
ad
fore
ign
curr
ency
ou
tflow
Tota
lTo
tal
expe
ndit
ures
Expe
ndit
ures
on
com
mod
itie
sEx
pend
itur
es
on fa
ctor
sH
ouse
hold
s ex
pend
itur
esG
over
nmen
t ex
pend
itur
esIn
vest
men
tsfo
reig
n cu
rren
cy
inflo
wSo
urce
: Cop
enha
gen
Econ
omic
s et a
l., 2
005
37
Table 2.4. Aggregate social accounting matrix for Ukraine with base year 2008, UAH billion
Activ
ities
Com
mod
ities
Fact
ors
Hou
seho
lds
Gov
ernm
ent
Savi
ngs-
inve
stm
ents
Chan
ges
in
inve
ntor
ies
Rest
of t
he
Wor
ld
Accounts / Transactions a b c d e f g h Total
Activities a 2,333.6 2,333.6Commodities b 1,483.4 589.7 169.2 250.5 14.4 444.9 2,952.0Factors c 831.3 19.0 850.3Households d 840.2 180.0 -10.0 1,010.2Government e 19.0 97.8 10.0 245.2 -0.6 371.4Savings-investments f 175.2 22.3 67.4 264.9Changes in inventories g 14.4 14.4Rest of the World h 520.6 520.6Total 2,333.6 2,952.0 850.3 1,010.2 371.4 264.9 14.4 520.6
Source: State Statistics Service of Ukraine, constructed by authors Note: Due to rounding procedures figures in some rows and columns may not sum up to totals
The production side of the economy is summarized in 39 sectors following Ukraine’s input-output data. Production in each sector requires the use of intermediate inputs of goods and services as well as primary factors such as capital and labour, the latter distinguished by two skill levels. With the exemption of the capital stock in extractive industry, both production factors – capital and labour – are assumed to be perfectly mobile. This assumption implies that the results of the model present the economic adjustments to the shock over medium- or long-term horizon, although time is not explicitly defined in the model.
Aggregate output can either be exported to several different regions or sold on domestic markets. Together with imports from all trade partners it forms the total aggregate of goods and services available for domestic consumption.
To sufficiently reflect the technical characteristics of Ukraine’s economy, production is divided into perfectly and imperfectly competitive sectors following Jensen, Rutherford and Tarr (2007). Each sector of the Ukrainian economy belongs to one of three distinct categories:
- competitive goods and services sectors where production takes place under constant returns to scale and prices equal marginal costs with zero profits;
- goods-producing sectors with production under increasing returns to scale and imperfect competition, and
- imperfectly competitive services sectors where production takes place under increasing returns to scale.
For the imperfectly competitive goods and services sectors the model applies Chamberlinian large group monopolistic competition within a Dixit-Stiglitz framework, resulting in constant mark-ups over marginal costs. Firms set prices such that their marginal costs equal marginal revenues and free entry implies zero profits. Individual firms regard themselves as too small to influence the composite price in their group. Moreover, the composition of fixed and marginal costs is identical for all firms producing goods or services under increasing returns to scale, leading to constant output per firm for all firm types. As the number of firms in a sector increases, the larger number of available varieties means that output can be more efficiently
38
put to use in the economy. This implies that the effective cost function for users of these goods and services declines in the number of total firms in the industry. Following Jensen, Rutherford and Tarr (2007), there is a one to one correspondence between firms and their differentiated varieties, i.e., each firm is assumed to produce one single variety.
On the consumption side, the model distinguishes between public, investment and intermediate consumption as well as final household consumption.
To improve analysis of the income distribution and poverty in the framework of a CGE model, a micro-simulation approach is employed in line with Cockburn, Corong and Cororaton (2010). In particular, information about households’ expenditure and income patterns from national households’ surveys into Ukraine’s CGE model is integrated. Households are presented in models as clusters of surveyed households. Clustering procedures are conducted using the SPSS, two-step clustering method. Variables used to form clusters include location (rural/urban), households’ size, weight of each representative household in the survey, aggregate expenditures of representative household, aggregate income of representative households, and poverty (poor/non-poor) using two different definitions of poverty. Clustering using absolute poverty line identified 214 clusters. Clustering using relative poverty line identified 250 clusters.
Labour and capital endowments of households, their skill level (defined on the basis of the skill level of the head of household), savings and transfers to and from the government were calculated based on the national households’ survey.
Consumers treat imported and domestically produced goods as imperfect substitutes while producers regard sales on domestic markets or exports as imperfect alternatives (Armington assumption). Exports and imports are disaggregated into different trading partners and modelled with constant elasticities of transformation and substitution. Direct taxes/subsidies are modelled as sector-specific taxes/subsidies on the use of primary input factors. Indirect taxes/subsidies are modelled as a commodity specific tax on private (household) and investment demand.
The government receives income from public capital endowments and collects a variety of taxes. These taxes include taxes on output, taxes on consumption, and taxes on foreign trade etc.. Total government revenue is used for public investments and the provision of public goods. The balanced budget is achieved via lump-sum transfers from households in the case the state revenues decline.
The model uses two closure procedures. First, on the macro-economy level, total investments must equal the sum of depreciation, public and private savings and the current account balance. Second, on the government level, fiscal revenue from various direct and indirect taxes must increase to offset the lost revenue in any counterfactual. In other words, there is an equal government yield constraint. This is achieved through adjusting the level of lump sum transfers to households.
The steady state formulation of the model developed by Copenhagen Economics et al. (2005) allows for an analysis of potential long run gains by allowing the capital stock to adjust to new steady state equilibrium. This adjustment is driven by the assumption that investors demand a fixed rate of return on investment. In the model, the rate of return on investment is defined as the rental rate on capital divided by the cost of producing a unit of the capital good. The implication is that if a policy change results in an increase in the rate of return on capital (relative to the cost of investment), investors will respond by increasing investment and thereby expanding the capital stock. The increase in the capital stock will lead to a fall in the rental rate on capital. Investors will keep investing, and expanding the capital stock, until the rental rate on capital has fallen to a level where the rate of return on investment is back to its initial level.
39
Results using the comparative steady state formulation are normally considered as upper bound estimates (if the capital stock increases). The reason is that the steady state calculation ignores the foregone consumption required to obtain the larger capital stock. However, Rutherford and Tarr (2002) show that a fully dynamic model with similar features (and that takes into account foregone consumption) can produce welfare gains of the same magnitude as comparative steady state results.
The model relies on elasticity parameters applied for Ukraine in the framework of study conducted by Copenhagen Economics et al. (2005). These parameters are presented in Table 2.5.
Table 2.5. Elasticity parameters
Parameter baseline value Description
esubc 1 Elasticity of substitution in consumer demand
esub 3 Elasticity of substitution between firm varieties in imperfectly competitive sectors
esubt 0 Elasticity of substitution between value added and other intermediate inputs
esubva 1 Elasticity of substitution between primary factors
sigmadm 3 Armington elasticity of substitution between imports and domestic goods in perfectly competitive sectors
eta_dx 5 Elasticity of transformation between exports and domestic production
etaf 15 Elasticity of multinational service firm supply with respect to price of outputSource: Copenhagen Economics et al. (2005)
The CGE model for Ukraine is realized in GAMS/MPSGE software.
40
sECTIon 3. WElfARE of UKRAInIAn HoUsEHolDs
3.1 PoVERTY: InCIDEnCE AnD DEPTH
3.1.1 official poverty lines The analysis of Ukrainian legislation indicates the existence of several approaches to defining poverty lines. These are:
- 75 percent of median of conditional expenditures;- Subsistence minimum;
- Guaranteed minimum income.
These poverty lines are defined at the national level and are used for different purposes.
75 percent of median of conditional expenditures. The officially approved poverty line in Ukraine is 75 percent of median of per capita conditional expenditures (‘75 percent of median’). This threshold is defined in the Order of different Ukrainian ministries.32 It is mainly used for analytical purposes rather than for social welfare policies.
To estimate per capita conditional expenditures the first household member receives a weight in consumption of 1, while other household members have a weight of 0.7. In particular,
( )1(*7.01exp_
exp_−+
=hsize
totalcond )
, where cond_exp are per capita conditional expenditures, total_exp
are total household expenditures and hsize is a number of household members.33
Therefore, such an estimate of expenditures takes economies of scale in household consumption into account.
By international standards, the poverty line ‘75 percent of median’ is a relative poverty line.
Subsistence minimum. Starting from 2000 the subsistence minimum was introduced as a replacement indicator of low-income levels. The subsistence minimum is basically the price of a basic consumer basket containing predefined food items and a minimum set of non-food products and services. The nominal amount of the subsistence minimum is estimated annually for the forthcoming period based on current prices.34 However, the components of the consumption basket have not been updated since 2000. As a result, the calculation of the subsistence minimum is based on a consumption basket, which is out-dated.
The subsistence minimum is defined annually in the State Budget Law for different demographic groups (Table 3.1). Usually it is indexed each year by inflation. It is a nation-wide indicator. Therefore, it does not take into account differences in price levels in different oblasts.
32 The Methodology of complex estimation of poverty is approved by the Ministry of Labour and Social Policy of Ukraine, the Ministry of Finance of Ukraine, the Ministry of Economy of Ukraine, etc. (Joint order of the Ministry of Social Policy and Labour, Ministry of Finance, Ministry of Economy, etc. No. 401/6689 from 26 April 2002.)33 Conditional expenditures are different from equivalent expenditures, used for estimating poverty by the European Commission among other poverty measures. In particular, equivalent per capita expendi-tures are calculated as household expenditures divided by equivalent household size according to the modified OECD scale, which gives a weight of 1.0 to the first adult, 0.5 to other persons aged 14 or over and 0.3 to each child aged less than 14 (see ‘Laeken’ indicators for more details). 34 The standards and consumption prices used for calculating the subsistence minimum need a critical assessment.
41
Since 2005 the minimum pension has been defined at the level of the subsistence minimum for individuals who have lost their ability to working (i.e. retired). Since 2009 the minimum wage has been set at the level of subsistence minimum for persons able to work. There were also Government attempts to target some types of in-kind privileges to the people with income lower than the subsistence minimum. However, these failed due to Constitutional constraints.35
By international standards, the ‘Subsistence minimum’ poverty line is an absolute poverty line.
Guaranteed minimum income (guaranteed level of subsistence minimum). The use of the subsistence minimum for providing social assistance, in particular, low-income family allowances, appeared to be financially unaffordable for the Government as the income of many families appeared to be lower than this threshold. As a result, the Government introduced another social standard called guaranteed minimum income (direct translation “guaranteed level of subsistence minimum”), which was defined at lower level than subsistence minimum (Table 3.1). Even though the official methodology of estimating this social standard is not publicly available, it is likely to take into account the available fiscal allocations for financing social allowances to low-income families. Since 2011 this social standard is defined in relation to respective subsistence minimum.
Table 3.1. subsistence minimum levels, UAH per person, average per year
Indicator 2006 2007 2008 2009 2010 2011subsistence minimum (average per year)
General level 464 519 608 639 843 914Children up to 6 years old 410 458 540 570 771 835Children between 6 and 18 years old 526 588 681 714 921 1,000Able to work individuals 495 554 650 682 888 963Unable to work Individuals 359 401 483 511 709 767
Guarantee minimum income (GMI)Able to work individuals 110 121 133 133 182.21 21 percent SM*Unable to work individuals 155 170.5 187.5 187.5 266.25 75 percent SM*Persons with Disabilities 165 181.5 200 200 294.0 75 percent SM*Children - - - - - 50 percent SM*
Note: * SM – subsistence minimum of respective demographic group.Source: State Budget Laws
International evidence suggests that state policies should be aimed at reducing absolute poverty, as it is a measure of the number of people that cannot afford certain goods and services. At the same time, relative poverty shows people falling under the median income but who can purchase basic services and goods.
In this paper, the two poverty lines are analysed:36
- Relative poverty line — 75 percent of median per capita conditional expenditures (75 percent of median);
- Absolute poverty line — the general level of the subsistence minimum (Subsistence minimum).
35 According to several decisions of the Constitutional court, taken in 2002, 2004, 2005, limiting social privileges only to individuals with incomes lower than the subsistence minimum would violate article 64 of the Constitution, according to which ‘rights and freedoms of citizens cannot be reduced’. 36 The national poverty line is used for the study. Poverty lines are constructed on the basis of expendi-tures data, which include consumption as well as non-consumption spending. Spatial price deflator for harmonizing the variables across the country could not be used due to limitation of data.
42
All estimates are based on the results of the HBS conducted annually by the State Statistics Ser-vice of Ukraine. The survey data covers extended information on components of revenues and expenditures. The poverty measures are calculated based on households’ total expenditures.
