Lübeck, 26 June 2001
Statement by Ms. Danuta Hübner
United Nations Under-Secretary General
Executive Secretary of the United Nations Economic Commission for Europe
1. Over the last years issues of poverty have come to the centre of both national and international public debates and policy-making. Apart from a moral motivation of the affluent societies of the world, this shift has been driven by a number of strategic considerations based on the findings of numerous studies. There is no doubt that today we have a better understanding of primary causes and societal implications of poverty than a decade ago. We are, however, far from an intellectual consensus with regard to both poverty and antipoverty mechanisms. We continue not to know enough about the underlying factors and the specific mechanisms at play. We certainly must be aware of complexity, multidimensionality, interacting linkages, dynamic aspects which are decisive, qualitative and subjective aspects, the old and the new poverty.
2. The challenge is also how to measure poverty which has other dimensions than simply average income. The quality of data continues to be poor and data are lacking. Growth is not a gain if it is accompanied by a damage to environment, if it excludes women or shifts families from very poor but secure rural communities to a crime-ridden city-slum life. That we know but all that is difficult to measure. Therefore, investing in statistical capacities for the purpose of measuring and monitoring social trends and the effectiveness of antipoverty strategies and policies is needed. It can be a fundamental instrument in the advocacy campaign.
3. The main message on poverty in Eastern Europe is that it will take a long time and a sustained effort to bring it down to sustainable levels. It requires a bold and forward-looking policy initiative, it will not work without a collaborative approach from all, public and private, national and international players. It requires a cross cutting coordination of economic, social, structural, technological, educational and other policy efforts and instruments.
4. In terms of dynamics, global poverty appears to increasingly concentrate in three world regions: Africa, South Asia, and in transition economies of Eastern Europe and Central Asia. In the latter case, according to the recent report of the World Bank, total number of absolute poor (people living on less than $1 a day) has grown from 1.1 million in 1987 to 24 million in 1998. The share of population living on less than one-third of average national consumption for 1993 (in internationally comparable prices) has increased from 7.5 per cent in 1987 to 26 per cent in 1998. This is more than twice the poverty incidence in the Middle East and North Africa and 5 percentage points higher than the poverty incidence in East Asia and Pacific.
5. Eastern Europe is not a homogenous group of countries also with regard to poverty level, dynamics and hopes. At the country level, the proportion of people living on less than $2 a day (the sum which is considered by many as a more appropriate measurement of absolute deprivation in the our region due to the need in warm clothing and higher heating consumption conditioned by more severe climatic conditions) varies from 5 per cent in Belarus, Bulgaria, Estonia and Hungary to 49 per cent in the Kyrgyz Republic, and 68 per cent in Tajikistan. Those countries which are most advanced in institutional and structural reforms, happen also to be least affected by poverty.
At the sub-regional level, poverty is more profound in the Community of Independent States, than in the Central European countries in transition, but is also significant in some countries of the South-eastern Europe, especially in Albania.
6. These levels of poverty lead to the spread of disease, environmental degradation and conflict. This is equally true for subregions and individual countries. What matters also in countries with economies in transition is the gap between the poor and the rich. This gap is rising and this has social and political consequences. In countries with economies in transition the widening inequality coincides with the democratic reform. Those unhappy can now better express their grievances. But the truly poor rarely have access to democratic means of expression.
