Rapid economic growth has facilitated a sharp decline in poverty in recent years. Poverty has fallen sharply from 31 percent in 2001 to 8 percent in 2005. Ukraine has enjoyed one of the fastest rates of poverty reduction in ECA since the onset of economic recovery in 2000. However, in spite of this achievement, the public’s satisfaction with their material well-being remains low (Box 1).
Generous increases in social transfers have significantly contributed to reducing poverty. Real average pensions increased by 34.8 percent in 2004 and another 28.9 percent in 2005. Pension increases, and to a much smaller extent a rise in child benefits, explain around one-third of the decline in poverty over the 2004-2005 period. However, these measures have pushed the size of the Pay As You Go (PAYG) pension system to 14 percent of GDP in 2005, one of the highest ratios in the world. Generous social transfers are financed by high payroll taxes of about 35 percent which burden businesses, stimulate under-reporting of wage income, and hurt Ukraine’s long-term competitiveness. Reforming Ukraine’s social insurance and assistance system is therefore a reform priority.
The doubling of household energy tariffs between 2005 and 2007 has created a significant social challenge. From January 2006, import prices for Russian gas increased by 53 percent and by another 35 percent in January 2007. Consequently, household tariffs for gas and power were also raised substantially. The size of the increase has raised concern about its potentially negative social impact. However, calculations carried out by the World Bank suggest that because even the poor do not spend a very large proportion of their income on energy, a doubling of energy prices from the levels at the end of 2005 would raise poverty by only 1.7 percentage points. Moreover, it would cost only US$63 million to restore all those that had become poor as a result of energy price increases to a spending level just above the poverty line, provided social assistance was perfectly targeted.
BOX 1: POVERTY IN UKRAINE: CONCEPTS VS. PERCEPTION
Poverty is conventionally defined as those individuals whose consumption falls below a certain level called the poverty line. However, poverty lines differ – some lines are defined in absolute terms, others are defined relative to average income.
The Bank’s poverty analysis is based on an absolute poverty line, a threshold below which individuals would not satisfy their basic needs. The line constructed for Ukraine reflects the country’s official calorie requirements (2,508 calories per day per person), aligned with the consumption patterns and the demographic composition of the populations, plus an allowance for non-food goods and services. This method differs significantly from the one applied in Ukraine to measure poverty. Thus, the Bank aggregate consumption estimate excludes consumer durables and health expenditures, adjusts for the rural population consumption patterns through imputing regional price indices for food, and, finally, applies different equivalence factors to account for economies of scale. As a result, the average consumption per capita equivalent to the absolute poverty line used by the World Bank is substantially lower than the official Subsistence Minimum – the money equivalent of an administratively defined consumption basket to ensure a minimum living standard in Ukraine. This basket contains a number of items that are not typically considered to be part of the basic consumption pattern of the poor, such as weekly rations of meat and fruit. In addition, the subsistence minimum is not constant in real terms complicating comparisons over time. Indeed according to the Government’s estimates relative poverty has remained constant at around 27 percent of the population, measured against a poverty line of UAH 365 in 2005, up from UAH 175 in 2001.
The poverty rate of 7.9 percent computed for 2005, based on the World Bank methodology, therefore does not seem to correspond to public perceptions of the underlying poverty situation in Ukraine. However, although the majority of the population remains dissatisfied with their current standard of living, a public opinion poll conducted by the Kyiv International Institute of Sociology, also suggests that households are more able to buy enough food to eat (see figure). Individual perceptions of well-being would seem to lag behind falls in the poverty rate. Nevertheless, the dynamics shown in the chart are consistent with the Bank’s findings that over recent years, Ukraine made huge progress in poverty alleviation.