3.1.2 Poverty rate Poverty reduction has been a policy priority in recent years. Before 2009, the Government adopted an annual action plan to implement the Poverty Reduction Strategy, which had been approved by the President in 2001. The measures envisaged in the Strategy concerned employment and labour remuneration, education and social support for various population groups. They were to be implemented in three stages: 2001–2002, 2003–2004 and 2005–2009. The goals of the first two Strategy Implementation stages were partially achieved: extreme poverty was reduced while there was a steady growth in people’s income. This reflected a peri-od of economic growth, that being a necessary condition to combat poverty. Wages grew due to higher productivity and because of a higher minimum wage. Minimum wages and mini-mum old-age pensions were approaching the subsistence minimum level during this period of economic growth. In particular, minimum old-age pensions were defined at the subsistence minimum level set for individuals that lost ability to work starting 2005. Moreover, minimum wage was defined at the subsistence minimum level for working able individuals since 2009. Moreover, households obtained access to bank credits that also promoted an increase in fi-nal consumption and improved their welfare status. As a result, absolute poverty measured against the general level of subsistence minimum significantly reduced from 77.1 percent in 2001 to 17.8 percent in 2009.37
37 According to data from the State Statistics Service of Ukraine, poverty levels had increased by the end of the first quarter of 2010. The percentage of the population whose per capita income was lower than the minimum subsistence level increased by 9 percentage points, to 30 percent compared with the first quarter of 2009.
43
Table 3.2. Poverty incidence and structure of poverty38
Year Place of Residence
Poverty line ‘75 percent of median’ Poverty line ‘subsistence minimum’
Households below poverty line, percent of population by
place of residence
Structure of poor households by
place of residence, percent of total
poor households
Households below poverty line, percent of population by
place of residence
Structure of poor households by
place of residence, percent of total
poor households
2001
Rural 32.1 36.3 80.9 32.5
Urban 25.4 63.8 75.4 67.5
Ukraine 27.4 100.0 77.1 100.0
2004
Rural 30.8 38.2 64.7 35.4
Urban 22.9 61.8 54.3 64.6
Ukraine 25.4 100.0 57.6 100.0
2006
Rural 36.3 41.1 52.3 38.8
Urban 23.6 58.9 37.3 61.2
Ukraine 27.5 100.0 42.0 100.0
2007
Rural 37.6 42.6 46.9 41.0
Urban 22.7 57.4 30.5 59.0
Ukraine 27.3 100.0 35.6 100.0
2008
Rural 37.8 43.9 28.8 45.4
Urban 21.7 56.1 15.6 54.6
Ukraine 26.7 100.0 19.7 100.0
2009
Rural 36.4 42.2 25.3 43.7
Urban 22.2 57.8 14.5 56.3
Ukraine 26.5 100.0 17.8 100.0Note: poverty incidence is calculated on the basis of the HBS with use of sampling weights. Source: the HBS of the State Statistics Service of Ukraine, own calculations
At the same time, relative poverty has not changed much, which could reflect the stratification of households in terms of income, lack of structural changes and insignificant declines in inequal-ity. Thus, level of equality remained unchanged during growth years. Between 2001 and 2009 relative poverty incidence was around 27 percent. In 2009 the mere decline in po verty measured against relative poverty line could be explained by a slight reduction in income inequality.
38 According to the World Bank Study (Ukraine: Poverty Update, Report No. 39887 – UA, June 20, 2007, avail-able at http://siteresources.worldbank.org/INTUKRAINE/Resources/poverty_update_200707_eng.pdf) poverty incidence was measured at the lower level due to use of lower poverty line. In particular, when the World Bank had begun research in countries with transition economies (Romania, Moldova, Ukraine etc.), one faced with the problem of absolute criterion search for poverty analyses. As this criterion the cost of 1 kilocalorie and amount of kilocalories that person can get from living wage in his country were chosen. However, Ukraine’s academic research institutions use criterions that similar to our report.
44
figure 3.1. Poverty lines and social standards, UAH
0
100
200
300
400
500
600
700
800
900
1000
90028002
Monthly minimum wage (average) Monthly minimum pension (average)
Relative poverty line (monthly) Absolute poverty line (monthly)
0
100
200
300
400
500
600
700
800
900
1000
Monthly minimum wage (average) Monthly minimum pension (average)
Relative poverty line (monthly) Absolute poverty line (monthly)
Source: Ukrainian legislation, the HBS, own calculations
Consequently during the recent decade more people were able to afford a basic basket of goods and services. However, nearly 27 percent of families could not purchase the set of goods and services, which are considered as necessary for the average household.
Poverty declined more in urban areas. Absolute poverty of urban households declined from 75.4 percent in 2001 to 14.5 percent in 2009, while relative poverty declined by 3.2 p.p. to 22.2 percent in 2009. Absolute poverty of rural households also declined substantially. How-ever, relative poverty increased in rural areas, where poverty is higher as rural development in Ukraine remains low. Such trends reflect the little effort the authorities make towards im-proving the situation in rural areas, particularly, concerning the labour market, infrastructure, etc. Often, rural development is perceived by the Government as agricultural development, although these two concepts are very different.
At the same time, a higher share of poor households lives in cities and towns. This follows the distribution of Ukraine’s population by places of residence. In particular, in the beginning of 2009 68.5 percent of Ukraine’s population lived in urban areas.
The level of poverty among households with children remains a major problem. This is a result of an inefficient state policy for supporting such families. In particular, the relative poverty of families with children was 33.6 percent in 2009, while the poverty incidence of families with-out any children was 22.3 percent.
Poor households are on average larger than non-poor households. As a result, individual pov-erty incidence is higher than poverty measures for households. In particular, in 2009 29.7 per-cent of individuals were poor against the relative poverty line, while 23.1 percent were poor against the absolute poverty line.39
Generally, the employment of household members does not guarantee a sufficient level of household earnings. In particular, 79 percent of the poor are members of households with at
39 Due to data limitation, further on all poverty measures on the basis of household data are estimated.
45
least one working person.40 This can be explained by comparatively low labour remuneration rates, a consequence of low labour productivity that is, in turn, often caused by using out-of-date equipment and resource-intensive production technologies.
However, despite the State’s efforts, the revision of social standards failed to result in any decline in inequality. This indicates the comparatively faster growth of the incomes of high earners. The situ-ation changed slightly in 2009 because the economic crisis led to a reduction in business profits whereas the income of the poorer sections of the population kept growing as both pensions and the minimum wage were increased. However, given lower labour demand, there was no substantial change in the indicators of inequality during the crisis (Table 3.3).
Table 3.3. Inequality indicators estimated in terms of overall income, 2007–2009
2007 2008 2009Income ratio between the richest 10 percent and the poorest 10 percent of the population 5.2 5.4 5.3
Gini index 0.252 0.259 0.257Source: State Statistics Service of Ukraine
According to the draft State Programme for Overcoming and Preventing Poverty in Ukraine, it is envisaged that extreme poverty will be eliminated between 2010–2015, i.e. to considerably reduce the share of the population whose daily consumption is below USD 4.30 by PPP.41 At the same time, the Programme forecasts that relative poverty will not change substantially (25 percent in 2015). It is planned to reduce the poverty incidence among children from 35 percent in 2009 to 29 per-cent in 2015. In addition, measures are envisaged to reduce poverty among working persons.
3.1.3 Poverty depth Table 3.4 illustrates changes in other poverty measures – poverty gap and severity of poverty. These poverty measures dropped against the absolute poverty line ‘Subsistence minimum’, reflecting lower transfers needed to shift people out of poverty and lower the severity of pov-erty. Such a trend is explained primarily by the minimum pension being set at the level of subsistence minimum since 2005 and since the end of 2009 defining the minimum wage at the level of subsistence minimum. Therefore, the administrative increases in social standards, including the minimum wage, were likely to largely contribute to the decline in poverty and, more importantly, the drop in the severity of poverty.
More importantly these two measures declined for the poverty line ‘75 percent of median’, even though the poverty incidence measures against this poverty line have not changed. In particu-lar, fewer people lived in severe poverty in 2009 as compared to 2001. The reduction of the pov-erty gap indicates a decline in the average shortfall of poor people from the poverty line and, thus, means that a lower fiscal transfer is needed for lifting poor households above poverty line.
Table 3.4. Poverty gap index and severity of poverty
Year Poverty gap index, percent Severity of poverty, percent
Poverty line ‘75 percent of median’
2001 14.5 8.12006 14.2 7.72007 14.0 7.62008 13.7 7.42009 13.5 7.2
40 MEU (2010)41 MEU (2010)
46
Year Poverty gap index, percent Severity of poverty, percent
Poverty line ‘subsistence minimum’
2001 31.5 16.12006 11.8 4.72007 9.3 3.52008 4.4 1.52009 3.8 1.2
Source: the HBS of the State Statistics Service of Ukraine, own calculations
A decline in the severity of poverty indicates lower inequality of poor individuals. On average, poor households became relatively richer in 2009 than in 2001.
Therefore, economic growth, combined with the administrative increases of social standards, resulted in a decline in the poverty gap and the severity of poverty, which indicates improved welfare of Ukrainians.
3.2 HoUsEHolD InCoME sTRUCTURE
The major sources of household income are wages and social assistance with current transfers, primarily, pensions. These two income components, in some years, generated a rather similar percentage of income. The share of capital income and income from property increased pri-marily due to the development of banking system and the property market.
figure 3.2. Income structure
0%
20%
40%
60%
80%
100%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
wage income social assistance and current transfersincome from farming and entrepreneurs activity capital income and income from property
Note: F - forecastSource: State Statistics Service of Ukraine, IER forecast for 2011, 2012
Most income (61.5 percent of total in 2009) is generated by the urban non-poor households. This is primarily explained by the structure of households by income groups. At the same time, they receive 70 percent of all wage income.
The structure of income by major sources varies within households groups. Urban house-holds rely more on wage income. Urban non-poor households are likely to have more income from wages, which proves that employment of households’ members is likely to
47
result in better welfare of households. At the same time, rural poor households claim to receive slightly higher income from pensions and other current transfers than from wages, which could be attributed to low agricultural wages and limited employment opportuni-ties. Sale of products received from subsidiary farming seems to be very important for rural non-poor households.
figure 3.3. Income structure by groups
0%
20%
40%
60%
80%
100%
2008 2009 2008 2009 2008 2009 2008 2009
urban poor urban non-poor rural poor rural non-poor
wage income pensionsother transfers income from farming and entrepreneurs activitycapital income and income from property other income
Source: HBS
In 2009 wage income declined in relation to total household income for urban house-holds, while maintaining its share for rural households. This could primarily be explained by the fact that during the crisis industrial and financial sectors contracted the most, re-sulting in greater problems in urban areas, including increased unemployment and limited wage growth.
Figure 3.4 shows again the high discrepancies in income received by different households groups depending on their residence and poverty status. Average wage income per house-hold and per capita is higher in urban areas. This is explained by differences in the labour market in urban and rural areas. In particular, wages in agriculture are traditionally the lowest among all types of economic activity. Besides, agricultural work is seasonal. Non-agricultural employment remains limited in rural areas. The development of per capita wages again re-flects economic changes during the crisis. In addition, the average number of working house-hold members is higher in non-poor households than in poor.
Per capita pension income in household is similar among different groups. This could be at-tributed to two major factors. First, pension differentiation is rather limited in Ukraine due to the significant increase in the minimum pension. Firstly, at the moment nearly 65 percent of pensioners receive the minimum pension. Secondly, the number of pensioners per rural non-poor household is slightly higher than for other households.
48
figure 3.4. Per capita income by groups, UAH thousand
0
1
2
3
4
5
6
7
8
9
2008 2009 2008 2009 2008 2009 2008 2009
urban poor urban non-poor rural poor rural non-poor
wage income pensionsother transfers income from farming and entrepreneurs activitycapital income and income from property other income
Source: HBS
Therefore, Ukrainian households show a considerable stratification in terms of income levels. Being employed provides a better chance for a household not to be a poor. In addition, the presence of pensioners in a household increases the chance of escaping poverty.
3.3 ConsUMPTIon PATTERn
3.3.1 Consumption structureConsumption expenditures amounted to 78 percent of household total expenditures in 2008 and 2009.42 The average is lower for rural households as they receive some food items from their own subsidiary farming. Consumption expenditures amounted to 69 percent of total expenditures for rural poor households in 2009. The percentage for urban poor households was 86 percent.
The bulk of consumption expenditures is attributable to food purchased of (including non-alco-holic beverages). While in poor households, food consumption accounted for near 60 percent of consumption expenditures, it was around 50 percent for non-poor households irrespective of their residence. At the same time, while urban poor households allocated nearly 53 percent of total spending to food in 2009, this figure for the rural non-poor was nearly 35 percent.
Payment for housing, utility products and services (without taking into account privileges and subsidies) accounted for 6 percent of total expenditures of household.43 Poor households tend to allocate a higher share of their expenditures to energy consumption than do non-poor.