7. Poverty in our region differs in many respects from that in other world regions. The principal distinction relates to the fact that in its present extreme form it is a recent and sudden phenomenon in the countries with economies in transition. Socialism had not achieved affluence, but it had largely avoided destitution. Full employment - whatever it meant in reality, controlled prices of essential goods and rents, a universal system of health and education, and moderate but widespread state benefits gave a subsistence minimum for the vast majority. Poverty could be covered up by distortions of the system. Official figures were unreliable, but even allowing for that, there is a slide of tens of millions of east Europeans into the transition to underdevelopment. Economic collapse and poor state contributed to rapid erosion in the basic social services. What matters is that the collapse of the established order came abruptly and without warning, giving no time for people to adjust materially and psychologically. In the countries, where poverty is endemic and prolonged, the population had time to develop mechanisms for survival. In the case of many transition economies and, especially, those of the CIS, people had no time to develop such mechanisms. Therefore, sufferings caused by economic hardship have been multiplied by a mental shock. This shock has been aggravated by the fact that while majority of the people have been getting poor, the new rich have become wealthy. And there have been many cases when many of the rich have prospered through gaining favours from the state or through the institutional void. Unfortunately, due to the absence of competition mechanism in this process, this new elite has not become an initiator of broader prosperity.
8. In those transition economies where poverty has reached the extreme, pensions and salaries have become worthless overnight, many schools close for winter due to lack of heat and electricity, children that used to get meals at school, now get nothing. Wages are not paid. Medical clinics are even in worse conditions than schools. The state institutions are underfunded and corrupt. Out of necessity, many villages – in particular in the CIS – have reverted to survivalism. People have replaced tractors in the field. Life expectancy has been cut, illiteracy has increased. Signs of deterioration are evident. Poverty is on the rise. Today, it is wide spread, particularly in CIS economies, and runs the risk of becoming chronic rather than remaining an acute transition issue. Its reduction could be an important indicator of success of overall reform.
9. Another distinct characteristic is that most of the new poor that have emerged in countries with economies in transition are people with skills and education, this is not to say that the status of the traditional poor (lone elderly, families with many children and people with disabilities) have been spared of hardship. The latter categories of the poor have been pushed to the extreme as the universal system of social protection has gone into pieces. According to the World Bank, half of all Moldovans now earn 220 USD a year, compared to 2000 USD in 1992. Moldova has the highest endowment of human capital for a country at its level of income. Human capital, in most countries in transition, the only inherited wealth, is dissipating at an alarming rate.
10. Finally, the third distinct feature of poverty in some of the countries in transition is that it was aggravated by unprecedented re-distribution of public assets both in terms of size of assets captured by a small fragment of the population, the speed of the process of public property acquisition and the manner in which it was executed, providing no time and fair possibility for the population at large to benefit from the distribution of public assets. Therefore, the population’s lack of material assets coupled with the lack of access to financial resources has become a powerful factor of poverty, preventing the vast majority from utilizing market opportunities brought about by transition. The Gini coefficient (the measurement of income inequality), as a result of the above process, has climbed in the Russian Federation, for example, from the average of 25 per cent in the 1980s to 49 per cent in 1998. A similar outcome has been observed in all the rest CIS countries with some evidence that this pattern of income distribution seems tending to persist. Increasing income and wealth inequalities make the growth factor less effective in poverty reduction.
11. A dramatic decline of output has been one of the major causes of poverty in countries in transition, causing mass unemployment and underemployment and lack of current income. The output contraction, however, varied across the countries in terms of size and duration. The deepest fall was registered in the countries of the CIS (in Georgia by 77 percentage point between 1989 and 1994, and by more than 60 percentage points in Ukraine and Armenia between 1989 and 1996), and some countries of South-eastern Europe (in Croatia, for example).
12. Unemployment rate, reaching in some transition economies up to 40 percent, is a major poverty factor, but the problem of poverty is also extremely acute for the employable part of population. In Ukraine, 25% of households whose heads are employed are poor. One eighth of such families are destitute. Wages and salaries are low by any standard. Inflation has wiped out all the savings.
13. The speed of the output recovery has also played a significant role in the formation of chronic poverty. The impoverishment trend has been largely arrested in some of the Central European countries (Hungary, Poland, Slovakia and in Slovenia) by a rapid recovery, while a delayed or slow output growth in the CIS countries has led to a widespread poverty and the new pockets of persistent, chronic poverty. But even in the countries where economic growth has resumed, the incidence of poverty has remained at the higher level than it was in the pre-reform period, revealing structural causes of poverty, such as the lack of skills and education, and the lack of material assets.
