Report No. 19385-AM ImprovingSocial Assistancein Armenia Public Disclosure Authorized
June8,1999
Human Development Unit Country Department III Europe and Central Asia Region Public Disclosure Authorized Public Disclosure Authorized
Public Disclosure Authorized Document of the World Bank ABBREVIATIONS AND ACRONYMS
ACBA Agriculture Credit Bank of Armenia ASIF Armenia Social Investment Fund BBP Basic Benefit Package CAS Country Assistance Strategy CIS Commonwealth of Independent States ECHO European Community Humanitarian Office FAR Fund for Armenian Relief FBS Family Budget Survey FSU Former Soviet Union GDP Gross Domestic Product GOA Government of Armenia HAC Humanitarian Assistance Commission HACC Humanitarian Aid Coordination Commission HBS Household Budget Survey HES Health and Education Survey IDA International Development Association IMF International Monetary Fund JMP Jinishian Memorial Program MA Mission Armenia NGO Non-governmental Organization(s) OECD Organization for Economic Cooperation and Development PAYG Pay-As-You-Go SDS Armenian State Department of Statistics SSC Social Services Center UNHCR United Nations High Commissioner for Refugees UNICEF United Nations Children's Fund USAID United States Agency for International Development VAT Value Added Tax WFP World Food Program YICRD Yerevan Institute of Computer Research and Development YSU Yerevan State University
Vice President Johannes Linn, ECAVP Country Director Judy O'Connor, ECCO3 Sector Manager Michal Rutkowski, ]ECSHD Task Team Leader Alexandre Marc, ECSHD ACKNOWLEDGEMENTS
The preparation of the report was managed by Alexandre Marc (Sr. Human Resources Specialist). Margaret Grosh (Sr. Economist) was responsible for the research work on targeting which she carried out in collaboration with Elena Glinskaya (Consultant), and was the main author of the chapter on targeting of social assistance. Ruslan Yemtsov (Economist) was. responsible for the poverty profile based on the household survey and other quantitative survey sources. Ruslan collaborated with Ghislaine Delaine (Sr. Statistician) who organized and supervised the analysis of the household survey results. Gillian Perkins (Human Resources Specialist) prepared the section on "other targeting options" and helped with the overall report preparation. Elizabeth Gomart (Consultant) was responsible for all the qualitative research. Ruslan and Elizabeth were the main authors for Chapter 1 of the study. The report benefited greatly from the assessment directed by Aleksandra Posarac (Sr. Social Protection Specialist) on the family benefit program and on the review of the social protection system carried out by Babken Babajanian (Social Protection Specialist). The report also benefited from the advice and guidance of Ana Revenga (Sr. Economist) and Jeanine Braithwaite (Economist). Hiwote Tadesse (Program Assistant) helped in producing the final report. The peer reviewers were Polly Jones (Program Coordinator) and Kalanidhi Subbarao (Principal Economist). The Sector Leaders are Michal Rutkowski and Maureen Lewis, and the Sector Director Chris Lovelace. The Country Director is Judy O'Connor.
The Bank team collaborated very closely with researchers and policy makers in Armenia and would like to thank in particular Julia Magluchants and Astkhik Mirzakhanyan who prepared the poverty analysis and the poverty profile, Hranush Kharatyan and the team of social scientists who participated in the social assessment work, and Sasun Tsirounian, Eva Giulnazarian and Astkhik Minasian who participated in the institutional assessment. The report benefited greatly from the comments of Mr. Gagik Yeganian, Minister of Social Security and Mr. Vahram Avanessyan, Minister of Economic Reforms. TABLE OF CONTENTS
EXECUTIVE S UMMMAIY...... i
INTRODUCTION ...... 1
1. RECENT EVOLUTION OF POVERTY...... 3
THE POVERTY PROFILE IN 1993-94 ...... 3 SUMMARYOF CHANGESFROM 1993-94 TO 1996-97...... 5 THE POVERTYPROFILE IN 1996-97...... 6 CHARACTERISTICSOF THEPOOR ...... 8 SOURCES OF INCOME ...... 13
ACCESS TO BASIC SERVICES ...... 17 SOCIAL EXCLUSION ...... 2 1 2. THE ROLE OF SOCIAL ASSISTANCE IN A POVERTY REDUCTION STRATEGY ...... 25
THE FUNDAMENTAL IMPORTANCE OF SUSTAINING ECONOMIC GROWTH ...... 25 THE ROLE OF LABOR MARKET POLICIES AND EMPLOYMENT-GENERATING PROGRAMS ...... 26 THE ROLE OF EDUCATION ...... 29 THE ROLE OF SOCIAL INSURANCE ...... 30 THE ROLE OF SOCIAL ASSISTANCE ...... 32 3. IMPROVING SOCIAL ASSISTANCE TO PROTECT THE POOR ...... 35 THE STATE-RUNSOCIAL ASSISTANCE SYSTEM ...... 35 NGO PROGRAMS ...... 38 THE STATUS OF THE SOCIAL ASSISTANCE REFORM ...... 39 THE R O OF THELE FAMILY BENEFIT ...... 41 MANAGING THE D ECREASEIN HUM ANITARIANASSISTANCE ...... 41 THE NEED TO STRENGTHEN OUTREACH ...... 42 4. TARGETING MECHANISMS FOR SOCIAL ASSISTANCE PROGRAMS ...... 45
THE ROLE OF TARGETING IN SOCIAL ASSISTANCE PROGRAMS...... 45 PAROS, HUMANITARIAN ASSISTANCE AND THE FAMILY BENEFIT...... 47 REFINING AND REFORMING PAROS FOR USE FOR THE FAMILY BENEFIT ...... 56 THE FUTURE OF PROXY MEANS TESTING IN ARMENIA ...... 63 OTHER TARGETING OPTIONS ...... 64 CONCLUSION ...... 69
BIBLIOGRAPHY ...... 73 ANNEXES
Annex 1 Main Results from the Household Budget Survey (Statistical Tables) Annex 2 Measuring Poverty in Armenia Annex 3 The Armenian Labor Market: Adjustments and Misalignments Annex 4 Fiscal Sustainability of Family Benefit Annex 5 Executive Summary of the Study of the Poorest of the Poor Annex 6 Methodology for PAROS assessment Annex 7 Executive Summary of the PAROS Beneficiary Assessment Annex 8 SSCs: Evaluation of Institutional Capacity
TABLES Table 1 Poverty Indicators for Armenia Table 2 Characteristics of the Poor by Labor Market Status Table 3 Income Sources and Inequality Table 4 UJnemploymentBenefits Table 5 Government Expenditures on Child Allowances and Social Transfers Table 6 Food Aid Assistance to Armenia Table 7 Emergency and Relief Assistance Table 8 FBasicTargeting Mechanisms Table 9 Basic Paros Results by Decile Table 10 Flarosand Per Capita Consumption Deciles Table 11 Incidence of Different Programs Table 12 Results of Modifications to Paros Table 13 Results of Different Targeting Formulas Table 14 P'overty and Inequality Indicators by Marz Table 15 Incidence, Depth and Severity of Poverty by Altitude (for rural areas only) Table 16 Poverty Incidence (among individuals) by Location of Households
FIGURES Figure 1 Poverty by Location Figure 2 Education Level by Poverty Groups Figure 3 Structure of Household Incomes by Poverty Groups Figure 4 Structure of Expenditures by Consumption Deciles Figure 5 Percentage Reduction in Relative Poverty for Various Models EXECUTIVE SUMMARY
In recent years Armenia has made significant progress in reforming its economy, restoring a sustainable path for growth and maintaining macro-economic stability. Despite these advances the recovery remains fragile. Although overall living standards have improved since 1994, poverty is still widespread and little or no impact has been made on the incidence of extreme poverty. It is urgent, therefore, to assess how the government's poverty reduction strategy can be made more effective and to identify the role social assistance can play in this area. The objectives of this study are to understand better the changes in poverty since 1994, to reassess options and priorities for the government's poverty reduction strategy, and to provide recommendations on improving the poverty focus of social assistance programs.
After the sharp descent into poverty from 1992 to 1994, when the vast majority of the population experienced conditions of absolute poverty, some improvement in living conditions has been achieved. The average wage doubled in real terms between 1994 and 1996 and substantial increases were achieved in the proportion of households with electricity and piped water. Nevertheless, poverty in Armenia remains widespread and severe. From the 1996/97 Household Budget Survey, about 55% of the population were estimated to be living in poverty and 28% percent of the population were under the food line. The average wage was still only one-third of its 1992 level. Vulnerability to poverty also continued to be high, with many households moving in and out of poverty. The trend of rapidly increasing inequality appeared to have stabilized since 1994 but remained very high. In 1996/97, per capita consumption was still 18 times higher in the top decile than for the poorest 10%.
The poverty correlates typical of market economies are still not evident in Armenia. The correlation between poverty and unemployment was found to be stronger than in 1994, but still very weak in comparison with non CIS countries. Although the unemployed have the highest incidence and depth of poverty, the largest number of poor are the working poor. Because of the low level of public sector wages, the large number of workers on administrative leave without pay, and the high prevalence of part time work, employment does not guarantee sufficient earnings to support a family. Education remains a relatively poor predictor of poverty as those with a high level of education are only slightly less likely to be poor. Overall, the urban population continues to be poorer than the rural population; however, in contrast to 1994, the incidence of extreme poverty was found to be higher in rural than in urban areas, suggesting that agriculture has become less effective as a safety net for the rural population. There appears now to be a link between household size and poverty but the evidence is not very strong. Some groups that would intuitively be considered as poor have not fared worse than the rest of the population; for example, refugees and pensioners living alone were found to have slightly lower than average risk of poverty.