42 Non-consumption expenditures include spending on items related to subsidiary farming (seeds, cat-tle, etc.), purchase and construction of buildings as well as purchase of cars and equipment related to subsidiary farming, major repairs of housing, purchase of shares and bonds, bank deposits, help to rela-tives, alimony payment, etc. Besides, non-consumption expenditures include privileges and subsidies. 43 This share turns near 8 percent if privileges and subsidies are taken into account.
49
figure 3.5. Expenditures structure by groups
0%
20%
40%
60%
80%
100%
2008 2009 2008 2009 2008 2009 2008 2009
urban poor urban non-poor rural poor rural non-poor
food consumption energy consumption other consumption other non-cosumption expenditure
Note: energy spending without taking into account privileges and subsidies.Source: HBS
The share of non-consumption expenditures is much higher for rural than for urban house-holds. This is explained by rural households, especially non-poor ones, allocating funds to items related to subsidiary farming. In particular, 60 percent of the total expenditures on sub-sidiary farming is attributed to rural non-poor households and another 20 percent to rural poor households. At the same time, expenditures on equipment, buildings, seeds and cat-tle, made by rural non-poor households, accounts for 74 percent of such expenditures by all households (the rural poor account for a further 12 percent). Purchasing of property is made mainly by urban non-poor households (99 percent of such spending). Besides, mainly non-poor households purchase shares and bonds and make bank deposits (63 percent by urban non-poor households and 29 percent by rural non-poor households).
Per capita expenditures by item also vary significantly for different household groups. In par-ticular, urban non-poor households spent, on average, 2.5 times more than urban poor house-holds. This share for rural households was 2.1. The difference is slightly less for food and energy spending (near 2 times higher for urban non-poor households and for poor, and near 1.8 times higher for rural non-poor than for poor), and higher for other spending items.
There are other differences between urban and rural households. By getting food from sub-sidiary farming, rural households tend to spend less on food items than urban households. In particular, urban non-poor households spent nearly three times more on food per house-hold member than rural poor households in 2009. There was not a large difference for energy consumption between urban and rural households. Lower per capita expenditures for other consumption items by rural households are attributed to lower income.
50
figure 3.6. Per capita expenditures by groups, UAH thousand
0
1
2
3
4
5
6
7
8
2008 2009 2008 2009 2008 2009 2008 2009
urban poor urban non-poor rural poor rural non-poor
food consumption energy consumption other consumption non-cosumption expenditure
Source: HBS
Therefore, the expenditure structure and levels of expenditures by poor and non-poor house-holds differ a lot. Having a higher income, non-poor households are likely to spend more. At the same time, rural households spend less on food, on account of subsidiary farming but al-locate more funds for items related to subsidiary farming.
3.3.2 Energy consumption Using the World Bank study (2007) the following components of services and goods consumed by households, which could be impacted directly or indirectly by a gas price increase, are identified:Electric energy Centralized gas supply Bicarbonate fuel (butane, propane, etc.) in bottles Liquid domestic fuel (kerosene) Solid fuel (coal, peat, and wood) District heating (heating, hot water and ice) Gasoline (including diesel and lubricants).
Table 3.5 summarizes the annual expenditures of households on these goods and services based on the relative poverty measure (personal income below 75 percent of median). Table 3.6 presents the structure of energy-related consumption if the absolute poverty line (subsist-ence minimum) is applied.
51
Table 3.5. Consumption of energy-related goods and services in 2009, poverty line: personal income below 75 percent of median
Total Urban poor Urban non-poor Rural poor Rural non-poorpercent in total energy-related consumption of households
Electric energy 17.9 22.0 17.0 21.4 17.3Centralized gas supply 24.6 31.4 19.3 34.7 33.0Bicarbonate fuel (butane, propane, etc.) in bottles 3.0 2.4 0.6 11.0 7.7
Liquid domestic fuel (kerosene) 0.0 0.0 0.0 0.0 0.0Solid fuel (coal, peat, and wood) 7.1 3.4 2.1 23.2 18.3District heating (heating, hot water and ice) 28.0 34.4 39.3 0.2 0.6
Gasoline (including diesel and lubricants) 19.3 6.4 21.6 9.5 23.1
ToTAl 100.0 100.0 100.0 100.0 100.0Source: State Statistics Service of Ukraine, own estimation
Table 3.6. Consumption of energy-related goods and services in 2009, poverty line: personal income below official subsistence minimum
Total Urban poor Urban non-poor Rural poor Rural non-poorpercent in total energy-related consumption of households
Electric energy 17.9 24.4 17.5 24.1 17.9
Centralized gas supply 24.6 31.4 20.8 34.0 33.4
Bicarbonate fuel (butane, propane, etc.) in bottles 3.0 3.1 0.8 12.4 8.3
Liquid domestic fuel (kerosene) 0.0 0.0 0.0 0.0 0.0
Solid fuel (coal, peat, and wood) 7.1 4.1 2.3 18.2 19.7
District heating (heating, hot water and ice) 28.0 33.8 38.7 0.0 0.5
Gasoline (including diesel and lubricants) 19.3 3.2 19.8 11.4 20.0
ToTAl 100.0 100.0 100.0 100.0 100.0Source: State Statistics Service of Ukraine, own estimation
On average, the households’ biggest energy-related purchase is district heating (28.0 percent of total consumption), followed by centralized gas used for cooking and heating (24.6 percent) and gasoline purchases (19.3 percent). The pattern significantly varies depending on a house-hold’s territorial location (urban versus rural) as shown in Figure 3.7, and their income status (above or below poverty line) as presented in Figure 3.8.
In particular, urban households spend a lot on heating (38.5 percent of total energy-related consumption). The other three important components of urban energy-related consump-tion are centralized gas (21.2 percent), gasoline (19.3 percent) and electricity (17.8 percent). Among these categories, gas price is the most important for determining the price of district heating and the centralized gas supply, whereas the electricity price is far less gas dependant.
In rural areas, usually not equipped with district heating, the consumption pattern is differ-ent. Their largest share of energy-related consumption is centralized gas (33.5 percent of total energy-related consumption), followed by solid fuels (19.6 percent). At the same time, con-sumption of gasoline (19.3 percent) and electricity (18.4 percent) in rural areas barely differs
52
from urban areas, indicating that demand for these products is not dependent on a house-hold’s location but on other factors. As in the case with urban households, the most gas-price dependent item of energy consumption in rural areas is the centralized gas supply.
There are several clear differences in energy consumption patterns depending upon house-hold income levels. Firstly, gasoline consumption is much higher in non-poor households than in poor households. It is linked to motor vehicle ownership. Also, non-poor households tend to consume more district heating, largely because most non-poor households live in urban territories equipped with this service. At the same time, poor households tend to spend more on centralized gas and on electricity.
figure 3.7. Territorial structure of energy-related products and services consumption of households
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
Electric Energy
Centralized gas supply
Bicarbonate fuel (butane,propane, etc.) in bottles
Liquid domestic fuel(Kerosene)
Solid fuel (Coal, peat, andwood)
District heating (heating, hotwater & ice)
Gasoline (including diesel &lubricants)
urban households rural households
% of total energy-related consumption
SSource: State Statistics Service of Ukraine, own estimation
53
figure 3.8. structure of energy-related products and services consumption of households depending on income level
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
Electric Energy
Centralized gas supply
Bicarbonate fuel (butane,propane, etc.) in bottles
Liquid domestic fuel(Kerosene)
Solid fuel (Coal, peat, andwood)
District heating (heating, hotwater & ice)
Gasoline (including diesel &lubricants)
poor households non-poor households
% of total energy-related consumption
Source: State Statistics Service of Ukraine, own estimation Note: * poverty line – personal income below 75 percent of median
Summing up, analysing households’ consumption patterns of energy-related products and services allows us to identify that about half of energy-related consumption is likely to be very sensitive to a gas price increase. In urban areas, the major price pass-through will go through centralized gas consumption and district heating, while in rural areas it will primarily be through centralized gas consumption. This channel of transmission is likely to cause the greatest problem for the poor population since they extensively rely on this supply.
54
sECTIon 4. IMPACT of GAs PRICE InCREAsE on PoPUlATIon
4.1 sCEnARIosIn this document, several scenarios of the impact of gas price increases on the population are considered. Formulating different scenarios allows us to capture several dimensions of the impact of a gas price increase, namely:
- Time dimension: medium-term versus long-term horizon;- Poverty dimension: absolute versus relative poverty line; and- Origin of the shock dimension: external versus internal price shock.
The first is time dimension: medium-term versus long-term horizon.44 The medium-term hori-zon is modelled with a static model assuming perfect mobility of production factors (capital and labour), but no changes in factors of production endowment. The long-term horizon is modelled with a steady-state model assuming that factors of production are perfectly mobile, and the amount of capital can change to adjust to the new equilibrium. The second is poverty dimension. There are several measures of poverty discussed in this report, and two poverty lines are considered in the CGE model: relative poverty line defined as personal income below 75 percent of median, and absolute poverty line defined as the subsistence minimum.The third dimension is origin of the shock dimension. In small open market economy, origin of price shock is external as global energy prices determine domestic prices. However, Ukraine is char-acterized by relatively high share of domestic gas production as shown in Table 1.5 and strong government intervention in price setting for domestically produced gas, as well as for in prices for utility services. Prices for domestically produced gas are administratively kept below imported gas price. These features explain differentiation of two origins of gas price shock in our modelling exer-cise. Specifically, we consider external price shock when global energy price trends are transmitted to Ukraine’s market through price of imported Russian gas, and internal price shock when prices for domestically produced gas and for utilities are increased irrespectively to external trends. These dimensions allow us to form a matrix consisting of eight distinct scenarios (Table 4.1).
Table 4.1. Matrix of scenarios
External shock Domestic shock
Medium-term long-term Medium-term long-term
Relative poverty Scenario 1A Scenario 1B Scenario 3A Scenario 3B
Absolute poverty Scenario 2A Scenario 2B Scenario 4A Scenario 4B
These scenarios could be described as follows.
scenario 1: • scenario 1A: Increase of import gas price modelled as 50 percent higher price for Rus-
sian gas. Poor households are defined using relative poverty measure. Medium-term model horizon is applied.
• scenario 1b: Increase of import gas price modelled as 50 percent higher price for Rus-sian gas. Poor households are defined using relative poverty measure. Long-term model horizon is applied.
44 Time horizon in the model could be defined only tentatively, but we use this term instead of refer-ence to static/steady-state model to simplify understanding of modeling results.
55
scenario 2:• scenario 2A: Increase of import gas price modelled as 50 percent higher price for Rus-
sian gas. Poor households are defined using absolute poverty measure. Medium-term model horizon is applied.
• scenario 2b: Increase of import gas price modelled as 50 percent higher price for Rus-sian gas. Poor households are defined using absolute poverty measure. Long-term model horizon is applied.
scenario 3: • scenario 3A: Increase in domestic gas and utility price for population modelled
as 50 percent increase in domestic prices. Poor households are defined using relative poverty measure. Medium-term model horizon is applied.
• scenario 3b: Increase in domestic gas and utility price for population modelled as 50 percent increase in domestic prices. Poor households are defined using relative poverty measure. Long-term model horizon is applied.
scenario 4:• scenario 4A: Increase in domestic gas and utility price for population modelled
as 50 percent increase in domestic prices. Poor households are defined using absolute poverty measure. Medium-term model horizon is applied.
• scenario 4b: Increase in domestic gas and utility price for population modelled as 50 percent increase in domestic prices. Poor households are defined using absolute poverty measure. Long-term model horizon is applied.
The CGE model for Ukraine is realized in GAMS/MPSGE software.
4.2 MACRoEConoMIC IMPACTSeveral general points must be mentioned before presentation of the results of modelling:
• All results give changes in the respective variable relative to the benchmark year of our assessment (2008). Results do not give indications concerning the adjustment path from benchmark to the new equilibrium.
• Given the purpose of our study, the results presented in this report isolate the economic impacts of a gas price increase from all other events that in reality affect economic devel-opment at the same time.
• Model assumes no substitutability between intermediate factors of production. However, in reality gas could be substituted for other inputs, e.g. coal or wood, in production of energy, and price shock on gas could be mitigated. Therefore, modelling results represent upper bound estimates.
Economy-wide results of simulations are given in Table 4.2 and Table 4.3. As indicated in these tables, the increase in gas price will have a negative impact on the welfare of households, dis-regarding the poverty line and time dimension chosen for estimates.
According to the results of the medium-term model simulation, the overall welfare losses (measured as Equivalent Variation) arising from a 50 percent increase of import gas prices constitute about 5.5 percent of consumption, while the impact of internal price adjustment is more moderate staying at 3.4 percent of welfare loss (Table 4.2). In the long-term model allowing for changes in capital endowment over time, overall welfare losses from increased
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import gas prices constitute about 10 percent of Ukrainian consumption, while the impact of internal price adjustment is once again more moderate staying at 5.7 percent of welfare loss (Table 4.3). Choice of poverty line and thus different clustering of households had an insignifi-cant impact on macroeconomic results.