14. In all instances, the institutional mix has had an enormous impact on the dynamics and characteristics of poverty in each country. In Central Asia and Caucasian countries, for example, informal institutions, such as the extended family safety net, have compensated, to some degree, the loss of social and labour income, while in highly urbanized countries of the CIS, informal economic activities and migration have become a widespread survival strategy of households. However, informal institutions were not able to sustain adequate consumption level of those, who have relied on them, and, therefore, to prevent a further deepening of poverty in those countries.
15. Formal institutions in some of the transition countries, as well as some of the government policies linked to transition reforms appear to reinforce the impoverishment trend. Tight budgets do not allow to compensate for price increases decisive for costs of living. While on the surface, new institutions look as derivatives of those of the Western market economies, its execution takes place through organizational forms that are plagued with administrative procedures, which give rise to corruption and abuse of the poor and disadvantaged, therefore, preventing the latter from accessing resources and opportunities needed to ensure their income-generating activities. The fact that in many of these countries, the informal economy has reached the proportion as large as 50 percent of the formal GDP proves that formal institutions and organizations are biased and discriminate against population groups that lack material assets.
16. To a large extent, a dramatic increase in income poverty, registered in a number of newly emerged states of Central Asia, Caucasus and South-eastern Europe, originates in the inherited structural development problems, and in the loss of preferential regime, which had been accorded to them under the distributional arrangements of the unitar state.
In the USSR, for example, the lack of production capacities and capabilities in less advances republics had been compensated by products, services and financial resources transferred from technologically advanced republics through various mechanisms, such as state prices and subsidization. With the collapse of the USSR, these were lost, adding to the hardship arising from the breakdown of enterprise and inter-republican ties.
Furthermore, whereas some producers in these countries have found themselves suddenly cut off from their traditional market, others had to face a fierce competition from foreign producers on the Russian and other former Soviet republics’ markets. A switch to other markets has been delayed due to complicating circumstances, including unfavourable geographical location, specific profile of physical infrastructure, asymmetry of market knowledge and information, unsettled ethnic conflicts and etc.
17. Other determinants of poverty, such as gender, ethnicity, health and age status, have come into play since the beginning of transition. In all countries in transition, income differentiation by ethnicity, age, gender and health status has increased. However, in some countries, the differences have become much more pronounced than otherwise they could be if objectives criteria and merits, such as differences in education, skills and productivity, are taken into account.
18. Recent studies have found that, as the mechanisms of protection of vulnerable groups (such as public affirmative action programmes, state guaranteed equal pay for equal work, equal treatment, targeted subsidization and other social mechanisms) have been either eroded or completely dismantled, discrimination against these groups in the labour market and in the access to other income opportunities has been growing, thus, contributing to a rapid impoverishment of these social groups.
19. The most disturbing trend in the ECE region has been a constant increase in child poverty in many countries in transition and in the victimization of the vulnerable groups, including young people, women and children. This is a clear evidence of worsening of human security and the failure of the state to fulfil its primary functions. Since 1989, the proportion of children in infant public homes has doubled, for example, in Bulgaria, Belarus, Ukraine, Kazakhstan. According to some estimates, total number of street children in Russia has reached half a million.
20. Deterioration of public services, especially, health care and education, is another indication that income poverty in some countries in transition has been acquiring new dimensions similar to those in developing countries. So far, most countries have been able to preserve their past social achievements in the area of health and education. However, with unemployment and with income poverty persisting in some countries, a trend of regressive adjustment of human capital will accelerate. In 1999, in Armenia, Moldova, Tajikistan, Georgia, Croatia, Ukraine and a number of other countries, primary education enrolments were lower in comparison with the pre-reform level by as much as 10-20 percentage points. At present, almost 64 million of young people in the age category of 15-24 throughout the countries in transition are neither in school nor in employment.