The primary reasons households remain poor include inactivity through lack of remunerated employment opportunities or assets for investment in private activities, low wages, lack of mobility, poor health and physical isolation. Unemployment is not only high, at 25 percent as measured by SDS surveys in 1996/97, it is also stagnant. Half of the -ii- unemployed have been without work for more than a year. Recent job creation has been concentrated mostly in self- employment and informal activities. At the same time, because of low wages, employment does not necessarily protect families against poverty. Salaries constitute a mere 13% of average current income of the population-the same share as private transfers and remittances from abroad (13% each). Seasonal labor migration to other CIS countries has become an extremely important income source for Armenians. Heavy reliance of the population on irregular sources of income, from private transfers, humanitarian aid and remittances, means that households undergo drastic extremes of income depending on the timing of the receipt. State transfers, as well as the declining institutional transfers of humanitarian aid, have not been targeted effectively to the poor and have therefore had a very limited impact on poverty reduction.
Evidence from the qualitative assessment indicates that social exclusion is increasing in Armenia and is closely linked to extreme poverty. The lack of a strong social network is a significant determinant of poverty. This is most likely to affect people with weak kinship ties, such as orphans and households composed of single parents. However, social exclusion is also related to lack of mobility, to poor health, and to psychological passivity due to repeated failure to integrate into the labor market or a support network.
The recent evolution of poverty implies the need for review by the government of its poverty reduction strategy. As poverty is still primarily a transitional phenomenon, affecting more than half the population, the main pillar of a poverty reduction strategy remains the acceleration of economic growth. For this purpose, further efforts are needed to increase public and private savings and to promote private investment. The restructuring of the, public sector needs to move forward, as do reforms in the judicial and legal systems. In man,y sectors, reforms should be deepened to increase transparency, reduce distortion and strengthen capabilities, to restore viability of the energy, water and transport sectors, and to meet the human capital requirements for economic growth.
When unemployment and low wages are primary reasons for poverty, the labor market should play an important role in reducing poverty and inequalities. Existing labor market regulations, however, are not creating major rigidities. An important question asked by many policymakers today is the potential role of proactive labor market policies to stimulate growth and employment. Under present economic conditions in Armenia, neither job subsidies nor training and retraining programs are likely to be effective in facilitating job creation. More could be done, however, in the areas of microcredit, support to self employment, and public works. Recent experience, in particular of the Agriculture Credit Bank of Armenia (ACBA), has demonstrated that micro credit programs can be successful when designed well, with minimal subsidies, and administered by competent financial institutions. Public works projects have already been successfully implemented in Armenia, with IDA (ASIF) and WFP support, with the objectives of stimulating the local economy through the use of small contractors and improving social infrastructure. However, with the exception of a few pilots, the potential of public works which have the primary objective of creating employment in labor intensive activities has not yet been thoroughly explored.
Social insurance programs, in particular old age pension and unemployment benefits, do not offer effective tools to provide protection from poverty in the short term because savings levels are very low, the levels of benefits are consequently very low, and the poor are not well targeted. In the long term, however, if the ongoing reformnsare maintained, the -iii- pension system could become a more efficient tool for preventing poverty among the elderly. Unemployment benefits cannot be efficient while the informal economy continues to prevail, which will probably be the case for a long time in Armenia. Another important area of the government's poverty reduction strategy is the protection of access to quality social services for the poor. In this area, deepening the social sector reforms will be very important, in particular strengthening primary health care services and general education. Additional mechanisms are needed to target health programs and education subsidies to the poor.
In this context, social assistance is one of the very few instruments available to protect the poor not benefiting from economic growth in the short and medium term. Social assistance objectives should be to protect the poorest of the poor and the most vulnerable groups from becoming socially excluded. For such a strategy, targeting becomes crucial. Social assistance should not create or promote dependence on charitable support but provide means by which those who have been marginalized can reenter society. This presents an enormous challenge for Armenia because (i) the approach is contrary to the Soviet principles of social assistance on which values and expectations still tend to be based, (ii) both public and private resources are severely limited, and (iii) the large scale of the informal economy makes it extremely difficult in practice to identify the poor. Until introduction of the Family Benefit in January 1999, the state-run system of social assistance-including cash transfers (child allowances and social pensions), residential institutions for a variety of vulnerable groups, and some very limited outreach programs for the elderly and handicapped-has not been poverty targeted.
NGOs play an important and positive role in delivery of programs that strengthen social safety nets in some Eastern European countries such as Poland and Hungary. The role of NGOs and the private sector (foundations and private donations, mostly from the Diaspora) is also growing in Armenia. Most of the local and international NGO groups were created in the aftermath of the earthquake of 1988. More than 1,200 NGOs are now registered, active in areas of elderly and nursing care, child support, employment generation activities, protection of refugees and the disabled. Most operate on a very small scale, hampered by limited funds. State collaboration is still at the embryonic stage. NGOs are often viewed more as competitors than collaborators. The legal framework for NGOs is still incomplete and unfriendly.
Aware of the system's shortcomings, the government has embarked on the reform of social assistance. In December 1997, a decree was passed to replace child allowances and other social benefits with a family benefit targeted to the poor. The introduction of this new benefit in January 1999 represents a major shift from the categorical system, oriented to socially deserving members of society, to a system focusing on protecting the poor. Other actions have been taken to improve outreach, train social workers and improve the capacity of the social services centers. Reforms need to be deepened to create an adequate institutional framework to deliver the targeted programs and to use humanitarian assistance more effectively. Outreach could be improved by increasing the role of elected local governments and NGOs in the design and delivery of social assistance programs and by strengthening partnerships with state structures. In addition, incentive systems needs to be improved, both to encourage social assistance centers to perform outreach activities and to encourage families and communities to support the poor and minimize dependence on the state.
To target the new family benefit, the government plans to use the Paros proxy means testing system. This system, introduced in Armenia in 1994 to improve the targeting of -iv- humanitarian assistance, was the first proxy means testing system adopted in Eastern Europe and Central Asia (though Russia is now experimenting with it on a pilot basis). The targeting performance of the Paros system has been evaluated using the results of the Household Budget Survey. About 71% of Annenian households report they were registered with Paros in the fall of 1996. Registration by decile shows very little self selection in the system. E]rrorsof exclusion were found to have essentially three causes: barriers in registration for the poor; problems with measurement of proxies; and informal procedures used by social workers to pre-screen beneficiaries before registering them. Errors of inclusion were related to the difficulty of using proxies in the Armenian context and the lack of home visits for the purpose of control.
Many changes can be made in the system to improve targeting of the poor. It appears that changing the proxy formula would provide some improvements, and that changing the weight of the indicators used in the existing formula would also improve the targeting outcome. On the other hand, an increased customization of benefits would not change the targeting outcome. Several reforms can be introduced to improve the administration of the Paros system: decentralize the process of assessing household scores; improve public information on the formula and the registration mechanisms; integrate a more systematic outreach by the social workers with the help of local governments and NGOs; set up iformal and informal appeal systems; and create a mechanism for program monitoring and evaluation. The family benefit program will also require the development of a streamlined, credible payment mechanism, and clear procedures for managers and staff of the social services centers, through a unified operational manual and training of social workers. After these reforms have been introduced and the impact of the targeted family benefit has been aLssessed, more thought should be given to using the proxy means testing system to support other programs in health, education or social services.
Alternatives to the proxy means test for poverty targeting are limited. Because of the localized nature of poverty in Armenia, geographic targeting could provide an administratively efficient mechanism for targeting of social sector spending; however, this would require more comprehensive and disaggregated data on poverty than are currently available, at least until the forthcoming census is carried out. The new capitation systems for financing of general schools and primary health care will need to take account of the large variations in poverty rates between districts and communities and incorporate a poverty weighting in the funding formula. Until better data are available, adjustment could possibly be based on the number of recipient;sof the family benefit in the catchment area. More assessment and analysis are also needed to explore the feasibility of community-based, targeting of health and education subsidies, such as the school-based targeting mecharnism recently introduced to waive textbook rental fees for the poorest pupils.
Considering the limitations to the development of social insurance in the short and medium term, and the relatively limited scope for interventions in terms of proactive labor market policies, strengthening social assistance is critical to support the very poor and socially excluded groups that are not in a position to benefit from the impact of growth. A number of measures can be taken to improve targeting and outreach, to ensure that social assistance helps poor groups integrate into the economy and society, and to prevent undue dependence on the welfare system. At the same time, the system needs to be closely monitored and remain flexible in order to adapt to an ever changing situation. INTRODUCTION
The objective of the study is to provide recommendations to the government on the reform of social assistance in Armenia and, in particular, on the introduction of a new family benefit to be targeted to the poor. The study also presents the results of the most recent analysis of poverty and the recent evolution of the reform of social protection, to provide the context for a better understanding of the reform of social assistance.
In recent years Armenia has made significant progress in reforming its economy, restoring a sustainable path for growth and maintaining macro-economic stability. After years of collapse, GDP grew by 5.4 percent in 1994, by nearly 7 percent in 1995, by 5.8 percent in 1996 and around 6% in 1997. Despite these advances the economic recovery remains fragile, particularly on the fiscal and external fronts. Restructuring of enterprises has been slow, the economy is not yet sufficiently diversified and private sector investments are low. This situation has contributed to a lower growth rate than would have been necessary to make a major impact on poverty reduction. The recent poverty profile shows that, although overall living standards of the population have improved since the poverty profile of 1994, extreme poverty has not been reduced and inequities remain serious.
