Poverty in Russia -- An Assessment

By Jeni Klugman

Poverty in Russia is not new. The country began its transition with extensive hidden unemployment and at least one-tenth of its population below the then subsistence level (based on a "social minimum" consumption basket). Since then, however, the number of poor households has risen, and by 1993 some 32 percent of the population was living below the revised official poverty line. At that time, some 12 percent of the Russian population was very poor (below 50 percent of the poverty line). In early 1994, an estimated 26.8 percent were poor, and 10.4 percent were very poor. Real earnings have halved since their end-1991 peak and remain somewhat lower than the 1987 level. Reductions in work hours have been widespread; workers have been placed on short-time work status or had to fake involuntary leave. During 1993 and 1994 only 40 percent of the workforce was being paid fully and on time. High inflation has adversely affected the poor, especially those whose administered income, such as minimum pensions and unemployment benefits, has been adjusted with a lag.

The income distribution between population groups and regions has widened, and inequality has reached levels that are comparable to Argentina and the Philippines. Regional disparities, inherited from the Soviet period, have widened. Industrial oblasts with high concentrations of military firms and light industry, primarily in central Russia and the North Caucasus, were especially hard hit, whereas major cities and resource-rich regions in the East and major cities suffered relatively little unemployment.

Who Are the Poor

Poverty indicators focused earlier on income data, which are problematic, especially during high inflation, and relied on unrepresentative survey sources. The Russian Longitudinal Monitoring Survey (RLMS), an initiative jointly financed by Russian's Goskomstat, the World Bank, USAID, and the University of North Carolina, created a nationally representative data set that allows investigation of trends in household welfare. Individual and household expenditures are measured against the Russian government's official poverty line, redefined in 1992.

In Russia, as in other European transition countries, the working poor predominate. About half of the poor live in households where the head of household is employed. The largest subgroup is composed of households with children, including in particular single-parent and young households: generally, the younger and more numerous the children, the more likely that the family is poor. Nearly 62 percent of families with three or more children under six years are poor. Single-parent households are much more likely to be poor than other types of families. More than 90 percent of such households are headed by women.

Unemployment is strongly linked with poverty. Unemployment benefits and income from informal jobs are often insufficient to raise recipient households out of poverty. Unemployment is still mainly short-term (averaging less than six months), but average duration is steadily increasing. Women figure disproportionately among the unemployed in the early stages of the transition, having borne the brunt of job losses as firms preferred laying off clerical and auxiliary workers first, the vast majority of whom are women.

Minimum pensions have frequently fallen below subsistence levels, due to high inflation and erratic indexing. Average pensions have tended to be better protected against inflation. About one-quarter of the elderly live alone, with little if any support from other family members, and with means hardly enough for obtaining basic goods and services. Pensioners represent a large (36 million) and growing share of the population.

The poor should not be thought of as a stagnant pool_a significant share of poor households rose above the poverty level during 1992-93, even while poverty was increasing overall. Nearly one-half of households that were very poor in summer 1992 were not considered as such a year later, while one-quarter of nonpoor households became poor over the same period. Since 1992 rural areas have become relatively worse off than cities, because subsidies to agriculture have been scaled back and local governments have been unable to take over the role of social provider from the crumbling collective farms. Regional differentiation of welfare indicators dramatically increased in the period 1992-94: the ratio of per capita real income between the top (Magadan or Tyumen) and bottom (North Caucusus) oblasts rose from about 8 to 42. Coefficients of variation for life expectancy widened from 2.7 to 3.9, and for infant mortality from 18.4 to 20.4, over the same period.

Systemic Cracks

The introduction of market principles from 1991 onward has seriously undermined the social support system of the Soviet period (based on low, administered prices for food, rent, household utilities and other basic goods and services, along with the virtual guarantee of a job). The inherited structure of social benefits, comprising both social insurance (pensions and unemployment benefits) and social assistance programs (including family allowances), is not adequate to deal with the needs created by the transition. Social insurance is largely financed through payroll taxation and federal extrabudgetary funds, whereas social assistance is largely the responsibility of local authorities. Local authorities also finance and deliver the bulk of education and health services and subsidize housing and domestic utilities. Enterprises still provide a wide array of social benefits for their workers and local communities, encompassing housing, health care, and child care.

While the number of poor has increased, social assistance has become inadequate both in quantity and scope of benefits:

• Social expenditures relative to GDP, excluding utilities and housing, have so far remained more or less constant but output itself has declined significantly. Pensions, employment programs, and social assistance together amounted to 7.6 percent of GDP in 1994.
• Minimum benefits are low and often insufficient to lift poor families over the poverty threshold. Unemployment benefits average only some 15 percent of the average wage, and the minimum pension has been allowed to fall far below the level of minimum subsistence for elderly people.
• Many poor households do not receive benefits at all (three in ten households are classified as very poor, and one in five as poor), yet almost four out of five nonpoor families receive public transfers. Even local social assistance benefits tend to accrue largely to nonpoor households.
• There is no regular federal support to help equalize local authorities' poverty alleviation programs, thus poorer oblasts with the greatest needs have little available resources. Unemployment benefits are paid from regional employment funds, but these funds are being strained to the limit, because their source of major revenue, payroll taxes, is drying up while joblessness increases. Local fiscal burdens will increase further as state enterprises divest themselves of responsibilities for social services.

As a consequence, only 5 percent of Russians would rely primarily on government agencies if they were in need, whereas 42 percent would rely primarily on friends and family, according to a June 1994 opinion poll. About one in every five households was a net recipient of private support, which averaged about 20 percent of the household's income. The recently emerged nongovernmental organization sector is rapidly becoming an important part of the social safety net, from Moscow to the Far East.