Table 4.2. Economy-wide effects of gas price increase: medium-term model, percent change over period
External shock Internal shockscenario 1A scenario 2A scenario 3A scenario 4A
Total change in welfare, percent -5.4 -5.5 -3.4 -3.4
Change in the unskilled real wage, percent -4.5 -4.5 -2.0 -2.0
Change in the skilled real wage, percent -4.0 -4.0 -2.0 -2.0
Unskilled labour adjustment, percent 3.0 3.0 1.2 1.2
Skilled labour adjustment, percent 1.0 1.0 0.7 0.7Source: authors’ simulations
Table 4.3. Economy-wide effects of gas price increase: long-term model, percent change over period
External shock Internal shockscenario1b scenario 2b scenario 3b scenario 4b
Total change in welfare, percent -9.8 -10.0 -5.7 -5.7
Change in the unskilled real wage, percent -11.1 -11.1 -5.2 -5.2
Change in the skilled real wage, percent -10.3 -10.3 -5.1 -5.1
Unskilled labour adjustment, percent 3.2 3.3 1.4 1.4
Skilled labour adjustment, percent 1.2 1.2 0.7 0.7Source: authors’ simulations
There are two channels of transmitting this shock to households:- Employment/output channel. Specifically, gas is used as input in several large manu-
facturing sectors, including metal production and chemistry, as well as in utility sec-tors. Higher gas costs lead to lower output (given unchanged external demands) and, thus, a lower labour demand. Given a full-employment assumption, lower labour de-mand transmits into lower wages and thus income of households.
- Consumption channel. Households are affected through consumption primarily due to higher prices for directly consumed gas, as well as higher prices paid for utility ser-vices that rely on gas as an input, predominantly, heating services.
External and internal price shocks affect aggregate domestic production a bit differently. In case of external price shock, domestic price for gas goes up as well, and thus gas becomes less affordable. Given no substitution between intermediate inputs in production, it results in lower aggregate output for sectors consuming gas, thus lower labour demand and lower wages. Production of domestic gas increases partly mitigating output reduction.
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In case of internal price shock, import gas price is not affected and thus only price for domestic gas price increases. Thus, average gas price faced by domestic consumers goes up relatively less that in the case of external price shock. Moreover, within medium- to long-term horizon when the economy fully adjusts to new equilibrium, domestic sectors producing gas and pro-viding utility services appear in much better economic situation increasing employment and partially mitigating price shock on other sectors. Thus, domestic price shock is not as deep as external price shock, and thus its welfare impact is somewhat smaller.
In all the considered scenarios, wages are estimated to decline, and price changes are expect-ed to result in labour adjustments. The impact is much more profound in the case of an exter-nal gas price shock, while domestic price adjustments result in smaller changes. It should be emphasised that results represent upper bund estimates of the shock.
4.3 IMPACT on PoVERTY
As stated before, gas price shock has an unambiguously negative welfare impact, and thus social mitigation measures need to be carefully considered by the state. However, the adverse impact of gas price increase varies for households with different levels of income (poor versus non-poor), living in different areas (urban versus rural), having different factor endowments etc. The gas price shock impact on various households is considered below.
Table 4.4 presents the impact of shocks on poverty measures, namely on poverty incidence, poverty gap, and severity of poverty in Ukraine. As shown, this impact differs depending on which poverty line is used as the benchmark. If the absolute poverty line (exogenous bench-mark) is applied, both the incidence and depth of absolute poverty grow as a result of a gas price increase ceteris paribus. This impact is more profound in the case of external price shock than in the case of domestic price adjustments.
However, if the relative poverty line (endogenous benchmark) is applied, the picture changes. As all households become poorer as a result of the shock, incidences and depth of relative poverty reduce in the country after the shock.
Table 4.4. Impact on poverty indicators, percent change over period
External shock Internal shock
Medium-term long-term Medium-term long-term
Poverty line “subsistence Minimum” (absolute poverty line)
Scenario 2A Scenario 2B Scenario 4A Scenario 4B
Poverty incidence 8.7 19.5 1.5 4.5
Poverty gap index 27.8 37.0 16.1 16.1
Severity of poverty index 40.7 63.8 22.6 22.0
Poverty line “75 percent of median” (relative poverty line)
Scenario 1A Scenario 1B Scenario 3A Scenario 3B
Poverty incidence -1.4 -3.4 -3.8 -4.9
Poverty gap index -0.9 -21.2 -3.7 -10.8
Severity of poverty index -2.6 -21.9 -6.6 -17.8
Source: authors’ simulations
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Different gas price shocks are absorbed differently by households depending on their poverty level. External price shock affects mostly poor households in the medium-term, but there is no statistically significant difference between mean welfare reduction registered for poor and non-poor households over a long-term horizon (Table 4.5).
For a domestic price adjustment, there are no statistically significant differences between households’ reaction in the medium-term, but non-poor households tend to experience high-er welfare losses over a long-term perspective as also reflected in reduction of relative poverty incidence (Table 4.4). These additional welfare losses of non-poor households could be ex-plained by taken capital losses, as it is assumed that non-poor households own capital and a stock and return on capital declines in long-term.
Table 4.5. Welfare impact by households’ poverty level, percent change over period
External shock Internal shock
Medium-term long-term Medium-term long-term
Poverty line “subsistence Minimum” (absolute poverty line)
Scenario 2A Scenario 2B Scenario 4A Scenario 4B
Non-poor households -6.30 -10.58 -4.22 -6.37
Poor households -12.56 -12.24 -4.96 -3.85
Mean-comparison tests:*
F-test (sign.) 0.002 0.418 0.557 0.011
Welch (sign.) 0.078 0.630 0.686 0.077
Poverty line “75 percent of median” (relative poverty line)
Scenario 1A Scenario 1B Scenario 3A Scenario 3B
Non-poor households -5.90 -10.67 -4.15 -6.58
Poor households -10.46 -10.05 -4.29 -3.17
Mean-comparison tests:*
F-test (sign.) 0.005 0.733 0.880 0.000
Welch (sign.) 0.047 0.823 0.897 0.001Source: authors’ simulations
Note: * The employed CGE model distinguishes over 200 clusters of households (see Section 2.2.3 for details). To study impact of the shock on welfare of non-poor vs. poor households, average welfare change for each group of households were estimated, and F-test and Welch test were run to check hypothesis about means equality.
Location seems to be a key factor in determining the variation in welfare responses of house-holds (Table 4.6). In the majority of scenarios urban households tend to experience higher losses than rural households. This can be explained by differences in their consumption struc-ture (Section 3.3.2). In particular, in urban areas the major items of energy-related consump-tion are centralized gas consumption and district heating, while in rural areas – primarily cen-tralized gas consumption. High urban heating consumption is very important for determining the welfare impact of gas price shock.
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Table 4.6. Welfare impact by households’ location, percent change over period
External shock Internal shockMedium-term long-term Medium-term long-term
Poverty line “subsistence Minimum” (absolute poverty line)Scenario 2A Scenario 2B Scenario 4A Scenario 4B
Urban households -8.96 -11.6 -5.15 -6.46Rural households -3.99 -9.01 -2.37 -4.76Mean-comparison tests:* F-test (sign.) 0.005 0.126 0.006 0.048 Welch (sign.) 0.000 0.221 0.000 0.116
Poverty line “75 percent of median” (relative poverty line)Scenario 1A Scenario 1B Scenario 3A Scenario 3B
Urban households -8.95 -11.95 -5.16 -6.60Rural households -3.37 -7.50 -2.10 -4.06Mean-comparison tests:* F-test (sign.) 0.000 0.006 0.001 0.002 Welch (sign.) 0.000 0.011 0.000 0.004
Source: authors’ simulationsNote: * The employed CGE model distinguishes over 200 clusters of households (see Section 2.2.3 for details). To study impact of the shock on welfare of urban vs. rural households, average welfare change for each group of households were estimated, and F-test and Welch test were run to check hypothesis about means equality.
Welfare impact differs statistically significantly between skilled and unskilled households (Ta-ble 4.7). In all scenarios, skilled households suffer more from changes in energy-related prices than unskilled households.
Table 4.7. Welfare impact by households’ skill level, percent change over period
External shock Internal shockMedium-term long-term Medium-term long-term
Poverty line “subsistence Minimum” (absolute poverty line)Scenario 2A Scenario 2B Scenario 4A Scenario 4B
Unskilled households -3.33 -8.12 -2.35 -4.62Skilled households -11.52 -13.55 -6.25 -7.24Mean-comparison tests:* F-test (sign.) 0.000 0.001 0.000 0.001 Welch (sign.) 0.000 0.001 0.000 0.001
Poverty line “75 percent of median” (relative poverty line)Scenario 1A Scenario 1B Scenario 3A Scenario 3B
Unskilled households -3.28 -7.77 -2.34 -4.47Skilled households -11.23 -13.41 -6.11 -7.17Mean-comparison tests:* F-test (sign.) 0.000 0.000 0.000 0.000 Welch (sign.) 0.000 0.000 0.000 0.000
Source: authors’ simulations Note: * The employed CGE model distinguishes over 200 clusters of households (see Section 2.2.3 for details). To study impact of the shock on welfare of skilled vs. unskilled households, average welfare change for each group of households were estimated, and F-test and Welch test were run to check hypothesis about means equality.
Finally, any statistically significant difference in welfare losses of households below and above medium size could not be found.
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Table 4.8. Welfare impact by households’ size level, percent change over period
External shock Internal shockMedium-term long-term Medium-term long-term
Poverty line “subsistence Minimum” (absolute poverty line)Scenario 2A Scenario 2B Scenario 4A Scenario 4B
Households below medium size -6.74 -11.29 -3.96 -6.17
Households above medium size -8.36 -10.41 -4.72 -5.71
Mean-comparison tests:*
F-test (sign.) 0.319 0.580 0.432 0.558
Welch (sign.) 0.323 0.592 0.436 0.571
Poverty line “75 percent of median” (relative poverty line)Scenario 1A Scenario 1B Scenario 3A Scenario 3B
Households below medium size -5.90 -10.76 -3.54 -5.86
Households above medium size -8.66 -10.24 -4.95 -5.71
Mean-comparison tests:*
F-test (sign.) 0.058 0.735 0.092 0.842
Welch (sign.) 0.063 0.740 0.100 0.845Source: authors’ simulationsNote: * The employed CGE model distinguishes over 200 clusters of households (see Section 2.2.3 for details). To study impact of the shock on welfare of household below vs. above medium size, average welfare change for each group of households were estimated, and F-test and Welch test were run to check hypothesis about means equality.
Summing up, all categories of households will experience a welfare loss due to higher gas prices. Welfare responses of households differentiated by location and by skill level are mostly unambiguous, while welfare losses of poor and non-poor households could not be statistically significantly differentiated in some scenarios.
Ceteris paribus, households respond by a significant reduction in gas-related services con-sumption. Thus, it could be expected that the price mechanism adjustment would result in increased energy-efficiency in the country. However, this reform — in line with expecta-tions — results in adverse social shock. This impact should be mitigated using social welfare programme, discussed in Section 5.
The CGE simulation suggests that urban households should be in the focus of social welfare programs for mitigation of increased gas price shock. However, difficult situation with public finances in the country and necessity to target social welfare programmes imply that the focus should be narrowed. Thus, we suggest to that the public attention should be on mitigation of shock for poor urban households.
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sECTIon 5. IMPACT of sElECTED soCIAl WElfARE PRoGRAMMEs on PoVERTY In UKRAInE
5.1 soCIAl sUPPoRT PRoGRAMMEs In UKRAInE: oVERVIEW
5.1.1 brief overviewUkraine features a rather comprehensive social welfare system for the population. Most social assistance programmes have been inherited from the USSR. A typical trait of such programmes in the USSR was the fact that the benefits provided by the programmes were a kind of ad-ditional payment to the income of certain population groups. Accordingly, the benefits were part of the Soviet incentive system; amid the “universal equality”, they improved the well-being of some population strata and protected those who were the most loyal to the Soviet regime.
The early 1990s in Ukraine featured not only independence, but also economic and legal re-forms aimed at shaping a market system. Those processes were accompanied by a decline in Ukraine’s economy and impoverishment of a large part of the population. The existing (Soviet) system of benefits was providing a hidden extra income to the population. Since the authori-ties of independent Ukraine failed to give up the Soviet system of benefits (Ukraine is the legal successor of the Ukrainian Soviet Socialist Republic), the State, amid privatization of enter-prises and development of market relations, had to assume the entire burden of funding social programmes. This consumed more than 2/3 of budget receipts.