The government took important actions in 1996 and 1997 to try and address the poverty issue and initiate comprehensive reforms in the social sectors. Improved targeting allowed the level of social benefits to increase in real terms during 1996, despite a decline in total public expenditures. A new Pension Law was approved at the end of 1995, laying the basis for comprehensive reform of the pension system and introducing an increase in the retirement age. In education, the government has taken steps to reallocate spending towards basic education, improve the availability of textbooks, and provide more managerial autonomy for schools. In health, the government has adopted a strategy separating the financing and provision of health care, and has created a State Health Agency charged with purchasing health care services from both public and private providers. The 1997 budget for health care introduced, for the first time, a program budgeting approach based on a Basic Benefit Package (BBP) of services entirely financed by the state, targeted at poor households and at the most essential services for the improvement of the health of the community.
The pace of reforms decreased during 1997-98, delaying the impact of some of the measures on poverty reduction. However, the main reason for the small impact that restored growth had on the reduction of poverty has been the lack of employment opportunities generated. The data of the Household Budget Survey and the social assessment of the Poorest of the Poor confirmed that unemployment and inactivity in Armenia are extremely high by any standard. Growth has not yet resulted in creating jobs on a significant level.
While structural reforms need to be deepened and accelerated, protecting the very poor in the short term will be crucial to avoid the apparition of long term poverty and social exclusion of the most vulnerable members of society. This requires strengthening reform of -2- social assistance and, in particular, improving targeting and outreach. The governmerLtis making serious efforts to target some of the programs to the poor more effectively; however, it faces a very serious challenge, considering the large size of the informal sector and the fact that poverty of this magnitude is a recent phenomenon.
In order to protect the poor, the government has decided to introduce a family benefit to replace most other social assistance cash benefits (child allowances and social pension) and to target this benefit to the poorest using a proxy means testing system. This is the first country in the Eastern European and Central Asia Region to introduce at the national level a poverty benefit using proxy means testing for targeting. The amount of funding allocated for this activity is also far from negligible in relation to the national budget (15%). The introduction of this poverty benefit is taking place in the framework of an overall reform of the social assistance system and has become a central element of the social sector reform. It is included in a program supported by the Structural Adjustment Credit. The government has requested the World Bank to provide technical advice and support to help in the introduction of the poverty-targeted Family Benefit.
In light of the above, the World Bank and the government decided to launch a series of assessments of poverty and social assistance programs in 1997 and 1998. These studies have been based on in-depth data collection efforts that have resulted in improving the data base on poverty, especially through the release of the results of the 1996-97 Household Budget Survey and the qualitative assessment of the poorest of the poor. Specific analysis has been carried out of the Paros program, a national proxy means testing system which was set up in 1994 to target the distribution of humanitarian assistance and which the government now plans to use to target the family benefit. The objectives of these assessments are: (i) to understand better the changes in poverty since the last Poverty Assessment of 1995; (ii) to identify directions for the reform of social assistance, in light of the new findings on poverty; and (iii) to improve the targeting of social programs and benefits. The present report summarizes the findings of the recent surveys and research as well as providing recommendations to the government on the reform of the social assistance system and the introduction of the new poverty benefit.
The first section of the report reviews the recent evolution of poverty, combining quantitative and qualitative infornation, and identifies characteristics of the poor and their coping mechanisms. The second chapter reviews the various instruments the government has at its disposal to reduce poverty. The third chapter discusses the role of social assistance in the short and medium term. The fourth chapter reviews options for improving targeting of social programs and, in particular, of the family benefit introduced in January 1999. The concluding section provides a sumrnary of general recommendations for the poverty reduction strategy and of specific recomnmendationson measures to improve poverty targeting. 1. RECENT EVOLUTION OF POVERTY
1.1 At a time of rapidly changing conditions, assessing the needs and options for measures to alleviate poverty in Armenia, including improvement of social assistance, depends on close monitoring of the extent and characteristics of poverty in the country. Who and where are the poor? How can they be identified? Why are they poor? How do they cope? How do they perceive their own conditions and problems? What strategies are poor families using to climb out of poverty? Drawing on available quantitative and qualitative information, this Chapter examines the recent evolution of the poverty profile in Armenia over the period from 1993-94 to 1996-97--i.e., from the low point just prior to the economic turnaround through three years of sustained economic growth.
1.2 Following some 40 years of steady improvement in living standards during the Soviet era, Armenia experienced the virtual collapse of its economy after independence in 1991. By the end of 1993, real wages had fallen to about 6% of their 1991 level and hyperinflation exceeded 1,000 percent, throwing the vast majority of the population into poverty. Living standards were further eroded by the removal of subsidies on essential goods and by drastic cuts in government spending on essential services and maintenance of infrastructure. A comprehensive reform program was introduced early in 1994, successfully stabilizing the economy and restoring economic growth. Overall incomes and living standards have improved; however, recent growth has so far had little impact on employment and the benefits have not reached all sections of the population. In the context of tight fiscal constraints, as well as policies for progressive price liberalization and cost recovery, Armenia faces a formidable challenge in alleviating the worst impact of transitional poverty and preventing the emergence of long tern structural poverty.
The Poverty Profile in 1993-94
1.3 Surveys carried out between 1993 and 1995 confirmed the widespread incidence of severe poverty throughout the country. For the poverty analysis based on the 1993-94 pilot household survey, relative instead of absolute poverty lines were used, partly because of technical difficulties in the data set, but also because the survey indicated no less than 97 percent of the population were below the unofficial (absolute) poverty line, making such a line less than useful for purposes of analysis. The drastic fall in living standards had been accompanied by high inequality in the distribution of income, with the top 10 percent of families in Yerevan, for example, earning 48 percent of the city's income, and the absence of a significant "middle class". -4-
DATA SOURCES
The informationpresented in this Chapteris drawn primarilyfrom the followingsources:
Quantiative surveys:
1. Pilot Household Survey by SDS and YerevanState University,1993-94. This survey, which was carried out over a 12 month period, was the first attempt by any former Soviet Union country to measure accurately household income and expenditurebased on a representativesample for the countryas a whole.The stratifiedsamples consisted of 2,100 urban familiesand 1,200rural families.
2. Household Budget Survey(HBS)by SDS, carriedout in November-Decernber1996, drawiLg on the lessons from the pilot survey. Due to differencesin design the findingsare not directly comparable with those of the pilot survey.The largesthousehold survey carried out in Armeniato date, it covered 100 villagesand 28 towns.The sample included5,040 households,with a response rate of 98%, and was representativeat the regionalfmarzlevel and of both urbanand rural areas.
3. Health and Education Survey (HES) by SDS, carried out in November 1996 with funding by UNDP.This survey used the same sample as the HES but with a differentquestionnaire on a separate visit.
4. Labor Market and Labor Force Survey by SDS, carriedout in October 1996with assistanceof the ILO.
5. Family Budget Surveys, by the SDS.On-going quarterly surveys which provide the only continuous sourceof data for monitoringliving standards in Armenia.
Qualiative surveys:
1. A Qualitative Assessment of the Living Standards of the Armenian Population, report by Nora Dudwick,1995, on fieldworkcarried out betweenOctober 1994and March 1995.
2. Using Land as a System of Social Protection: An Analysis of Rural Poverty in Armenia in the Aftermath of Land Privatization, report by Sharon Holt, 1995.
3. Poorestof the Poor..report by ElizabethGomart, 1998on fieldworkcarTied out in December1997.
Poverty assessment:
Armenia: Confronting Poverty Issues, by the World Bank, 1996. Poverty profile, analysis and recormnendationsbased on 1993-94Household Survey and 1995qualitative surveys.
1.4 Surveys revealed unusual characteristics of poverty at that time and pointed to difficulties in identifying good indicators of poverty for targeting social transfers. Poverty was found to be more severe in urban than in rural areas. Subsistence agriculture provided a safety net against extreme poverty for many rural residents; however, wide variation was found in poverty rates between villages, with pockets of extreme rural poverty reflecting differences in climate, elevation, transport links, irrigation levels and soil quality. -5- 1.5 The factors most strongly related to poverty, especially in urban areas, were lack of extended family support, and lack of private remittances or informal sector earnings. These factors are all difficult to measure objectively for targeting purposes. No strong relation was found between poverty and age, gender, unemployment, level of education, size of household, stock of consumer goods, or housing attributes.
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Data' provided by SDS -6- electricity (from 22 percent to 99 percent) and with piped water (from 57 percent to 88 percent).
1.7 Despite these improvements, still more than half the population was defined as living in absolute poverty by the end of 1996. Poverty continued to be mainly urban, with lower average consumption in urban areas. By the end of 1996, however, the incidence of extreme poverty, measured in relative terms, was found to be higher in rural than in urban areas. Evidence was also found in late 1996 of long term malnutrition of children, particularly widespread in upland villages and border areas.
1.8 It is clear that Armenia's poverty profile is moving toward a more typical pattlern of poverty correlates. In contrast to 1993-94, a discernible relationship has emerged between poverty and unemployment, and between poverty and lack of productive assets. The inverse relationship that was found in 1993-94 between education level and poverty has shifted to a very weak relationship in the expected direction. Similarly, larger households are no 'longer found to be better off than small ones and the relationship between poverty and number of dependents per breadwinner has become very strong. Landholding status has become a very strong correlate of rural poverty, although not all landholders escape extreme poverty.
1.9 Some changes are evident in the relative importance of different sources of income. For urban households, the share of income from earnings (including wages, self employment and income from sale of agricultural products) has dropped sharply. For the better-off half of the population, this has been replaced largely by "sales of valuables and property" (much of which is informal sector income). For the lower deciles, it has been replaced mainly by private transfers and humanitarian assistance, which was an insignificant source of income for the poorest four deciles in 1993-94. Changes in the structure of rural incomes have been smaller but also reflect increasing dependence of better-off households on informal sector income.
1.10 Inequality in the distribution of incomes and consumption continues to be high but there is no evidence that it increased for the country as a whole between 1993-94 and 1996- 97. Comparison of data on the distribution of incomes from the two household surveys suggests a possible reduction in inequality in urban areas and increase in rural areas, but the comparability of data is not sufficient to allow a firm conclusion on this.