21. Finally, the social capital of countries with economies in transition that they inherited from the past has determined the dynamics of poverty and ways and means their societies have chosen to cope with poverty. It embraces basic social institutions: the family, the community, the state, tradition, but also modern forms of social organizations – NGOs, the private sector, trade unions, political parties. In many ways, the collapse of the earlier social arrangements at the communal and national levels has contributed to the poverty formation in many countries in transition. The well-known phenomenon observed among the poor in developing countries - voicelessness and powerlessness, has emerged in these societies, as more rich and powerful have come to dominate the political process, mass media and institutions. Apathy, social deviance and withdrawals from the social life (suicide, drug-addiction, alcoholism and etc.) have emerged on a large-scale in many countries, implying that human deprivation has reached an alarming level.
22. All countries in transition are now faced with the task of poverty alleviation, and it has to be addressed on several fronts. It is obvious that a job-generating growth is the most important means of poverty alleviation, and the emphasis should be on creating conditions for economic expansion. The efforts to create a favourable environment for investment activity should continue. In many countries, the existing institutional framework still represents a mixture of old and new institutions and overcrowded with bureaucratic constraints.
However, this is only a part of the task. Specific measures are needed to remove obstacles to the market entry/exit, and to develop land and property markets to overcome, for example, liquidity constraints. In some countries, an effective anti-monopoly law is urgently needed for inducing growth-generating competition.
23. From the poverty alleviation perspective, the introduction of measures aiming to improve the access of population at large to financial and other resources are of paramount importance in all countries in transition. These measures should included the creation of a supportive environment for the creation and development of small- and medium-sized enterprises, encouragement of micro-financing, provision of public services to start-ups and SMEs. Although some countries are more advanced than others, all need to do more, particularly, with regard to vulnerable groups.
24. There is a need of strong and continuing advocacy to keep these issues firmly and high on the agendas in Europe, both regional and national. There is a need of lessons sharing and best practice mechanisms being effectively used, and there is a need of getting the right strategies, policies and institutions in place.
In our region, there are many examples of successful macroeconomic policies that have encouraged integration into a global economy, there are many examples of successful development of strong private sector that has created millions of jobs. There are cases of improved governance and sound financial sectors and policies, and there are examples of reforms and investment in education and health systems. Plenty of countries have dramatically reduced poverty and it is, certainly frustrating that it is not the case in so many other countries.
25. There seems to be no controversy with regard to the role of income growth in alleviating mass poverty. This can come about only through long term development, on the basis of long term investment in people and physical capital.
Combating poverty is not about merely narrowing income inequalities. In particular, using taxation mechanism for this end does not bring us closer to long term poverty reduction aim. As somebody said, higher taxes for the rich can make some people feel pleased but few can become better off. For transition economies, the serious question with regard to poverty alleviation is how to increase their ability to exploit opportunities in trade and inward investment. Brain drain processes which have been taking place over the last decade make the needed changes more difficult and the erosion of human capital undermines development perspectives.
26. Policy makers in transition economies face the dilemma of striking the right balance between growth maximising and redistributive policies in poverty alleviation. In economies with highly uneven income distribution, poverty reducing effects of growth seem to be weaker. This means that growth may not be enough, we must also address the inequality to increase the share of poor people in the benefits of growth. But even convinced proponents of redistribution as an instrument of the alleviation of mass poverty tend to stop at their own national borders. Resistance to large scale international transfers is a reality.
27. It is true that in transition economies, the poverty reduction has not been so far integrated into macroeconomic and structural reforms. There is hardly any debate that could lead to an intellectual consensus on which elements of poverty reduction policies should be given priority. There is the assumption that pro-growth policy is good for the poor, but it is uncertain what type of growth could be more pro-poor. There seems to be no controversy with regard to the need of a steady and lasting growth and about the link between growth and poverty reduction. Poverty reduction is more than increasing income. Investment in education, in social protection and participatory processes and inclusion into development are of particular importance.