There are more than 1,000 different benefits that can be granted to a person. The procedure of ben-efit provision and assignment is regulated by more than 50 regulatory legal acts (laws of Ukraine, Presidential Decrees, regulations and orders of the Cabinet of Ministers of Ukraine, other ministry- and agency-level acts). The benefits are provided in-kind and include, in particular: housing and utility benefits (exemption from, or reduction of, payment for housing and utility services (includ-ing heating) for certain population categories, etc.); transport benefits (entitlement to free travel in all modes of public (urban) and suburban transport); telecommunication benefits; health care and rehabilitation benefits (free or privileged purchase of medicines, etc.), industrial benefits, etc.
Overall, more than 40 percent of the country’s total population is entitled to benefits. The larg-est categories include old-age pensioners (over 10 million), war children (over 6 million), labour veterans (over 4 million), war veterans (over 2 million), and victims of the Chernobyl disaster (over 1 million). According to estimates, the total amount of benefits equals the annual spend-ing of all local budgets in Ukraine; hence most benefits remain just a declaration. Targeting social benefits at the poorest groups of the population remains low because the benefits are provided to various groups based mainly on their service rather than their income level. Evi-dence suggests that richer households receive considerably more privileges and benefits than poorer ones. Furthermore, not all poor households are able to enjoy their benefit entitlement.45
Therefore, the current social welfare system in Ukraine is complex and expensive. In particular, the Soviet system of benefits was kept due to lack of political will to change it. At the same time, the need to address poverty issue under an economic decline in 1990s, forced the au-thorities to implement new social programmes under which the State assumed a number of additional social commitments. As a result, four major categories of Ukraine’s complicated sys-tem of social assistance could be highlighted:
(і) social benefits; (іі) assistance for paying housing and utility services (housing subsidies);
45 Handrich, Betliy (2008)
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(ііі) family assistance;(iv) support for low-income families.
In addition, the social security system was introduced in 2000-2001, being represented by four types of compulsory state social insurance: pension insurance, insurance in case of unemploy-ment, insurance against work accidents and insurance in case of temporary loss of ability to work.
In 2009, the government approved a Strategy to Streamline the Benefit System until 2012. Within the Strategy, there is no plan to introduce targeted social benefits or to cancel privi-leges granted on an occupational basis. However, these steps are envisaged in the Programme of Economic Reforms developed by the Committee for Economic Reforms under the President of Ukraine in 2010.
In the report the effectiveness of two programs are assessed keeping in mind the results of simulations presented in Chapter 4:
- low-income family allowances: as this is the type of targeted cash payments to poor individuals, who are likely to be mostly hit by the gas price shock;
- housing and utility subsidies: as this program was specifically designed to protect vul-nerable (poor) households in times of increase in utility prices.
5.1.2 family assistanceThe family assistance programme is designed to protect families with children. Family assis-tance is assigned based on the level of need (except for child-birth benefits) and includes five benefit types: (i) maternity benefit; (ii) child birth benefit; (iii) children’s allowance; (iv) benefit to care for a child under three and (v) single mother benefit. In addition, there is a programme of allowances to low-income families, which gives greater weight to children. The situation with child-birth benefit has some specificity. It was the most popular subject of political specu-lation between 2004 and 2008 and became prominent again during the 2010 presidential election campaign. As of late 2010, UAH 12,000, 25,000 and 50,000 was paid for the birth of the first, second child and third and every subsequent child, respectively, regardless of the parents’ income level. Although the election is over, some political forces in Ukraine keep competing to increase the child birth benefit, suggesting it be raised to UAH 25,000, 50,000 and 100,000 respectively. All other types of children’s allowances are assigned based on the degree of need and their size is usually linked to the subsistence minimum.
Family assistance is designed to reduce the scale of poverty among children and encourage an increase in the birth rate. Whereas the former goal could be considered as being achieved, the programme failed to stimulate population growth. Minor increases in the birth rate over the past years are explained by recent improvements in the economic situation. At the same time, programmes of benefits to care for children are inadequately funded.
The programme of support for low-income families was designed with the specific objective of directing the benefit solely to the worst-off population. Provision of social allowances to low-income families is regulated by the Law “On social allowances to low-income families”.46 Low-income family payments are provided monthly to eligible families in cash. The eligibility criterion for being granted this type of assistance is that families should have a per capita in-come less than the guaranteed minimum income (GMI).47 The level of the GMI is defined annu-
46 The Law of Ukraine, No.250 from 24 February 2003.47 Initially the Law defined the subsistence minimum as an eligibility criterion for assisting low-income family payments. However, lack of adequate fiscal revenues resulted in the allowance being
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ally in the State Budget Law. Its size increases for each child in the family. Therefore the social allowance to low-income families is a means-tested social welfare programme.
The low-income family assistance is calculated as the difference between the GMI and the fam-ily’s monthly income to a maximum of 75 percent of the GMI. Data on income to estimate the assistance level is based on the previous six months. The payment of the assistance is assigned for the next six months.
Total income of the family, taken into account to pay low-income families allowances,48 includes wages and salaries, stipends, pensions, other social assistance payments, entrepreneurial in-come, etc.49 Family members are individuals living together and joined by legal rights and re-sponsibilities. In particular, these are husband and wife, their children (either natural or adopt-ed) and their parents who are unable to work (pensioners). Particularly family also covers:
children that study in vocational or higher education institutions are considered as part of family if they are under 23 and do not have their own family;
children with disabilities without their own family;
parents without their own income.
The following families are not eligible to receive the assistance:
- families with able to work members who are not working, studying or registered as unemployed;
- families, whose members made large purchases (more than 10 times the subsistence minimum) during the last 12 months;
- families owning land of more than 0.6 ha (except for cases, when this land does not create an additional source of income);
- families owning another apartment or house if the total size of housing exceeds 21 square meters per family member (plus 10.5 square meters per family) or more than one vehicle.
At the same time, the special local social commission could approve the payment of low-income families allowances to the aforementioned families after special consideration of their cases. Reasons for the approval can include families with disabled individuals, with three or more chil-dren, etc. The level of assistance can be reduced by up to 50 percent if the Commission decides that family members are not making enough effort to find additional sources of income.
Families applying for assistance are subject to possible checks by social inspectors. Their duties include avoiding possible fraud by families. In particular, they could inspect the living situation of families.
5.1.3 Housing subsidies and benefitsUkraine’s housing and utility sector features the largest, when compared to other economic sec-tors, number of benefits and assistance for consumers of housing and utility services as well as a large-scale price subsidization. In addition to the above-mentioned benefits for housing
based on much narrower criteria – GMI (the direct translation from Ukrainian would be ‘guaranteed level of the subsistence minimum’).48 The calculation of income is based on the methodology defined by a special Order of the Minis-try of Labour and Social Policy, the Ministry of Economy, the Ministry of Finance, and the State Statistical Committee of Ukraine, No.486/202/524/455/3370 from 15 November 2001.49 Except for the lump-sign payment of the first tranche of birth grants
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and utility service payments, granted on the basis of people’s occupational category and social status, benefits for paying housing and utility services, based on people’s income levels, are also granted (housing subsidies). Benefits for housing and utility services are received by more than 10 million people whereas 1.5-2 million people receive housing subsidies. More than 2 billion UAH is allocated from the state budget annually to cover the cost of these benefits and subsidies.
Benefits for housing and utility services are a system of discounts to the payment of services. They are granted to those with a certain social status or occupational category (war veterans, persons with disabilities, persons having special merits, etc.). The level of the discount varies from between 25 percent and 100 percent of the nominal payment for housing and utility services. It does not depend on the recipient’s income level. Instead, housing subsidies are granted on the basis of share of housing and utility bill in income.
Whereas benefits for housing and utility services have existed since Soviet times, housing sub-sidies were introduced in 1995 to support the most vulnerable groups of the population as en-ergy carrier prices were rising sharply. The programme of housing subsidies was implemented under Cabinet of Ministers of Ukraine Resolution No. 89 of 4 February 1995 “On providing the population with subsidies to reimburse for expenses incurred to pay for housing and utility servic-es”. It was amended on 30 June 1995, so people also began to receive subsidies for purchases of liquefied gas and solid fuel. Development of the housing subsidy system was promoted by Cabinet of Ministers of Ukraine Resolution No. 848 of 21 October 1995 “On simplifying the procedure of providing the population with subsidies to reimburse expenses incurred paying for housing and utility services and to purchase liquefied gas, solid and home heating (liquid) fuel that was amended later on. The most recent amendment was made under Resolution No. 861 of 8 September 2010 “On streamlining some issues concerning the implementation of a simplified procedure of providing the population with subsidies to reimburse for expenses incurred to pay for housing and utility services and to purchase liquefied gas, solid and liquid home heating fuel”. Pro-cedures for providing the subsidy are defined in the joint order of several ministries.50 House-holds eligible for assignment of housing subsidies started paying only some part of their ag-gregate average monthly income for housing and utility services.
Housing subsidies, as assistance in payment for housing and utility services, are intersected with social benefits. However, housing subsidies are only assigned to those able to document their low income as compared to the housing and utility services bill. Implementation of the housing subsidies programme has naturally become a sort of “social protection mechanism” to low-income families. As early as 1997, the number of housing subsidy recipients reached its peak, 7 million households, or more than a quarter of all Ukrainian households. According to the housing subsidies programme, eligible households receive non-cash assistance while subsidies for purchasing solid fuel and liquefied gas are granted in cash (mainly in rural areas). Housing subsidies are financed from local budgets (housing and utility service tariffs are also subsidized from local budgets).
In principle, housing and utility subsidy was introduced as a social assistance programme aimed at helping vulnerable families against the background increasing prices for utility ser-vices. According to the regulation, households living in apartments (houses) of state or munic-ipal housing stock, including hostels, are entitled to receive a housing subsidy in the form of non-cash assistance51 for paying housing and utility services and cash assistance for purchas-ing natural liquefied gas, liquid and solid fuel. Cash assistance to purchase natural liquefied
50 Order of the Ministry of Labour and Social Policy, the Ministry of Economy, the Ministry of Finance, etc., No. 58/45/91/73/51/23/10-538 from 15 April 1998.51 Non-cash assistance is a form of assistance that does not provide cash to individuals. The assistance is paid by means of transferring non-cash funds directly to the accounts of enterprises rendering housing and utility services.
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gas, liquid or solid fuel is granted to those residing in premises, which are not connected to the systems of district heating, electricity supply or gas supply for heating purposes. If several fuels are used for heating, assistance is granted to purchase one fuel only. Assistance is assigned to persons whose payments for consumed housing and utility services, liquefied gas and solid fuel are within consumption rates set by the Cabinet of Ministers.
In 2010, households whose charges for housing and utility services exceed 15 percent of the aggregate household income are entitled to housing subsidies (10 percent for the most vul-nerable household categories).52 The most vulnerable household categories include: house-holds consisting solely of incapacitated persons (pensioners, persons with disabilities, chil-dren); households including persons with 1st or 2nd group of disabilities and households with children under 18 where the average monthly income per household member is less than 50 percent of the subsistence minimum. Calculation of the compulsory part of payment consid-ers an applicant’s benefits for housing and utility services. Therefore, the size of subsidy equals the difference between this threshold and the actual housing and utility bill.
The subsidy takes into account the size of accommodation. The norm is defined as 21 square me-ters per household member plus 10.5 square meters for all household members registered in the apartment (house). However, if individuals live in a one-room apartment, the total area is taken into account. The norms of electricity consumption are defined by the Cabinet of Ministers.
For estimating the eligibility for, and size of, housing and utility subsidy the income for the past six months is considered, while for subsidies for liquefied gas and fuel annual income is considered. Subsidies are assigned after submitting receipts for paying for service for the previous period. The housing and utility subsidy is provided for six months or for the heating season. The subsidy for liquefied gas and fuel is granted only for the heating season. If only non-working pensioners and other working unable persons live in the apartment / house, the subsidy could be provided for the whole year. If housing and utility tariffs change, the size of subsidy is adjusted automatically by the respective authorities.
The subsidy design contains a component to stimulate energy-saving. In particular, the hous-ing and utility payment is reduced by 2 percent for every 10 percent of decline in consump-tion by services. As a result, families can reduce the threshold on spending for services to 10 percent of income, while this limit for families with only pensioners or unable to work unable individuals may reduce to 5 percent.
Other eligibility criteria for receiving housing and utility subsidies include:
- the family does not have able to work individuals who does not study, work, or are registered as unemployed;
- family members do not have additional means of living except for those identified in the application (e.g. rent);
- family members have not made any large purchases (of more than 10 times the subsistence minimum) within a year prior to applying for the subsidy;
- family members do not own any other housing or vehicle.
If a person applying for the subsidy has arrears of utility payments, he/she may still be granted the subsidy if there is a signed agreement on debt restructuring with the utility company.
The regulation also contains some anti-fraud measures. In particular, social inspectors can check living standards of customers. If the subsidy was allocated on the basis of false docu-ments, then the overpaid subsidy is to be refunded by the claimant.52 Before, these thresholds were defined at 20 percent and 15 percent of income, respectively.