The Poverty Profile in 1996-97
1.11 Poverty in Armenia continues to be widespread and severe. The proportion of 55 percent of the population in poverty by the end of 1996, cited in Table 1, implies that about 2 million people were poor.2
2 This estimate is based on the officially reported population. -7-
Table 1: Poverty Indicators for Armenia
Poverty indicators based the national Based on the Based on poverty line Food line: Relative Une:* Incidence Percent very poor Percent extremely Population Depth Severity (percent poor) poor Urban 62.4 58.8 23.1 11.6 29.6 8.1 Rural 37.6 48.0 18.9 10.3 24.4 9.2 Total 100.0 54.7 21.5 11.1 27.7 8.5 Source: SDS 1996 Household Survey. *Relative line at 40% of median per capita consumption.
1.12 The three poverty lines indicated in Table 1 were established through comprehensive analysis of consumption expenditures. The "food line" (representing 6,600 drains per month per capita) was derived by calculating the cost of a "food basket" providing adequate caloric requirements on the basis of the actual structure of food consumption. The higher "poverty line" (10,800 drains per month per capita) is derived by adding to the food line the actual expenditure of those close to the food line on non-food items (38.7%). The relative line, marking the extremely poor, is set at 40% of the median. At 4,000 drains per month per capita, this happens to coincide with the cost of providing a daily requirement of 2,000 calories from bread and oil.
1.13 Levels of consumption for a large percentage of the population fell far below the poverty line. The average poor Annenian spent US$15 monthly for food, far below the country's national poverty line of almost US$25 per month.3 Poverty depth and severity translate into astonishingly high numbers of very poor and extremely poor.
1.14 It is also important to note that studies have shown considerable movement of households into and out of poverty since the fall of the Soviet Union. An overwhelming majority of Armenian households have had at least one episode of poverty between 1992 and 1996. Most households are vulnerable to seasonal fluctuations in food availability, wage arrears, incidence of serious health disorders, irregular receipt of remittances and non-formal earnings.4 In the qualitative study (Gomart, 1998), families reported fluctuations in basic necessities, such as food availability, electricity or heating, throughout the year. Many households anticipated a period of hunger at the end of winter or early spring, after having run out of food, food stocks and savings. Dramatic fluctuations in family welfare were closely linked to the health and mobility of its members, which, along with other factors such as labor availability in the household, access to remittances and trade profits, asset availability, and access to credit, proved crucial to income generation.
1.15 The available information on inequality suggests that a dramatic polarization took place during the period of economic turmoil that followed independence. Income inequality had increased radically by 1994, when the Gini coefficient for per capita income distribution
3At the averageexchange rate duringthe survey:435 dramnsper I US$
4 Unfortunately,in the absenceof longitudinaldata it is impossibleto assesswith any precisionthe extentof consunptionvariability. -8- was estimated at 0.58, compared to the pre-transition (1989) level of 0.26.5 Since then, the trend appears to have stabilized. From the 1996 survey data, the same index was estimated at 0.596 for both urban and rural areas, implying a possible decrease in inequality in towns and increase in rural areas.
1.16 Measures of income inequality need to be interpreted cautiously, especially when incomes are as irregular as they are currently in Armenia. For household expenditures, which tend to be more consistent, data from the 1996 survey suggest that inequality in expenditures is somewhat lower, with a Gini coefficient of 0.44. Nevertheless, per capita consumption in the top decile remains 18 times higher than for the poorest 10 percent of the population. Some increase in inequality is normal and inevitable in the transition to a market economy. Very high inequality, however, has negative implications for any poverty reduction strategy in that the benefits of growth are likely to be shared unequally, and economic growth alone may be insufficient to lift the poorest in the population out of poverty. It can also have negative implications for social stability and for political support of the reform process.
Characteristics of the Poor
1.17 Since the poor make up half the population and transient poverty predominates, it is difficult to find household characteristics that distinguish poor from non-poor families. The poverty profile helps to assess the relative risks of poverty for different groups.
Characteristicsof the Poor
Accordingto the 1996 SDS Survey, Armenia's poor and very poor are more likely, but not exclusively,to be:
* Urban(58.8 percentof urbanhouseholds are poor comparedto 48 percentin rural areas) * Landless,in rural areas,where 70 percentof landlesshouseholds are poor * Less educated, (although this relationship with poverty is still weak) * Unemployed(63A percent),though work is often insufficientto avoid poverty * Livingin householdswith a high dependencyratio, especiallywhen the dependentsare young children,invalids, or disabledelderly
Location
1.18 Poverty is mainly urban, both because the majority of Armenians live in townos,and because average consumption levels are lower in towns than in rural areas. These robust results stand for different data sets and methodologies. The lower incidence of poverty in rural areas, already apparent at the time of the 1993-1994 pilot survey, was attributed to benefits from the land privatization program.7 Conversely, as Table 1 shows, by the end of 1996 rural areas had a somewhat higher incidence of extreme poverty than urban areas. As
For 1994 -- estimates based on SDS traditional family budget survey, data for 1989 are estimates taken from Atkinson and Mickelwright 1992, pl 37,based on the same source.
6 This is very close to the results of CEPRA survey conducted in Yerevan in 1995-1996 that reports a Gini of 0.63.
7It is discussed in greater detail in "Armenia: Confronting the Poverty Issues" p 6. -9- illustrated in the graph below, although a smaller percentage of rural residents are poor, a much larger share of those who are poor are very poor indeed. Information from the qualitative survey suggests that this extremely poor group may continue to grow as families are compelled to dip into seed stock in order to compensate for poor harvests and to deplete cattle stocks and other assets to cross-subsidize unprofitable land cultivation efforts (see Annex 1, Table 6).
Figure 1: Poverty by location
. 7 0%Wid on-poor 660% M POOr
marzesgreaterstill.Thequalityofagriculturallandiery is Poor 40 30%3 M.Extrem ely ;.20% P oo r 10% 0%
1.19 Wide regional variations in poverty exist across regions and within regions. Poverty is highly localized. Although the incidence of poverty varies substantially between marzes- from 38.1 percent in Anmavirmarz to 63.1 percent in Shirak marz-the variation within marzes is greater still. The quality of agricultural land is an important factor. Nevertheless, pockets of poverty are sometimes found even in regions with rich agro-ecological conditions. For example, in Armavir, the country's most fertile agricultural province, almost 15 percent of the rural population are food poor. Further examination of poverty within marzes confirms that extreme poverty tends to be most concentrated in national border areas, high altitude areas and earthquake zones. Location can be a contributing factor in poverty in so far as some isolated regions have less access to roads, water supply and social services (see Annex 1, Tables 6, 7, and 30).
Landholding
1.20 Rural poverty is closely linked to landholding. Rural poverty is highest among 6 percent of households who are without a land plot (70 percent are poor or very poor) or who are unable to farm their land. Not only are the landless poor, their poverty is also very deep. Access to land is also an important factor for many urban families who depend on garden plots, or gifts of produce from relatives in rural areas, as a crucial food source of last resort: 19 percent of urban residents, but only 9 percent of poor rural residents, have access to garden plots.
1.21 Land ownership does not in itself preclude rural poverty. Quality and quantity of land, access to irrigation and other necessary resources such as labor, financial investment, markets, good weather, and supporting infrastructure are at least as important (see Annex 1, Table 16). The qualitative study (Gomart, 1998) identifies households that found their land was more of a liability than an asset. Some had either refused to accept land during -10- privatization or later returned it without compensation to the municipal land reserve, citing that land cultivation drained their resources or was a burdensome tax liability. Households which lacked the labor or other inputs to cultivate their land were usually also unable to sell or lease it. According to the rural survey (Holt, 1995), only 16 percent of farmers had entered into land-leasing transactions, and 90 percent of leased land came from the municipal reserve, not fellow rural residents. The survey also found that the average rental cost was approximately the amount of tax due on the land. Land sales are also sluggish with anniual turnovers hovering at one percent.
1.22 The unemployed have the highest incidence and depth of poverty (see Table 2 and Annex 1, Tables 13, 15 and 17). The rural unemployed are more likely to suffer greater poverty-38 percent are below the food line. As many as 43 percent of Arrnenian families have at least one unemployed member, and nearly 61 percent of such households are poor. The highest incidence of poverty (72 percent) arises after about four to five months of unemployment, when savings have been exhausted but before individuals have had time to develop new coping strategies, lowering the risk of poverty to a still high 60 percent. However, most of the unemployed belong to families where the head of the household is either employed or self-employed which indicates that, despite a high correlation between unemployment and poverty, the core poverty problem is one of the working poor. Employment is not a guarantee of sufficient earnings to support a family. First, a sizeable share of the labor force is only formally attached to employment and does not performnany actual work or receive a salary. Second, the ongoing practice of labor hoarding leads to a high prevalence of part-time work with a correspondingly low salary. And finally, most of the employed are on the payroll of state-owned enterprises that are unable to pay reasonable wages due to the need for restructuring.