Implications for Policymakers

The transition from a command economy in Russia has taken place alongside increases in the scope and depth of poverty. Moreover, restructuring in such sectors as coal, chemicals, metallurgy, machine-building, and agriculture_will likely entail a significant number of layoffs, further increasing hardship. Thus, many people will likely be unable to generate incomes above the poverty line for some time.

The adverse effects of transition and the risk of severe chronic poverty strengthens the case for better-targeted assistance. A series of key changes would make social protection more cost -effective and affordable and help reduce poverty in the immediate future. The World Bank has proposed reforms to improve the efficiency of antipoverty programs, with the following elaborations:

• Adequate protection while avoiding welfare dependency. Revise minimum unemployment and pension benefits upward to a point where work is still attractive. Minimum unemployment benefits should be increased toward oblast minimum subsistence levels (from the present 20 percent to about 60 percent). The rules governing receipt of benefits should be tightened to exclude those with wage earnings, and benefits should be linked to training and job search support. Targeted temporary employment schemes should be expanded, possibly with federal support for high-unemployment regions. The minimum pension should be set at about the minimum subsistence level. To finance increased minimum benefit levels, pension adjustments to inflation could be shifted to a flat basis and pension eligibility could be tightened for pensioners with wage income.

• Strengthened targeting. A poverty benefit could be introduced, targeted at the very poor and be set at a level below the revised minimum pension and unemployment benefits. Such needs-based social assistance should be developed and implemented at the local level, underpinned by federal guidelines for targeting, and by federal financial support. (The only significant distinction between the poor and the nonpoor for targeting purposes is income. Although poverty status is related to certain readily observable attributes, such as number of children, the correlation is not significant enough to support a comprehensive approach to poverty reduction.) Alongside the poverty benefit, a system of tax credits could be introduced for the working poor.

• Address regional disparities. Federal allocations to reduce poverty could be based on per capita income in individual oblasts and on estimates of the poverty gap (resources required to elevate the income of the poor above the poverty line) in lack oblast. Federal grants preferably should be matched by local financing. The matching rate should vary across oblasts, depending on local fiscal capacity.

Increasing social spending targeted to the very poor would cost an estimated equivalent of 0.7 percent of GDP, including administrative costs and leakage to the nonpoor. Additional administrative costs would arise from targeting spending for employment schemes (about 0.4 percent of GDP), as well as raising unemployment benefits and minimum pensions. But these increases in efforts to reduce poverty would be affordable provided that the other cost savings, such as reduced housing and utility subsidies and cuts in overall pension spending, are also implemented. These measures would relieve subnational budgets of a significant and otherwise increasing fiscal burden, thereby creating greater scope for local financing of targeted social assistance.

The article is based on the author's report, "Poverty in Russia: An Assessment," to order: Ms. Annie Minofu, room H3165, the World Bank, tel. (202) 473-6199.

Jeni Klugman is an economist in the Human Resources Division, Europe and Central Asia Department III, the World Bank.

Development of the minimum subsistence basket in Russia and the importance of the poverty line

In the late Soviet period, a minimum consumption basket (MCB) was developed to guide policy on social payments. It was introduced in 1975 at R 50 per month, then raised to R 70 in 1984_which happened to equal half the average per capita income. After the 1992 price liberalization and transition from a command system began, such a large proportion of the population fell below the minimum consumption level that the concept became irrelevant for policy. Local MCB estimates were often not published for fear of unduly raising expectations about social benefit levels.

During 1992, technical assistance was provided to the Russian government to refine the food portion of the basket. A revised food basket corresponding to World Health Organization nutritional guidelines was subsequently adopted by the Ministry of Labor (MOL). Under the MOL methodology, the poverty level is assumed to equal a percentage of the food basket, and reflects the different cost requirements of different age groups.

The subsistence minimum income, as defined by the Ministry of Labor, is the poverty threshold used in the Bank's report, "Poverty in Russia: An Assessment." It is preferred because it now has wide acceptance and usage among government agencies. The revised MOL methodology is consistent with earlier World Bank recommendations. This poverty line is not an absolute physiological minimum, however, in that significant numbers of Russians are living below 50% of the level.

While income dispersion has increased during the transition, households seem to be fairly evenly distributed around the poverty line. In other words, although the distribution has become much more unequal, households in the lower income brackets were not particularly concentrated around the poverty line in summer 1992 or summer 1993.

A subjective evaluation of the minimum income needed to keep an individual or family out of poverty leads to very different results about the extent of poverty. The Russian Center for Public Opinion Research (VCIOM) includes a block of questions on this topic as a part of its monthly, nationally representative public opinion surveys. Typically, the VCIOM survey includes at least these two queries: What minimum income does a person need to live normally? What income is necessary to provide for a minimum existence? The level of income estimated by respondents as necessary for a "minimum existence" significantly exceeds the official poverty line. In June 1994, the official per capita poverty line was 92,000 rubles while the VCIOM subjective poverty line was 194,000 rubles. The share of the population under this subjective line leaps to 88 percent.

The subjective poverty measure is not the only measure of poverty presented in the Russian press which exceeds the official poverty line. For example, some so called "poverty lines" include allowance for consumption of cigarettes, alcoholic beverages, and a "normed" or "normal" rate of savings. These measures obviously do not define a common-sense minimum existence, as captured in the methodology of the official poverty line.