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However, local social commissions can approve housing and utility subsidies even when eligi-bility criteria do not apply e.g.
- apartments are larger than assigned norms of square meters;
- able to work individuals do not work and have zero income;
- the owner of apartment (house) or family members owns more than one apartment or car;
- the family purchased housing less than a year before applying prior for the subsidy;
- the family made large purchases less than a year before applying prior for the subsidy.
Such decisions by Commissions are made on the basis of the inspections of living conditions conducted by social inspectors.
In summary, housing subsidies are not assigned to households that have some other potential income source, e.g. when a family has a new car or another apartment. However, even despite strict criteria for the housing subsidy entitlement, well-off households benefit more from the housing subsidies programme because they usually live in larger-area premises and, hence, receive greater subsidies when compared to poor families. Thus, the housing subsidies pro-gramme protects the population against sharp rises in the price of energy carriers and other housing and utility services, but its efficiency is questionable.
5.2 EVAlUATIon of soCIAl AlloWAnCEs To loW-InCoME fAMIlIEs
5.2.1 Coverage by the programme Due to tight eligibility criteria the coverage of the low-income allowance programme remains low. In 2009, only 1.2 million, or 2.6 percent of the entire population, received assistance (Table 5.1). Most families receiving the allowance are families with children as they tend to be poorer in Ukraine when compared to families without children. Rural families account for 64 percent of all families receiving the assistance.
Table 5.1. Coverage by low-income allowance, 2009Number of families Urban Rural
Number of families applying for assistance 418,869 151,261 267,608Number of families granted assistance 382,108 136,563 245,545
Structure of families granted a benefit by size, percent1 person 5.2 8.1 3.62 persons 24.1 37.8 16.43 persons 17.1 20.0 15.54 persons 21.0 15.8 23.95 and more persons 32.7 18.2 40.7
Number of persons receiving assistance 1,205,529 386,900 818,629Structure of beneficiaries by status of family members, percent
Adults able to work 37.5 39.4 36.6Adults unable to work 0.4 0.4 0.4People with disabilities 1.3 1.2 1.3Children 60.8 59.0 61.7
Source: State Statistics Service of Ukraine
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At the same time, the level of assistance remains low due to the cap imposed by the pro-gramme design. Monthly payment totalled UAH 36.9 million in 2009 (Table 5.2). Overall, in 2009, only UAH 169 million was allocated for the programme.
Table 5.2. financing and size of the low-income families allowance, 2009
Total fiscal allocations for assistance, UAH thousand
Average size of assistance, UAH per year
Ukraine Urban Rural Ukraine Urban Rural
For families appointed the payment 169,017 46,078 122,939 442 337 501
By family size:
1 person 2,161 1,152 1,009 109 105 114
2 persons 14,700 7,961 6,739 160 154 168
3 persons 17,024 6,824 10,201 261 249 269
4 persons 34,667 10,057 24,610 432 465 420
5 and more persons 100,466 20,085 80,381 805 807 804Source: State Statistics Service of Ukraine
Therefore, the lack of sufficient fiscal revenues along with tight eligibility criteria has resulted in a very limited coverage by the low-income family allowances programme. As such, the pro-gramme is unlikely to impact significantly poverty alleviation in Ukraine.
5.2.2 Efficiency of the programLow-income family assistance is designed as a targeted social welfare programme as it contains means-tested eligibility criteria. As the defined income threshold is rather low, it could be expected that the under-coverage of the poor, defined according to either of the pover ty lines used in this paper, would be significant. At the same time, low leakage to the non-poor could be expected. To define them, the leakage and under-coverage for this programme were estimated using data of the HBS conducted by the State Statistics Service of Ukraine.
The results of the estimates are somewhat surprising (Table 5.3) as poor households com-prise less than 70 percent of all beneficiaries of low-income family allowance. However, they receive a larger share of the assistance. In particular, poor households, defined against the po verty line ‘Subsistence minimum’, comprised 17.8 percent of all households, but account-ed for 63.3 percent of all households receiving low-income family allowances. They have re-ceived 77.1 percent of all budget funds to finance this programme. At the same time, non-poor households accounted for 36.7 percent of beneficiaries of the programme. It is likely that these non-poor families received the allowances according to the respective decisions of the local social commissions.
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Table 5.3. beneficiaries of low-income family allowance by poverty and locality, 2009
Against poverty line ‘75 percent of median’
Against poverty line ‘subsistence minimum’
Structure of households by poverty status, per-cent of all
households
Structure of beneficiaries
of low-income allowance,
percent of all households
Share of received
pay-ments, percent
of total al-locations
Structure of house-holds by poverty
status, per-cent of all
households
Structure of beneficiaries
of low-income allowance,
percent of all households
Share of received
pay-ments, percent
of total al-locations
(1) (2) (3) (4) (5) (6) (7)
Poor households 26.55 68.10 73.89 17.84 63.30 77.11
Urban poor 15.33 29.80 25.84 10.05 26.30 27.36
Rural poor 11.21 38.30 48.06 7.79 37.00 49.75
non-poor households 73.45 31.80 26.11 82.16 36.70 22.89
Urban non-poor 53.86 16.60 14.13 59.14 20.20 12.61
Rural non-poor 19.59 15.20 11.98 23.01 16.50 10.29Note: The columns (2) and (5) partially repeat the information from the Table 3.2: they provide the distribution of all households ac-cording to their poverty status and place of residence; column (3) and (6) provide data for the structure of beneficiaries.Source: the HBS of the State Statistics Service of Ukraine, own calculations
Even though there is a lower absolute number of rural households in poverty than urban poor households, rural households form a higher percentage of beneficiaries as they are poorer. In particular, rural households comprise 37 percent of the beneficiaries of low-income assistance if poverty is measured against the ‘Subsistence minimum’ poverty measure. Poor rural house-holds receive nearly 50 percent of all allocations from the programme since there is higher poverty in rural area as well as a larger number of children in these households.
The analysis of the received low-income family allowances by deciles against per capita ex-penditures is presented in the Table 5.4. It indicates that 20 percent of the poorest house-holds receive 78.0 percent of the programme’s entire payment. Besides, the richest 10 percent of households do not benefit from such payments. Therefore, the targeting of the assistance is high enough. At the same time, the average annual amount of benefit received is much higher for the poorest 10 percent of households than for others.
Table 5.4. Targeting of low-income family benefits as a social welfare programme, 2009
Deciles Share of total low-income family benefits, percent Mean benefits, UAH per year1 50.5 3362 27.5 2813 7.3 3214 2.6 4505 2.8 4076 2.4 4707 4.9 4228 0.1 3029 2.0 32510 0.0 376
Source: The HBS of the State Statistics Service of Ukraine, own calculations
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Table 5.5 reveals efficiency measures of the programme in reaching the poor. The coverage of the programme is very low. Only 0.9 percent of all households participate in the programme,53 and from them two thirds are defined as poor. This is explained by the low income eligibility cap applicable for participation in the programme. As a result, the under-coverage of poor households (exclusion error) is equal to nearly 97 percent, reflecting the share of poor house-holds excluded from the programme. This is high for any social assistance programme. At the same time, despite tight eligibility criteria, leakage to the non-poor (inclusion error) is also high at more than 30 percent. This could be explained by provision of the allowance under special decisions of local social commissions.54
Table 5.5. Efficiency of low-income family benefits as a social welfare programme, 2009
Poverty line ‘75 percent of median’
Poverty line ‘Subsistence minimum’
TOTAL 100.0 100.0Included poor households,percent of all households 0.6 0.6Excluded poor households,percent of all households 25.9 17.3Included non-poor households,percent of all households 0.3 0.3Excluded non-poor households,percent of all households 73.2 81.8
Under-coverage of poor (exclusion error), percent of excluded poor households 97.7 96.8leakage to non-poor (inclusion error),percent of included non-poor households 31.9 36.7
Source: the HBS of the State Statistics Service of Ukraine, own calculations
Therefore, the low-income family assistance is characterized by a low coverage of the popula-tion. Due to the low income criteria for eligibility, there is a large under-coverage of the poor. At the same time, surprisingly there is a large leakage to non-poor. Hence, the efficiency of the programme is of concern.55
5.2.3 Impact of the programme on poverty reductionAnother approach to estimating the efficiency of the programme is to look at its impact on poverty reduction by comparing different poverty measures before and after receiving the low-income family assistance. In this case it is better to apply the absolute poverty line (sub-sistence minimum in our case), as the relative poverty line changes when the assistance pay-ments are subtracted from expenditures.
Table 5.6 shows that provision of the low-income family assistance does not significantly con-tribute to a decline in poverty. Poverty declines only by 0.1 p.p. However, what is important is
53 This indicator is provided for the share of households and, thus, is lower than one shown in the Table 4.1, which refers to population as data reveals that households with higher number of members (in particular, children) are more likely to be poor.54 Another reason could be attributed to the fact that the allowance is provided to families, while due to data limitations the current assessment is made on the basis of households. 55 At the same time, there could be also methodological problems when estimating the efficiency of the programme. In particular, the survey data are provided for households, while allowances are pro-vided to families. However, this does not contribute to large discrepancies in the estimates.
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that this assistance contributes to the reduction of the severity of poverty, although not to a high extent (0.4 p.p.).
Table 5.6. Poverty measures before and after receiving low-income family assistance according to the poverty line ‘subsistence minimum’, 2009
Before benefit After benefitPoverty Incidence, percent
Rural 25.3 25.3Urban 14.6 14.5Ukraine 17.9 17.8
Poverty gap index, percent 4.00 3.81Severity of poverty, percent 1.29 1.25
Source: the HBS of the State Statistics Service of Ukraine, authors’ calculations
Such a low impact of this type of assistance on poverty could be explained by the low cover-age of households. As the level of assistance is low, it merely contributes to the improving the income situations of households. Therefore, even though low-income family assistance is the only targeted programme in Ukraine, its impact on poverty remains rather low. The pro-gramme merely contributes to higher equality of poor people bringing the poorest closer to the poverty line ‘Subsistence minimum’. Therefore, the programme contains design draw-backs, which result in its inefficiency.
5.3 EVAlUATIon of HoUsInG AnD UTIlITY sUbsIDIEs To HoUsEHolDs
5.3.1 Coverage by the programme The coverage of the population by housing and utility subsidy is much higher than by the low-income assistance due to the difference in eligibility criteria. However, it sharply dropped be-tween 2000 and 2005 due to several reasons. The major reason was related to economic recov-ery, which stimulated wage growth after 2000. Besides, wage arrears significantly declined at that period. The rapid increases in social standards, including minimum pensions and minimum wages, have also contributed to the increase in households’ income. Overall, during this period income of households was growing at a higher pace than the housing and utility tariffs, reduc-ing the share of income spent for respective services. Besides, the Government has streamlined the legislation on the eligibility criteria for participation in the program. The coverage declined further during the economic crisis of 2008-2009, when the eligibility criteria were made even tougher. In particular, according to new regulation all households’ members of working age and being without work (and not being either student or disabled) should have been registered as unemployed in the State Employment Centre (SEC). Simultaneously, the Government has changed the procedures of registering in the SEC restricting the possibilities of people to regis-ter.56 As a result, in the end of 2009 the registered unemployment rate was at the pre-crisis level, while unemployment rate measures according to the ILO definition increased sharply.
In 2010, subsidies to reimburse for expenses incurred on payment for housing and utility servic-es were assigned to 1.77 million families or 78.3 percent of the total number of families applying for a subsidy (Table 5.7). Subsidies were assigned to 1.35 million families in urban areas and to 412,800 in rural areas. The number of families to whom subsidies were assigned increased by 56 See: Betliy Oleksandra, Unemployment in Ukraine: from Assessing Magnitude and Trends to Adequate Policy Response, IER report, 2009, http://www.ier.com.ua/files/Projects/Projects_2009/2009_01_Soros/Project%20output/ 2009_01_ukr.pdf
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517,600 or 41.4 percent, when compared to 2009. Overall in December 2010 the number of families receiving housing and utility subsidy was 8.2 percent of all families, being by 3.1 p.p. higher than in December 2009. The coverage of population increased due to changes in eligibil-ity criteria as well as 50 percent increase in gas tariffs for population. Contrary to the low-income family assistance, 66 percent of families receiving housing and utility subsidies had one person.