Employment Status
Table 2: Characteristics of the Poor by Labor Market Status
Incidence of Percent of Incidence of Incidence of Individual Characteristics poverty total poor food poverty extreme poverty Small children (under 5) 59.1 10.1 32.9 10.9 Children (6-15 years) 56.7 22.7 28.5 8.8 Students (over 15 years) 45.3 2.9 19.0 6.0 Singlepensioners (not working) 37.1 1.4 18.0 5.0 Pensioners (not working) living in families 60.6 14.1 30.8 9.6 Disabled and caring for disabled 58.6 1.8 32.3 10.6 Other inactive adults 55.8 12.8 28.1 7.9 Unemployed 63.4 12.4 35.9 12.6 Ernployed at State-owned and privatizing firms 50.5 8.8 23.0 6.1 Employed by the Government 38.0 1.8 18.2 5.0 Self-employed and private sector employees 44.7 9.0 19.5 5.5 Other economically active adults 51.0 2.3 22.0 6.6 Total 54.7 100.0 27.7 8.5 Source:SDS Household Survey 1996. -11- 1.23 The average employee does not earn enough to support a family. (Annex 3, Table 6, indicates average wages reported by sector.) Employees of state-owned enterprises are at the highest risk for poverty among all those employed. However, since they receive support from different channels by these enterprises, poverty is not severe for this group. But when a worker goes on administrative leave, his or her situation becomes worse than that of an unemployed person, partly because he or she cannot register as unemployed and receive benefits. Seventy percent of this group were found to be poor. The employed at-work were comparatively better off. Self-employment in rural areas was particularly lucrative, generating enough income to lower the risk of poverty by four times as compared to the average population8 (see Annex 1, Tables 31, 32 and 33).
Education
1.24 Those with higher education are somewhat less likely to be poor, although level of education in itself is still a poor predictor of poverty in Armenia. With labor markets still undeveloped, the wage premium paid for higher education is not yet resembling the rate typical in market economies. No less than 46 percent of those with tertiary education remain poor. The typical wage that college graduates earn even in new private firms is sufficient only to support a worker plus one, or at most two, dependents. If such an employee has to support more than two dependants, the household falls below the poverty line. As a result, as many as 38 percent of Yerevan's private firm employees with higher education earn less than is needed to make their families non-poor (see Annex 1, Table 10). The very low salary rate of teachers, who constitute a major share of the highly educated population, is also an important factor in depressing the average income premium normally associated with higher education. For the unemployed, however, higher education appears to be particularly beneficial in providing possibilities for different coping strategies. Among the unemployed, those with higher education, especially men, have the lowest risk of poverty-lower in fact than the average population risk.
Figure 2: Education level by poverty groups l
80%
60% M Prim ary DOSecondary general 100% 4 0% *Secondary special
20%
0% Non-poor Poor Very Poor
This typology of occupational group and poverty, based on the survey data, is in line with what is observed in other studies. -12- Household size and composition
1.25 It appears that larger households are more likely to be poor. However, when poverty is closely linked to demographic variables and the analysis is based on per caplita indicators, survey results should be interpreted with caution. Because of possible economies of scale in consumption, the per capita cost of reaching a certain welfare level may be lower in large households than in small ones. For example, the cost of heating can depend on the building's physical characteristics, regardless of the size of the family living in it, while the per capita cost of heating would, of course, be lower for a larger family. Considering a plausible degree of economies of scale adjustment, the household survey data reveals only a slight difference in the incidence of poverty between largest and smallest families.9
1.26 The typical Arnenian household is made up of an extended family of three or rnore adults living under one roof. About 60 percent of the population live in extended households and 34 percent in nuclear families (couples with or without children). Relatively few "incomplete" families-single adults, single parents, or single elderly-exist in Armenia and their poverty risks are the lowest (see Annex 1, Table 8 and Figure 2). Extended families with children have the highest incidence of poverty among all household types. Couples with three or more children have the second highest risk for poverty, which means large households constitute the majority of the poor. Very poor households are substantially larger (average 4.52) than the average Armenian household (3.94).
1.27 The dependency ratio is a much better predictor of household poverty than household size itself. Increase in the number of dependents steeply increases the risk of" poverty so that, for example, households with two dependents are on average almost twice as poor as households where all members are actively generating income (see Annex 1, Tables 12, 32, 33, and Figure 1; and Annex 2, Section 4). Among dependents, small children have the highest risk of poverty (see Table 2), while students have the lowest. Most poor households are made up of families with children and those living in rural areas or having disabled children experience the most severe poverty (see Annex 1, Tables 32 and 33). Only one third of multi-generational households, including both children and elderly members, manage to stay non-poor.
Traditionally Vulnerable Groups
1.28 The disabled, the elderly living with relatives, and orphans are highly vulnerable to poverty, supporting the widely held belief in Armenia that erosion of the state and traditional social support networks during the economic transition has left these segments of the population particularly vulnerable. Fifty-nine percent of the disabled and those caring for them are living in poor households, as are 61 percent of pensioners living in families (Table 2). However, the poverty risk for small children, under five years old, is equally high.
1.29 Some groups traditionally considered vulnerable have fared better than the rest of the population. Refugees were found to have a lower incidence of poverty than the average population, although the number included in the 1996 household survey was too small for this to be conclusive. Surprisingly, the 12 percent of pensioners who live alone have the least
9 It should be emphasized that there exists no consensus on whether, or how much, to adjust incomes or consumption for economies of scale. See Appendix I for detailed analysis of this issue. -13- poverty risk (37 percent), while pensioners residing with families, and thus directly supported by their relatives, are among the most vulnerable to poverty. Among the single elderly, a clear gender distinction emerges: for women in this group the poverty rate is 42 percent, twice as high as for their male counterparts.
1.30 Analysis of the income structure of single pensioners makes clear that the combination of traditional support networks and humanitarian assistance have effectively lifted this group out of poverty. Income from the state pension (averaging 3,000 drains per month-less than half the food poverty line-barely constitutes 15 percent of the single pensioner's average income. Just over 50 percent of their income is derived from private transfers, remittances and help from humanitarian organizations. The remainder is almost equally distributed between rental income from subletting apartments and income from private garden plots. This totals about 16,000 drains (US$ 36), enough to lift the majority in this group above the poverty line. If the private and humanitarian support were withdrawn, single pensioners on average would become food poor. Among single pensioners who receive private transfers or support from humanitarian organizations, the risk of poverty is only 29 percent; for those who do not it rises to 50 percent. Multivariate analysis suggests that when living in urban areas and not receiving any transfers, the risk of poverty doubles; if a single pensioner is also female, there is an almost 100 percent certainty that the household will be poor.
1.31 A further explanation as to why single pensioners, as a group, are less poor than average is offered by the qualitative assessment: better off families are able to avoid multigenerational living, and instead spread out into independent apartments or homes within the same city or village. Being a single pensioner does not necessarily mean isolation and can, in fact, imply a privileged background. In addition, being a single pensioner is a highly visible state and can, therefore, attract additional support from the traditional support network.
Sources of Income
Formal employment
1.32 Salaries and wages constitute on average a mere 13 percent of incomes (Table 3). Official unemployment in Armenia (i.e., job seekers who are registered as unemployed with state employment offices) is moderate and constitutes only about 10 percent of the labor force. However, because there are few incentives to register and some legal restrictions to obtaining unemployment status, the actual unemployment rate, as reflected in household surveys, is around 25 percent of the labor force.10 Half of the unemployed have been without work for more than a year. Only a third of those registered received benefits, and a further quarter report arrears in payment. However, the level of payment is so low (2,100 drams on average) that the impact on incomes and poverty risk is relatively small. In addition to the unemployed, many adults of working age, often among the poorest of the poor, would like to work but have become discouraged and relinquished their job search.
1° As measured by the Labor Force survey conducted by State Department of Statistics or household survey, both of which give similar estimates. -14- Self-employment
1.33 Recent job creation has been concentrated mostly in self-employment and informal activities. The 1996 household survey shows that 80 percent of those employed in the non- state sector of the economy are self-employed. Although average earnings in this group are high enough to move most of the self-employed out of poverty, the variation in these earnings is extreme. Self-employment is obviously a highly heterogeneous occupational category, comprising both highly paid professional occupations and low-paying positions. The poor are typically forced to take the latter positions, and are usually employed on a short-term daily basis with informal-- hence insecure-- contracts.
Figure 3: Structure of household incomes by poverty groups f00% MOther income
80o% E Sales of Property and Valuables B.In-kind Produce 60% ..... e.- . Private Transfers and 50% Humanitarian Aid
40% -b-,',.:;_, i -i:"_b.,"., .| | - -; ": ." " i ' E3StateTransfers
30% .. * Self-Employment, Rent and Interest 20% INWages and Salaries
0% Non-poor Poor Very Poor
Table 3: Income Sources and Inequality
Structure of Concentration Contribution to Sources of Current income! current income coefficient inequality Salaries (including in-kind wages and benefits) 13% 0.362 8% Self-employment income(including farm products sold) 29% 0.776 38% Rent and interest income 3% 0.935 4% State transfers 6% 0.005 0% Private transfers (domestic) 13% 0.549 12% Humanitarian aid and charity 4% 0.227 2% Remittances from abroad 13% 0.786 18% In-kind produce from agriculture 15% 0.515 13% Other income 4% 0.748 5% Total 100% 0.587* 100% * Gini coefficient; for households with non-zero current income -15- 1.34 Some of the factors behind the high levels of income inequality are revealed in Table 3, where the disparity is broken down by primary income components.11 The concentration coefficients reported in Table 3 indicate the extent to which the distribution of each component of income is unequal. The largest contributor to overall inequality is income from self-employment. Wage inequality is not significantly high. If all income had been solely derived from labor income, the Gini index would have been near 0.40, much lower than the observed level (see Annex 1, Table 14).
Remittances andprivate transfers
1.35 Private transfers and remittances from abroad are an essential coping mechanism. Seasonal labor migration to other CIS countries has become an important income source for the Armenian population.12 Ten percent of families have at least one temporarily absent member and, in cases where this member is an adult, the risk of poverty for the family is strongly reduced.
1.36 The high incidence of working poor can be attributed to Armenia's low level ofjob creation. The average private firm wage for prime age workers with higher education in an urban area was about 20,000 drams (US$ 48) per month at the time of the 1996/97 survey, which was more than double the average public sector wage but barely sufficient to support the average size family without falling into poverty. Consequently, most highly qualified Armenians prefer to seek even temporary employment abroad. This drain on the labor market led to the collapse of the statistically reported wage as a component of income. The 1996 household survey reveals that the share of other, "unofficial" sources of income was as high as 70 percent of total current income (Table 3), comprising self-employment, private transfers, remittances and produce from agriculture consumed in-kind. It is important to note that the data in Table 3 are for current income, not including income from "sales of assets and valuables", a large part of which is understood to represent earnings from petty trade, smuggling, and other informal or illegal activities. When this category is included in total income, the share of "unofficial" income reaches 84 percent.
1.37 Heavy reliance of the Armenian population on private transfers, humanitarian aid and remittances (see Table 3), all of which tend to be unreliable and irregular, leads to extreme fluctuation in the level of household income depending on the timing of the receipt. At the end of 1996, private remittances (domestic and from abroad) were reported to account for 26 percent of incomes. According to the 1993-94 household survey, most private transfers at that time went to better-off families. From the 1996 survey, however, these appear to have a more neutral distributive impact with about 30 percent received by the very poor.
Institutional transfers
1.38 Institutional transfers of humanitarian aid or state assistance have had, at best, a neutral impact on inequalities and therefore small impact on poverty. The distribution of medical humanitarian aid (although this constitutes an insignificant factor in consumption) is
" Gini index, as shown in Shorrock's 1982 can be broken down by income components, where the contribution of each income source to total inequality can be obtained from the product of concentration coefficients from each component and their respective weights in total income.
12 References to Dudwick 1995, results of November 1995 SDS survey on extemal nmigrationin Armenia. -16- parceled out most unequally: 61 percent is received by the richest 10 percent of the population. State transfers also fail to target the most needy. The household survey reveals that, by the end of 1996, state transfers had dropped to a mere 6 percent of current income levels; they were equally shared by all groups of the population and were not, therefore, targeted to the poor at all.'3 The neutrality of state transfers in terms of income distribution has clear implications for social sector strategy. Simply increasing the budget of social transfers without changing its distribution would have no impact on inequality and an insignificant impact in alleviating extreme poverty.
Food security
Conditionsof the Poor
The poor household in Armenia is unable to meet its most basic needs. In sum, the poorest householdsare likelyto: * Experiencespells of malnutrition,especially seasonal hunger in late winter and early spring * Have problemspaying their electricitybill and, especiallyin urban areas, heatingtheir homes * Live in poorlymaintained and overcrowdedhousing * Have less access to quality secondary education and to higher education * Have less accessto health servicesand littlepublic healthawareness
1.39 Although neither starvation nor acute malnutrition has been reported in Armenia, the nutritional status of the poor, and especially very poor, shows that serious deprivation exists. On average, the poor are 18 percent below the mean caloric intake for the population; the very poor fall short by 25 percent. The diet of the poor consists mostly of bread and potatoes, failing to provide enough micro-nutrients even in cases when the caloric minimum is met. Food represents about 70 percerntof expenditures in poor households, but this is still less than the cost of the minimum food basket for 44 percent of Armnenians.'4 Whereas adults mnay adapt to poor nutrition, growing children are severely affected (Annex 1, Table 5).
1.40 In 1994, a study by UNICEF found no evidence of under-nutrition, nor of increased mortality or morbidity, for children under the age of five.'5 Cultural factors, in particular the high value placed on children's welfare in Armenian tradition, have played an important role in mitigating the impact of poverty on children. There is now evidence, however, of low height-for-age, or stunting in Armenia's poor children, an indicator of long-term malnutrition.'6 Nutritional screening of children at the end of 1996 found that 16 percent fell into the low height-for-age index, a sign of poor socioeconomic conditions and inadequate
'X When all households are ranked by consumption level, all deciles receive an equal share of State transfer -- about 10 percent. The same is true when current income is taken as an indicator of well-being. As a result, concentration coefficient for State transfers is close to zero, indicating that the poor are not targeted at all.
4 This is a lower bound estimate based only on part of the sample with a diary of expenditures that had a detailed recording of fc,od stock consumed.
"A Situation Analysis of Children and Women in Armenia," Govemment of Armenia in cooperation with UNICEF, June 1994
16 The screening was conducted by the Children's Aid Direct and funded by European Community Humanitarian Office (ECHO,)in September-December 1996 and involved 9,500 children under 5 years old in four regions. The results are reported in ECHO 1997. -17- access to food over a long period.17 The same survey also reported wide variations in regional prevalence of low weight-for-height and height-for-age. In upland villages and border areas the prevalence of low weight-for-height reaches 45 percent and, in the same areas, more than 85 percent of screened children were anemic. The SDS health survey shows that children under age five who are from very poor families weigh less than non-poor children in each age group. 18 This constitutes an alarmningnew phenomenon which has not received adequate public attention because a considerable number of deprived children are "hidden" in remote and inaccessible areas.
Figure 4: Structure of expenditures by consumption deciles
100%
90/o iOt;"ther ni 80/o 70eciles householdsCulture/f and 0 60%/ " Transport and tourism 1.41Despite a series of disasters, te humandevelopmentindicatorsi Housing 40% Hou 30% M:;Health
10% E3Food 10%
1 2 34 5 6 7 8 9 10 l3eciles of households (1 poorest)
Access to Basic Services
1.41 Despite a seres of disasters the human development indicators in Arnenia are still high. Armenia has a virtuallyi00 percent literacy rate, relatively high life expectancy (72.6 at birth), and an infant mortality rate (at 15.5) well below the FSU average.19 However, serious under-funding of the social sectors has led to deterioration in the quality of and access to services. As more and more services are provided on a fee-for-service basis, monitoring accessibility to services by the poor will become increasingly important in the future.
Housing
1.42 The poor in Armenia often live in overcrowded housing with faulty or non-existent utilities. Yet surprisingly, living in temporary housing, such as railway cars, containers, etc.,
'~"Low" in these antropometric studies is a relative concept related to the prevalence of observations that fall below the mean minus two standard deviationisfor the population. In a well-nourished individual, the expected prevalence of below -2SD should be around 2.3 percent for this antropometric parameter. 8 The difference in mean weight is at least tO percent between children from very poor households and non-poor children for the same age in all age groups between 0 and 5. But given the limited number of observations in each age group in the health SDS survey (about 60), no generalization could be inferred from this sample for the population as a whole.
19 "Armenia: Confronting Poverty Issues. Annexes 3, 4, 7." The latest figures provided by SDS for 1996: life expectancy at birth 72.6; life expectancy at 30: males 41.8, females 47.9; infant mortality 15.5, matemal mortality 20.8. -18- does not necessarily constitute poverty; indeed, the incidence of poverty for this group is actually slightly lower than for an average Armenian household. While the housing conditions of the poor are somewhat worse than those of the non-poor, the type of housing or house-ownership profile of the poor does not differ markedly from the population at large (see Annex 1, Tables 19, 20 and 21).
Electricity
1.43 The difference between the poor and non-poor becomes more strongly apparent when housing costs are factored into household expenditures. For example, by the end of 1996 the cost of electricity exceeded 10 percent of an urban household's expenditures for the average very poor family as compared to less than 3 percent for a non-poor family. As a result, as many as 25 percent of very poor urban households cannot pay their electric bills, even though they risk having the power cut off.20 Inability to pay the electric bill was a close indiicatorof poverty severity; about one-quarter of families who did not pay for electricity during the month of survey were extremely poor and 75 percent were poor (see Annex 1, Table 22).
Heating
1.44 A similar picture emerges when we compare how the poor and non-poor meet heating costs. The average total winter heating cost according to the household survey is about 20,000 drams,21beyond the price range of very poor families, many of whom postpone purchasing fuel until the coldest months. Almost none of the very poor households spent any moneyon wood -- the only source of heat for half of Armenian households -- in November and December 1996, whereas many non-poor families purchased wood during these months.22 The poor tend to economize on such expenditures by collecting fuel themselves. This behavior has obvious negative environmental consequences. It also means that the ploorare often without adequate heat during the cold season, which poses, in turn, direct health consequences (see Annex 1, Table 22).
Education
1.45 Education has traditionally been viewed by Armenian families as a priority need. According to the SDS education survey, school enrollment rates continue to be high, showing only a slight bias against the poor. Neither the distribution of textbooks, nor attendarnceduring the year shows clear discrimination against the poor. Access to higher education, however, is clearly related to family wealth. In secondary school, the difference between poor ard non- poor is strongly evident in the expenditure on private lessons, which are considered an essential pre-requisite in pursuit of higher education. Even so, the fact that some 20 percent of households below the food poverty line report spending an average of more than 2,000 dramns per month on private lessons for secondary school children underlines both the high value placed on education and also the perception of the necessity of private lessons to supplement
20 This risk explains why the majority of poor (80 percent of poor urban and rural families) were paying electricity bills.
21 Estimated total cost of heating for winter months is not different between poor and non-poor families. Source: SDS Survey cf Health and Education.
22 For urban areas as well: only 2 percent of very poor households have actually spent money for wood or heating oil, whereas more than a quarter of urban non-poor families have bought some fuel (such as wood, coal or heating oil) for the cold season. In rural areas the contrast is even sharper: 5 cent of very poor households spent something on wood as compared to 41 percent of non-poor. -19- the public school curriculum. These private lessons are often provided by teachers at the schools where students are currently enrolled, presenting the danger of a two-tier system within public education. A pattern is emerging of excluding the poor from access to quality secondary and tertiary education, even where education is formally free (see Annex 1, Tables 27 and 28).
Health
1.46 Self-reporting is one way to assess health status, although it is clearly a subjective one. In Armenia 30 percent of respondents reported dissatisfaction with their health. Poverty appears to be associated with adverse health conditions. Compared with the non-poor, the very poor tended to report somewhat more frequently that their health was unsatisfactory2 3 (see Annex 1, Tables 23 and 25).