Table 5.7. Coverage by subsidies
Housing and utility subsidies Subsidy for liquefied gas and fuel2000 2005 2008 2009 2010 2000 2005 2008 2009 2010
Number of families applying for the subsidy “000’s”, 5,142 1,769 1,570 1,394 2,257 626 789 435 332 455
Number of families granted the subsidy, “000’s” 4,878 1,423 1,425 1,249 1,767 593 647 400 256 328
percent of families receiving the subsidy from those that applied 95 80 91 90 78 95 82 92 77 72
Total amount of subsidies, UAH million 237 44 128 143 237 131 171 198 89 137
Source: State Statistics Service of Ukraine
The total amount of subsidies assigned to families to reimburse for expenses incurred in pay-ing for housing and utility services was UAH 237.4 million in 2010, or UAH 94.0 million more than in 2009, including UAH 189.6 million in urban areas and UAH 47.8 million in rural areas. The average size of the subsidy increased by 4.2 percent yoy in December 2010 to UAH 163.1.
In 2010 the number of individuals covered by the programme substantially increased for several reasons. First, the cap on spending for housing and utility services was reduced, resulting in a larger number of families becoming eligible for a subsidy. Second, the gas price to the popula-tion increased by 50 percent from 1 August 2010, while housing and utility tariffs were also raised in some localities, which contributed to higher housing and utility spending of households.
The coverage by cash subsidy for liquefied gas and fuel is much lower as it is provided to indi-viduals using these energy resources for heating. In 2010, subsidies for purchase of liquefied gas, solid and liquid home heating fuel were assigned to 327.8 thousand families (72.0 percent of those who applied). Near 80 percent of families receiving this subsidy live in rural area. 86 percent of beneficiaries live alone. The total amount of subsidies assigned to families for purchase of liquefied gas, solid and liquid home heating fuel was UAH 137.4 million in 2010, including UAH 29.9 million in urban areas and UAH 107.5 million in rural areas. Average size of this benefit in December 2010 reached UAH 466.8 per family.
5.3.2 Efficiency of the programThe coverage of poor households by the programme varies depending on the poverty line applied. This is most likely attributable to the absence of a cap on the participantsє income. If poverty is measured against the poverty line ‘75 percent of median’, poor households con-stitute only 28 percent of households receiving housing and utility subsidies (Table 5.8). If defining poverty against the ‘Subsistence minimum’ poverty line, the situation is even more troubling, as then poor households account only for 11.8 percent of all households receiv-ing the subsidy. The percentage of subsidy received by poor households is 32 percent of all allocations for the programme if the poverty line ‘75 percent of median is applied’, and 13 percent if the ‘Subsistence minimum’ is used. Therefore, even though this type of social welfare programme is claimed to be targeted, it is not de facto so. In particular, more than two-thirds
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of cumulative state spending on the provision of housing and utility subsidies is directed to non-poor households.
Table 5.8. beneficiaries of housing and utility subsidy by poverty and locality, 2009
Below poverty line ‘75 percent of median’
Below poverty line ‘subsistence minimum’
Structure of house-
holds, percent
of all house-holds
Structure of beneficiaries of housing
and util-ity subsidy,
percent of all households
Share of re-
ceived sub-sidy, per-cent
Structure of house-
holds, percent
of house-holds
Structure of beneficiaries of housing
and util-ity subsidy, percent of
households
Share of received subsidy, percent
(1) (2) (3) (4) (5) (6) (7)Poor households 26.55 28.00 32.09 17.84 11.80 13.00
Urban poor 15.33 25.1 28.66 10.05 10.7 11.93Rural poor 11.21 2.9 3.43 7.79 1.1 1.07
non-poor households 73.45 72.00 67.91 82.16 88.20 87.00Urban non-poor 53.86 62.9 60.43 59.14 77.3 77.16Rural non-poor 19.59 9.1 7.47 23.01 10.9 9.83
Note: The columns (2) and (5) partially repeat the information from the Table 3.2: they provide the distribution of all households ac-cording to their poverty status and place of residence; column (3) and (6) provide data for the structure of beneficiaries.Source: the HBS of the State Statistics Service of Ukraine, own calculations
Rural poor households were almost totally excluded from the programme of housing and util-ity subsidies. This is likely to be explained by the absence of centralized heating in rural areas. The lack of coverage of rural households by housing and utility subsidies is partly compen-sated by access to the cash subsidy for compensating expenses for gas and solid fuel, which is mainly provided to rural households (Table 5.9). In particular, according to the official HBS, 87 percent of all households receiving compensation for liquefied gas and solid fuel for heating purposes live in rural area. They receive nearly 90 percent of all compensation provided from the budget. At the same time, poor households comprise nearly 40 percent of all participants in this programme if poverty is measured by the relative poverty line of 75 percent of median but only about 15 percent if the subsistence minimum is applied.
Table 5.9. beneficiaries of liquefied gas and solid fuel subsidy by poverty and locality, 2009
Below poverty line ‘75 percent of median’ Below poverty line ‘Subsistence minimum’
Structure of households,
percent of all
households
Recipients of gas and
fuel subsidy, percent of all households
Share of received subsidy, percent
Structure of households, percent of
households
Recipients of gas and
fuel subsidy, percent of
households
Share of received subsidy, percent
Poor households 26.55 40.80 37.30 17.84 18.60 14.73Urban poor 15.33 7.08 7.16 10.05 3.52 3.06
Rural poor 11.21 33.72 30.14 7.79 15.08 11.67
non-poor households 73.45 59.20 62.70 82.16 81.40 85.27
Urban non-poor 53.86 5.03 10.08 59.14 8.58 14.18
Rural non-poor 19.59 54.18 52.62 23.01 72.82 71.09Source: the HBS of the State Statistics Service of Ukraine, own calculations
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Table 5.10 presents data on the targeting of housing and utility subsidies. This targeting is low-er than for the programme of low-income family allowances primarily due to the absence of means-testing. In particular, 20 percent of poorest households receive nearly 17.5 percent of all utility subsidies received by households. At the same time, 20 percent of the richest households receive 12.1 percent of the allowances for housing and utility subsidies. On average, poorer households tend to receive higher housing and utility subsidies. At the same time, the highest compensation for liquefied gas and fuel subsidy is received by those in an average household.
Table 5.10. Targeting of utility subsidies, 2009
Deciles Housing and utility subsidy Liquefied gas and fuel subsidy
Share of total subsidies, percent
Mean subsidy, UAH per year
Share of total subsidies, percent
Mean subsidy, UAH per year
1 5.9 634 6.6 3362 11.7 829 10.7 2813 11.7 662 14.2 3214 14.9 661 10.7 4505 9.6 794 7.3 4076 10.0 493 14.7 4707 14.5 711 20.0 4228 9.7 583 6.7 3029 5.9 378 3.5 32510 6.2 419 5.5 376
Source: the HBS of the State Statistics Service of Ukraine, own calculations
Table 5.11 shows that leakage and under-coverage errors are very high for this type of assis-tance, especially if measured against the absolute poverty line. In particular, nearly 97 percent of poor households defined against this poverty line are excluded from the programme. At the same time, 88 percent of non-poor households receive the subsidy.
Table 5.11. Efficiency of housing and utility subsidies as a social welfare programme, 2009Against poverty line ‘75
percent of median’Against poverty line
‘subsistence minimum’Included poor households,percent of all households 1.1 0.5
Excluded poor households,percent of all households 25.4 17.4
Included non-poor households,percent of all households 2.9 3.5
Excluded non-poor households,percent of all households 70.6 78.6
Under-coverage of poor (exclusion error), percent of excluded poor households 95.8 97.3
leakage to non-poor (inclusion error),percent of included non-poor households 72.0 88.2
Source: the HBS of the State Statistics Service of Ukraine, own calculations
Still, the total programme coverage remains low. This might be explained by several factors:- the large share of households, especially poor ones, with expenses on housing and utility
services below the 15 percent of income eligibility threshold. Figure 5.1 presents results of the non-parametric estimation with DASP. As illustrated the expected share of household spending on energy was below 15 percent of total expenditures in 2009. In particular, ac-
74
cording to the HBS only about 6 percent of households had a percentage of energy expen-ditures higher than 15 percent. At the same time, the expected share of energy spending is not surprisingly higher for households that already receive subsidy.
figure 5.1. Expected share of expenditures on energy, 2009
0
2
4
6
8
10
12
14
16
18
600
976
1352
1728
2104
2480
2856
3232
3608
3984
4360
4736
5112
5488
5864
6240
6616
6992
7368
7744
8120
8496
8872
9248
9624
1000
entire sample receiving subsidy
shar
e of
ene
rgy
spen
ding
in to
tal e
xpen
ditu
res
annual per capita total expenditure
Note: for estimating expected share of energy spending the household size was taken into account Source: HBS, own estimation
- limited possibilities to disconnect households from using housing and utility services in the case of arrears of payment. As a result, some households decide not to pay for services rather than apply for the subsidy.
The efficiency of the compensation provided for liquefied gas and solid fuel used for heat-ing is higher than that for housing and utility if it is measured as an exclusion error, but low-er if measured as an inclusion error (Table 5.12). This might be explained by lower coverage of households by this social assistance programme.
Table 5.12. Efficiency of liquefied gas and solid fuel subsidy as a social welfare programme, 2009Against poverty line ‘75
percent of median’Against poverty line
‘subsistence minimum’TOTAL 100 100
Included poor households,percent of households 0.2 0.1
Excluded poor households,percent of households 26.4 17.8
Included non-poor households,percent of households 0.3 0.4
Excluded non-poor households,percent of households 73.2 81.8
Under-coverage of poor (exclusion error), percent of excluded poor households 99.3 99.5
leakage to non-poor (inclusion error),percent of included non-poor households 59.2 81.4
Source: the HBS of the State Statistics Service of Ukraine, own calculations
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The low targeting of the subsidy programmes is likely to be explained by the absence of clearly defined means-testing in these programmes. As there is no cap on the income for eligible households, the leakage to non-poor individuals would be high.
5.3.3 Impact of the programme on poverty reductionThe impact of these subsidies on poverty is reflected in the Table 5.13. The impact is rath-er limited. It is higher for the housing and utility subsidy as its coverage is higher than that of low-income assistance as well as subsidies for liquefied gas and fuel. The state achieves a reaches reduction in poverty incidence at 0.2 p.p. through the housing and utility subsidies programme. This type of subsidy reduces poverty in both rural and urban areas. At the same time, subsidies for liquefied gas and fuel naturally result in a reduction of poverty only for rural households, as the primary recipients of this subsidy.
Table 5.13. Poverty measures before and after receiving housing and utility subsidies against the poverty line ‘subsistence minimum’, 2009
Housing and utility subsidies
Subsidy for liquefied gas and solid fuel After benefits57
Before benefit Before benefit
Poverty Incidence, percent
Rural 25.38 25.33 25.29
Urban 14.76 14.53 14.53
Ukraine 18.03 17.86 17.84
Poverty gap index, percent 3.83 3.81 3.81
Severity of poverty, percent 1.25 1.25 1.25Source: the HBS of the State Statistics Service of Ukraine, own calculations
Even though these two social policies result in a reduction the incidence of poverty, they do not have an impact on the severity of poverty. Therefore, they are not helping those in extreme poverty. This might be explained by the low spending of very poor individuals on housing and utility subsidies, which makes them ineligible for assistance. Another reason could be difficul-ties in applying for subsidies. One more reason could be related to the possibility to accumu-late housing and utility payments arrears.58
Matching procedures of poverty structure before and after the social policy implementation also could help in indicating the impact of housing and utility subsidy provision on poverty. In par-ticular, the change in poverty status of households before and after the subsidy is studied (see Ta-ble 5.14). The analysis is made on the basis of the absolute poverty line, particularly, the subsist-ence minimum, as the relative poverty line changes with changed attitudes to income and expen-ditures. The Table 5.14 reveals that poverty incidence is only marginally influenced by the provi-sion of housing and utility subsidies to households. In particular, only near one percent of poor households moved out of poverty due to this programme. This again suggests that the coverage of the program is not sufficient as well as its size. At the same time, it should be noticed that this program helps households in urban area, who could be most impacted by the gas shock.
57 After both benefits were paid.58 In particular, the accumulated housing and utility payments arrears reached near UAH 9.9 billion as of end of September 2011.
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Table 5.14. Change in poverty status due to receiving housing and utility subsidy, 2009 (Percent of all households)
HD structure BEFORE
receiving subsidy
HD structure by income status AFTER receiving housing and utility subsidy
urban poor
urban non-poor
rural poor
rural non-poor
HD structure by income status BEFORE receiving housing and utility subsidy
urban poor 10.2 10.1 0.2 - -urban non-poor 59.0 - 59.0 - -rural poor 7.8 - - 7.8 -rural non-poor 23.3 - - - 23.0
HD structure AFTER the subsidy 100.0 10.1 59,1 7,8 23.0Note: the selection was made only of households that receive housing and utility subsidy. HD refers to households.Source: the HBS of the State Statistics Service of Ukraine, own calculations
Therefore, even though housing and utility subsidies do not result in sharp changes in poverty measures, they do help some people to move out of poverty. However, the efficiency of the pro-gramme remains low as it is not means-tested.59 The share of income of poor households spent for housing and utility services is often below the income threshold even though close to it, which makes then ineligible for the subsidy. Thus, the programme could be an efficient instrument of so-cial welfare policy if its coverage was improved and its targeting approach was better implemented.