1.47 Reported morbidity was relatively high for both poor and non-poor. In a single month of the survey almost one-fifth of respondents reported at least an episode of illness that impaired their daily activities.24 Once sick, the poor are less likely to take advantage of medical services and rely primarily on self-diagnosis and self-treatment. A significant cause for concern was that the poor were much less likely than non-poor to use pre-natal checkups or birth services (see Annex 1, Table 24).
1.48 The average cost of medical consultation alone could eat up to two months of the average poor household's earnings. The cost of full treatment per patient is equivalent to one- third of the annual average per capita consumption. Average per capita private health expenditures were equivalent to 8.2 percent of current per capita expenditures, high by any standard, and represent a substantial increase in dollar terms compared to 1995 costs2 (see Annex 1, Table 24).
1.49 The poor finance the cost of medical treatment primarily by borrowing and from the sale of assets. A single episode of illness that requires hospitalization can be cause for emergency liquidation of assets even for those who are relatively well-off. Every fourth non- poor household that faces paying for medical services would effectively be counted as poor if their expenditure on medical costs were excluded from total household expenditures.2 6 Consequently, the average Armenian family tends to postpone medical treatment until a very acute condition develops2 7 (see Annex 1, Table 26).
23 As much as 38 percent of very poor reported the condition of their health as unsatisfactory; only 25 percent reported it was good (data from SDS household survey percentage relates to cases where some answer was given).
24 Health and education survey conducted by SDS revealed that over the last 12 months 37.6 percent of the population had a serious health condition.
25 The estimate is based on the SDS household survey. By interpolating the mean expenditure over the whole year, one gets an estimate of USS35 per capita -- a doubling compared to the 1995 Ministry of Health estimate and threefold increase compared to extrapolations based on the 1995 Social Assessment. (Source: Health Financing and Primary Health Care Development Project SAR, Report 16475 AM, p.2.).
26 In the SDS household survey, 544 non-poor families incurred some health expenses; 156 of them would plummet below the food line if health expenditures were subtracted from total household expenditures. This adjustment, however, could only be done for pure illustrative purposes and should not affect the overall classification of families, since it violates the consumer sovereignty principle.
27 This also translates into a very high share of hospitalizations as an outcome of illness: 10 percent of tose who were sick over a year ended up being treated in hospitals (Source: Health and Education Survey), which might have been prevented if proper treatment were available. Among all respondents who were seriously ill in the last 12 months 39 percent reported "successfully curing" themselves. -20- 1.50 Data on the use of health care facilities by different groups of the population sheds light on the incidence of public expenditures on health. Because the majority of public health spending at the end of 1996 went toward hospital care, informnationon the use of hospitals indicates how these expenditures are distributed between the poor and non-poor. The health and education survey revealed that 68 percent of hospital patients were non-poor, implying that the bulk of public spending goes to the less needy. Taking all medical services together, as many as half of the patients who received care in medical facilities that provided services free of charge were non-poor. But even when poor patients used publicly provided medical services one out of every two treatments were accompanied by out-of-pocket payments. These payments proved burdensome for poor households - averaging 20,000 drams in publicly funded hospitals.
1.51 Another indicator of low quality of life is poor public awareness about health. The evidence suggests relatively poor nutrition practices, such as diets high in fat, and negligence towards risk factors, such as a high prevalence of smoking. As many as 45 percent of Armenian households report spending money on tobacco.28 Many poor or very poor households where a member smokes are spending part of the limited cash they have on tobacco rather than meeting basic needs. Extremely poor households that fail to come anywhere near the nutritional minimum on average reported allocating 5 percent of their money for tobacco.2 9
1.52 In the qualitative study, men rarely reported not smoking or quitting to save money. (Women outside of Yerevan would not report smoking because of the societal taboo against women practicing the habit.) On the contrary, the incidence of men who smoked increased, they said, with the stress of failing to provide for their household. Men smoked between one to two packs of cigarettes a day; the cheapest pack cost 60 drams. While households reported disputes over the cash wasted on cigarettes instead of on other necessities, they never mentioned the effect of smoking on health and related health expenses.
1.53 Alcohol was also found to be a drain on resources. While the rate of alcoholism in Armenia is not as widespread as in other former Soviet countries, extremely poor families with at least one alcoholic were pointed out at each site visited by the team preparing the qualitative assessment. They were described by neighbors and local officials as "passive" households. These families were likely to be living in the most abject poverty in poorly maintained housing, without assets, electricity or a stable food supply. Mothers reported that their children grew up to mimic their elders by turning to alcohol, violence or passive depression.
28 Unfortunately, household surveys available to date did not include a question on smoking, but a study conducted by the National Institute of Health revealed that 56.4 percent of boys and 20.7 percent of girls between ages 14 and 16 smoke. Quoted in Health Financing and Primary Health Care Development Project SAR, Report 16475 AM, p. 2.
29 This share is, of course, higher if one considers only households that have reported spending on tobacco. As much as 14 peTcent of monetary spending in rural poor families with a smoking member and 8 percent of monetary spending of poor urban households were allocated to tobacco over food or other basic necessities. -21- Social Exclusion
In the Armnian:cont:ext etixoshlsmy epriual trs o xrm oet fte are:t,nf
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1.54 Most of the coping strategies of the poor depend on at least a small capital outlay and/or on social connections. The lack of strong social networks means that poor households are often unable to access official jobs, have few contacts to locate temporary employment, including work abroad, do not have access to credit, and do not benefit from gifts of food from relatives who are better off. Poverty itself may also reinforce isolation, when poor households are unable to take part in social ceremonies or family rituals in which they would be expected to contribute materially. Isolation may be compounded by the efforts of the poor themselves, especially households that are work-capable and educated, to hide their poverty. Households which become socially marginalized for any reason, including poverty itself, are those most vulnerable to extreme long term poverty.
1.55 Social institutions define rules by which individual households are included or excluded from access to resources at different strata -- extended family network, community, associations, economy and state levels. Social exclusion can lead to the household's economic vulnerability and can result in poverty, even where poverty was not a predetermining factor. The most important and recurrent determinants are: moral and traditional values which define the deserving and undeserving poor; financial wealth which can be used to obtain services, amenities and start-up economic activities; social connectedness which guarantees privilege; and access to goods, services, assets and jobs. Social ties often provide the only recourse for a household at a time when legal, health, financial and other support systems are in disarray.
1.56 Households that had recently relocated in new towns such as Sharensavan were significantly worse off than long-time town or village residents with ancestors or relatives in the surrounding areas who were able to provide some food staples. Having ancestors nearby also carried the potential of political and economic weight in Armenia. In Yeghegnadzor, those households who could not demonstrate ancestry in 1937 were excluded from land privatization. In other regions, a household's political standing was linked to when the family established itself in the region (for example, prior to or after the genocide, in the 1950s when repatriates were sent to the villages by Stalin) and the location of its origins (Van in Turkey or local Armenian, etc.).
1.57 Weak kinship ties, as in the case of orphans and even adult orphans, also limit the household's ability to rely on relatives for a support networks. Examples were evident among female pensioners living alone or in couples where male children had moved away. Ties to -22- daughters or sisters were not compensatory and often offered inadequate support. The loss of connection can come from personal differences, physical distance, moral issues, suclhas alcoholism, or a lack of direct ties to male providers such as brothers, father and mother or brothers-in-law.
1.58 The most extreme cases of poverty occur when traditional support networks fail because they are unreliable or insufficient. Cases were cited of young, single men in Spitak and Yerevan who had taken their own lives because, according to neighbors, they had lost all hope of being able to support themselves. Without the benefit of kinship ties, young men are also unlikely to marry, a state that would offer them the support of a wife's relatives. Recently separated or divorced women reported being belittled and rejected by their mothers-in-law because they were now considered orphans and were without a dowry. Some street children in Yerevan shared the common characteristic that their mothers were separated or divorced and thereby rejected from the husband's family. In villages, single pensioners who were unable to cultivate their land, without close relatives nearby, and living solely on their pensions were often in terrible conditions.
1.59 In the qualitative assessment, the poorest of the poor were found often to suffer from physical or psychological immobility. Those whose earning opportunities were limited by immobility-due to chronic ill health, physical or mental handicap, or family care-giving commitments-were often extremely poor. In addition, many of the very poor experienced feelings of depression and hopelessness and were convinced their situation was unlikely to improve. Some had tried different income-generating activities and failed and, as a result, believed themselves incapable of supporting their families. A number of households were unwilling to start anything new after depleting not only their savings and assets but also their capacity to tolerate risk. Many of the unemployed were looking for work in their field, often in industries that no longer operate on a large scale in Armenia. They found themselves sidelined from current changes in the economy, lacking the skills, confidence and energy to adapt once more to a new set of circumstances. -23-
*0 tBy the end of l1996 mretha hlfthei :populaionofArmnaeaie below th oet line and0mor tana quarterblw h oo ie In teise crus>taess ocal asgsistanceprga l ca0have no dscer ibe impaton port asawoet3 wl eedo su0;ccessful oi Iest 0 sustai 0grwhof theecnmyand failitat joraion.t 0 0;00 00-t00:0 00:0000 00 0
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affected the veypoor0 sineth 01996survey 0was c£arriedout,and0therftreimpc shul be *follwe clsey Thes include: th0eetnion of ^cost reoveryfor b:asic serieinclu2din :00ielectrctywaer and meia 1 ae thei decline0in intenaionalfood -aid;ndthe proresiv depltioofprsnland prouctve tassets,0as poorhousehld are:oledtsllwha hea to pa for food and other immediateneeds.00 $:f00000000000000f000000000000 -00000 0i~
2. THE ROLE OF SOCIAL ASSISTANCE IN A POVERTY REDUCTION STRATEGY
2.1 To understand the role social assistance can play in alleviating poverty in Armenia, it is important to view social assistance in the context of the overall strategy for poverty reduction. This strategy, which depends fundamentally on sustained economic growth, includes economic restructuring, labor market policies, the development and restructuring of social insurance, and policies facilitating access to social services. The purpose of this chapter is not to provide an in-depth discussion of these components but to review the status and possible future directions of the reforms in these areas. In some sectors, including labor market developments and reform of the pension system, much more work is needed before detailed recommendations can be made.30 In the area of pensions, the government is starting to prepare a comprehensive reform of the pension system and has just recently begun carrying out some actuarial projections.3
The fundamental importance of sustaining economic growth
2.2 The central pillar of any poverty reduction strategy in Armenia must be sustainable economic growth. The country's poverty results directly from the recent economic crisis related to the breakup of the Soviet Union, the war and the blockade. Output in Armenia fell by nearly 70 percent between 1991 and 1994. As a result, poverty is severe and widespread, with more than 50 percent of the population falling under the poverty line. In these circumstances, no impact can be made in reducing poverty without substantial and sustained economic growth.