5.3.4 Possible changes in the provision of housing and utility subsidyCurrently the eligibility of households to receive housing and utility subsidies does not directly take into account the level of income of their household. Expenditure levels could sometimes be taken into account with regard to the absence of large purchases over the last 12 months to determine eligibility. At the same time, low-income family benefits are provided taking into account the claimant’s income situation but at a rather low level of assistance. One could think about possibly combining the two programmes, housing and utility subsidies and low-income family allowances, into one.
The following scenario for describing the potential programme was constructed:
- households are eligible for this type of assistance if their per capita expenditure net of hous-ing and utility payments is lower than 85 percent of the general level of subsistence minimum.
Recipients under the new policy when compared to the current situation of receiving housing and utility subsidies are presented in the Table 5.15.
Table 5.15. Eligibility for the programme, 2009
Currently receiving the housing and utility subsidies
No Yes Total
Eligibility according to new programme No 80.8 3.6 84.4
Yes 15.2 0.4 15.6
Total 96.0 4.0 100.0Source: HBS, own estimation
So, if the subsistence minimum was taken into account, but the income threshold for eligibility for housing and utility subsidy is disregarded, nearly 15 percent of households will be eligible
59 The efficiency of the program is marginal as in case with low-income family allowances as even though the coverage of population by this program is higher, the coverage of poor population does not differ much between these two programs.
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for assistance. This programme will by design be more targeted to the poor, as shown by Table 5.16. Nearly 76.5 percent of poor households will be covered by the programme.60 At the same time, leakage to the non-poor will be much lower than under both current programmes.
Table 5.16. Targeting to the poor, 2009, in per cent of all households
Poverty status
urban poor
urban non-poor
rural poor
rural non-poor Total
Eligibility according to new programme No 2.4 57.4 1.8 22.8 84.4Yes 7.7 1.7 6.0 0.2 15.6
Total 10.1 59.1 7.8 23.0 100.0Source: HBS, own estimation
However, higher coverage is costly. In particular, according to estimates new program could require the Government to spend near UAH 10-15 billion each year for provision of social as-sistance payments to eligible households. Therefore, the adjustment to the program could be made gradually. Moreover, increase in level of targeting should be accompanied by elimina-tion of expensive in-kind benefits provided to different groups of population. As a result, new program could be at least by half be financed thanks to reallocation of funds from current expensive in-kind benefits towards financing of assistance to poor households.
Thus, the simulations indicate that new programme will be more efficient in helping poor households. At the same time, it requires intensive administration. In particular, the government should consider the possibility of introducing proxy means testing (indicator based targeting) to estimate the income, which is taken into account while providing households with benefits.
60 According to the new program, poor households would comprise 13.7 percent of all households eligible for assistance, while poverty incidence is 17.9 percent. As a result, the coverage of poor by the programme is assessed at 76.5 percent of poor households.
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ConClUsIons AnD RECoMMEnDATIons
There could be made two major answers to the research question underlined in the report. First, increase in gas prices will result in welfare loss of all categories of households, with more profound impact on urban households. Second, the current social welfare programs are not very efficient in targeting the poorest households. Therefore, the reform of social welfare sys-tem is required to ensure the safety net for poor households in times of gas price hikes.
Conclusions and recommendations regarding the gas market Natural gas remains a dominant fuel in Ukraine’s energy balance accounting for 38 percent of the total primary energy consumption. This share is twice as high as in Europe, which might signal the great potential for Ukraine to reduce gas consumption. Between 2005 and 2008 the percent-age of gas in used energy resources reduced by 9.5 p.p. due to the substitution of gas by coal in electricity generation and industry and the implementation of energy saving technologies.
Ukraine depends on imported gas supplies from Russia and faces continually growing im-port gas prices. The country has its own sufficient resources of both conventional gas and unconventional gas, using which could result in a lesser dependence on imports in the future. However, Ukrainian gas production enterprises are required to sell energy at prices lower than foreign suppliers’ prices. Accordingly, Ukrainian producers and suppliers of gas do not receive adequate funds for production development and upgrading.
During the last five years consumption of gas decreased mainly on account of industrial con-sumers. Residential consumers reduced consumption at much lower degree, despite quite sig-nificant administratively orchestrated increases in gas prices for the population.
Lesser willingness of residential consumers to reduce gas consumption despite the constant growth of import gas prices and increase in domestic gas tariffs paid by households is ex-plained by administrative interference into the pricing of gas. Specifically, politically motivat-ed gas pricing resulted in cross-subsidization of households by industry. Despite the recent changes in gas market legislation, gas pricing remains controlled by the Government through the National Electricity Regulatory Commission (NERC).
The losses from gas sales at prices below cost-covering level are accumulated in the state-owned gas company NJSC ‘Naftogas’. The company faced increased losses, which were cov-ered by the state.
Thus, the issue of raising gas prices for the population as well as of heat generators remains critical in Ukraine. In particular, this step is also envisaged in an ambitious reform agenda an-nounced in mid-2010 aimed at restoring stable high growth of the economy. Such step along with the liberalisation of gas market is likely to result in positive impact on the State Budget, which will receive higher fiscal revenues from VAT on gas consumption as well as from royalties and taxes from larger domestic gas production.
Policy recommendations regarding gas market:• The state should finalize gas market reform based on the EU framework and make it
competitive through the vertical unbundling of state gas monopolist NJSC ‘Naftogas’.• The NERC has to become an independent regulator of the energy market and, thus,
the interference of the Government to gas pricing should be minimized.• The NERC has to gradually increase gas prices for residential consumers to cost-cover-
ing levels and eliminate their cross-subsidy by industry. While gas prices for residential consumers remain lower than costs, the gas supply to this group of consumers should
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be conducted by a newly created public entity that is fully independent from the ‘Naf-togas’.
• The state must implement a programme to support installing individual household gas meters.
• The NERC should specify a methodology for assessing the costs of domestic gas production in line with modern regulatory practices, i.e. with explicit consideration of capital costs. This would stimulate further investment in the development of new fields. All companies that produce gas in joint cooperation with state-owned entities should be allowed to sell extracted gas on wholesale markets at unregulated prices.
• The Government would benefit from initiating reforms in the district heat sector, shift-ing from compensating the losses of the gas supplier to covering losses of the heat generator. However, subsidies to the heat generators should be phased out over time through gradual increase of gas tariffs for them.
• The Government should also impose a price formula for setting domestic gas transpor-tation costs on the basis of capital and operational costs (including fuel costs). Transpor-tation costs should be allowed to change within reasonable periods (e.g. quarterly).
• The energy needs of residential gas consumers are to be assessed. Appropriate thresh-olds for essential gas consumption should be specified.
• To mitigate adverse gas price shocks on consumers, housing and utilities subsidy pro-grammes should be carefully tailored. Greatest attention should be paid to urban consumers.
Conclusions and recommendations regarding social protection system During the recent decade poverty measured against the absolute poverty line of ‘subsistence minimum’ substantially declined. Such a favourable trend was primarily attributed to econom-ic growth and administrative increases in the social standards to the subsistence minimum level. Therefore, more people could purchase the minimal basket of goods and services.
At the same time, relative poverty has not changed substantially. This might reflect a lack of structural reforms. Rural poverty remained a problem as Ukrainian governments do not pay enough attention to rural development. Moreover, adverse social shocks are very likely in the future given difficult recovery path of the Ukrainian economy, an ambitious reform agenda announced in mid-2010 and accumulating global economic risks.
The CGE simulation conducted within this project shows that the increase in gas prices would be a negative shock for households in Ukraine, causing welfare losses. The reduction in house-holds’ consumption caused by 50 percent increase in imported gas price would be about 5.5 percent cumulatively over medium-term horizon and about 10 percent over long-term hori-zon. Internal price adjustment detached from external price shock would result in lower losses amounting to 3.4 percent and 5.7 percent, respectively.
As a result of gas price shock, absolute poverty of Ukrainian households would increase. Spe-cifically, absolute poverty incidence would grow by 8.7 percent over medium-term horizon and by 19.5 percent over long-term horizon in the case of external price shock, and incidence by 1.5 percent and 4.5 percent, respectively, in the case of internal price adjustments.
Gas price shock would be absorbed more by richer part of the population, as changes in rela-tive poverty measures show. External price shock would result in reduction of relative poverty incidence by 1.4 percent over medium-term horizon and by 3.4 percent over long-term horizon.
Among factors determining welfare responses of households on the gas price shock, loca-tion plays the crucial role. In the majority of scenarios urban households tend to experience
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higher losses than rural households. This can be explained by differences in their consumption structure. In particular, in urban areas the major items of energy-related consumption are cen-tralized gas consumption and district heating, while in rural areas – primarily centralized gas consumption. High urban heating consumption is very important for determining the welfare impact of gas price shock.
Thus, modelling exercise suggests that social welfare programs for mitigation of increased gas price shock should focus on urban households. More specifically, the focus should be on urban poor households given difficult situation with public finances in the country and necessity to target social welfare programmes.
However, existing social welfare system to protect poor has important deficiencies. The analysis of the means-tested programme of low-income family allowances revealed that the efficiency of the programme is low. There is a high under-coverage of poor households, attributable to the low income eligibility criteria. At the same time, leakage to the non-poor is comparatively high. This might be explained by exclusions made by local social offices. Due to the low cover-age by the programme and the low level of cash payments, this programme does not have a real impact on poverty reduction. However, it does help households in severe poverty.
The housing and utility subsidies were introduced in Ukraine for a particular protection of house-holds at the time of gas tariffs hikes. They have greater coverage than low0income family allow-ances being provided without imposing direct means-testing eligibility criteria. As a result, the leakage to non-poor is high. At the same time, not all poor households receive the subsidy. This might be partially explained by the eligibility criteria of the share of their charge for housing and utility services being less than the 15 percent of income (10 percent for vulnerable households) defined in the regulation. However, this social programme has a larger impact on poverty than the low-income family assistance programme probably due to its higher coverage.
Therefore, two programmes designed to help poor households have low efficiency. Therefore, the Government will benefit from changing the regulations on their provision.
Policy recommendations regarding the social protection system:• For improving the social assistance system the Government could develop and ap-
prove a long-term strategy on poverty reduction, which should foresee the gradual reform of the current social benefits system, in particular through decreasing the num-ber of untargeted social benefits and monetizing them, and the further development of targeted social assistance.
• International evidence suggests that development of an efficient targeting system is an iterative process with continuous checks, data analysis and policy adjustments. It will require several years. Ukrainian policy makers should be committed to this pro-cess. A monitoring system should be introduced to track the implementation of the strategy for poverty reduction, the progress in poverty alleviation and the changes in the characteristics of the poor. Such monitoring would provide policymakers with the information necessary for improving poverty programmes.
• When reforming social assistance, the Government should first target households in severe poverty. For this, the targeting of the existing low-income benefits programme should be radically improved. This would redirect fiscal spending towards poor house-holds. The objective should be reducing the severity of poverty first, then closing the poverty gap and at a later stage reducing the share of poor households.
• Due to the high share of undeclared income and the procedures for defining eligi-ble families, the Government should not rely on strict income means testing. Instead,
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a mixed system based on self-targeting via workfare programmes and proxy means testing is recommended to be developed.61
• Taking the aforementioned measures into account, a gradual increase in the income threshold for being eligible for low-income family allowance bringing it closer to the subsistence minimum is suggested. At the same time, local social commissions should have less chance to include non-eligible families. If local administrations would like to include more families, they should co-finance the programme.
• It would be beneficial to introduce an income threshold for providing housing and utility subsidies. Proxy means-testing should be applied for defining the eligibility for the programme. At the same time, households should be stimulated to make higher energy savings.
• In the longer run the Government would benefit from combining the low-income family assistance and housing and utility subsidy into one type of social welfare pro-gramme, targeted at the poor. Such program requires larger fiscal spending than cur-rent financing of existing two programs. At the same time, the Government is likely to receive additional fiscal revenues from increasing gas tariffs for the population and heat generators. These revenues could be then partially be directed towards financing new program, which will be more efficient in targeting poor individuals.
• As reduction in child poverty is officially defined as a policy objective, the Government should devote attention to such issues. In addition to generous birth grants the Gov-ernment should ensure better access to kindergartens. The access to quality educa-tion (all levels) should be also ensured.
61 Proxy means tests, also called indicator based targeting proceeds in two steps. In the first step of proxy the poverty indicator is constructed, and the statistical analysis is performed with the aim of defining deter-minants and co-variables of poverty. The poverty indicator then determines the eligibility of a household for social assistance and the level of benefits based on the scorings achieved. According to international best practice variables selected include information on expenditures, employment, education, health, fam-ily structure, the location and quality of housing, ownership of durable goods etc (Handrich, Betliy).
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