2.3 To consolidate macroeconomic stability and accelerate growth, the Bank's Country Assistance Strategy (CAS) stresses several important elements. Efforts are needed to raise both public and private saving levels to stimulate investments; in 1997, domestic savings were negative. Fiscal consolidation and civil service reform are needed to increase the effectiveness of public expenditures. The size of the state sector must be reduced to increase private activities and generate savings, and the banking system's credibility must be restored. Formal and informal barriers to local and foreign investment need to be removed. Reforms of the judicial and legal system must be accelerated to increase the system's transparency and fairness. Major bottlenecks in infrastructure need to be alleviated, restoring viability of the energy, water and transport sectors. The lifting of the blockade imposed by some of Armenia's neighbors should open up opportunities for Armenian entrepreneurs.
30 After the results of the on-going Household Expenditure Survey are available, a Labor Market Note will be prepared to review the issues in detail.
3 The World Bank plans to assist the government in formulating its strategy for pension reform. -26- 2.4 Although higher growth rates are necessary, they may be far from sufficient to reduce absolute poverty. There is some evidence of slow abatement of poverty following the re- establishment of growth in 1995, but the incidence of extreme poverty has not been reduced and may even have increased. Growth needs to be more robust and must translate into incomes for the general population. Even though real wages increased by over 29 percent in 1996 and 19 percent in 1997, they were still (at US$20 per month on average) only one third of their 1992 level, Inequality of income distribution is very high, with a Gini coefficient of about 0.60 in 1996. The 1996 study, Armenia, Confronting Poverty Issues provides recommendations that are still valid on a variety of policies that could increase the poverty reducing impact of growth: these include measures to improve investment in human resources, to broaden income earning opportunities, and to strengthen the capacity of organizations involved with poverty alleviation.
2.5 Even under the best possible policy environment for equitable economic growth, reducing transitional poverty takes time. During this time, the persistence of extreme poverty increases the risk of social exclusion and the entrenchment of long term poverty. Some households will deplete their assets entirely, reducing their own and their children's chances of coming out of poverty. Attention will also be needed, therefore, to target assistance to households which are marginalized and excluded from the benefits of growth.
The role of labor market policies and employment-generating programs
2.6 Armenia faces high uneimploymentand high levels of inactivity. The unemployed, of whom half have not worked in the formal or informal sectors for a year or more, constitute 25 percent of the labor force. Recent growth has created very few jobs. Moreover, having a job does not guarantee escaping poverty in Armenia, because of the low level of remuneration for work and the fact that those with jobs are often supporting many dependants (see Amnex3).
2.7 Existing labor market regulations do not create major rigidities as legislation allows for reasonable flexibility in hiring and dismissing workers. Payroll taxes are high, however, and could potentially become a major constraint to job creation when the share of wages in total costs increases, as wages rise through improvements in productivity. There is an obvious tradeoff between establishing a high level of payroll tax to finance pension and unemployment benefit and maintaining employers' incentives to hire. In the short run to medium term, the balance should be in favor of job creation incentives.
2.8 To stimulate activities at the local level, some countries in transition have introduced job subsidies, training and retraining programs, micro-credit and support to micro-enterprise development, and labor intensive public works. In a relatively depressed economy, such as Armenia's, with a relatively slow pace of economic restructuring, it is unlikely that job subsidies or training programs would be a cost-effective way to fight poverty. Introducing job subsidies would be liable to delay the restructuring of enterprises in Armenia. It would also have only a very short-term impact, if any, on employment when enterprises are already inefficient and many workers are underpaid. A positive aspect of present economic policies is that nearly all explicit subsidies to the enterprise sector have ceased (although some imnplicit subsidies are still in place related to electricity and other utilities prices). Reducing these subsidies has contributed significantly to the macroeconomic adjustment essential to supporting long-term growth; introducing job subsidies could jeopardize these achievements. -27- 2.9 Training and retraining programs would be difficult to design because there is no evidence that lack of skills in the labor force is, at present, a serious constraint to economic growth in Armenia. Industries and services with new technology are still limited. The unemployed appear quite capable of actively and effectively retraining themselves in those areas where demand has recently been generated by foreign investment, primarily computer skills, foreign languages, and accounting. Small private training institutions have proved successfuilin filling training gaps in these areas. Lack of demand for persons with traditional technical training has resulted in a large number of students dropping out of technical colleges. Since 1990, primary and secondary education enrollment has remained stable while the number in technical and vocational education has plummeted. Programs oriented to small businesses and the self-employed in management, finance and marketing, often offered by foreign NGOs, have had limited success to date. Small enterprises are currently facing many other more serious constraints. Demand for training in management will likely develop later when local competition increases and managers need to become more efficient to survive.
2.10 At this stage, micro-credit and support for the self-employed and small enterprises should offer greater opportunities than training or re-training programs. Small businesses and self-employment constitute the largest sector by far for job creation in the economy, especially if private farmers are considered small businessmen: farmers and the self-employed account for about 50 percent of total employment; the non-fanning self-employed account for 12 percent (see Annex 3). Access to formal credit, however, is still a major obstacle for small businesses because of the banking sector's fragility and risk aversion. Many small businesses and the self-employed operate in the informal sector, making access to official credit even more problematic.
2.11 The primary complication regarding micro-credit and support for the self- employed is the high cost per beneficiary of outreach and administration. Additionally, the sustainability of financed projects can be an issue in a country where many factors other than financing (such as the need for personal connections and market access) act as constraints to the development of small businesses. However, some successful experiences, especially in agriculture, with the Agriculture Credit Bank of Armenia (ACBA), show that micro-credits can be an effective tool to help the poor climb out of poverty. A number of NGOs and UN agencies, including Save the Children, Oxfam, UNHCR, International Organization for Migration, and Eurasia Foundation, are also piloting micro-credit activities with some success.
2.12 Micro-credit and other programs to support to small enterprises may have little immediate impact in combating extreme poverty and social exclusion in Armenia, because small businesses do not generally recruit from among the poorest in the population. Micro- -28- credit cannot, therefore, substitute for social assistance. Nevertheless, the current imrportance of self-employment in job creation in Armenia makes this an important area of intervention. Even though micro-credit programs may not immediately benefit the poorest, these programs should not be weakened by efforts to target them only to specific categories of the population, such as the unemployed, or by administering them through agencies with no specific expertise in the area, such as employment service offices. Nor should they be considered charity. Micro-credit programs have proved effective when they are administered on real banking terms, with very limited subsidy of the interest rate, as in the ACBA model (see box above). More effort is needed to test micro-credit approaches in urban areas on a larger scale than the very limited experiments that "havebeen carried out so far.
2.13 Public works programs are potentially an important complementary activity to social or unemployment assistance to support the poor. Three different approaches to public works programs can be distinguished, according to their primary objective: (i) to provide subsistence to the poor unemployed; (ii) to provide a work test for social assistance benefits; and (iii) to improve social and economic infrastructure. The first approach has the advantage of maximizing the immediate impact on poverty; this is liable to be at the expense of productivity, however, unless substantial resources are devoted to supervision and monitoring. The aim is to provide better targeted assistance to the poor unemployed without reducing work incentives or promoting an entrenched "dependent mentality." Benefits in exchange for work should, therefore, be lower than market wages and should be administered by local or regional government. This type of public works program has not yet been attempted in Armenia, but may be tested on selected groups in the future. Experience in other cotutries (including India, Chile and Argentina) has shown that it works better when the target unemployed are unskilled workers, while in Armenia the unemployed are for the most part at least semi-skilled.
2.14 A second approach is to use public works as a work test for social assistance benefits provided to the poor who are able to work. In this case too, the level of the benefits should be under the market wage. At the same time, the level of benefit must be high enough to allow the poor working on the scheme to survive without depending on other coping activities. This would not be feasible in Armenia at present, considering the very low level of benefits and wages. Another disadvantage of such programs is that they can have very high administrative costs for a small improvement in targeting outcome.
2.15 A third type of public works program is designed primarily to support growth and improve social and economic infrastructure. Projects are identified according to local or comnunity priorities. The drawback is that the costs per job created can be relatively high, when labor costs typically constitute only 20% to 30% of the total. The Armenia Social Investment Fund is a good example of this approach (see box below). The World Food Program is also running a food-for-work program with local governments and municipalities where it is in high demand; it pays locally recruited workers in food for work on small projects identified by the regions. -29-
ASI:PIILC WRK FORCOMMUNITfY DtVELIMN
Sic its cet ion0in 95 ASIFhsimlem4ntedmoeha 120 small-scale;infratrutr reaiiainpoet at9anX; avera0ge cost of UtS$50,000eah These000prjcs aeha ostv
02 peren0 o;t ec wr agreementXIn treeyeas, ASFhas crate 1O;000 wokas¢< n a0
capbiltyof loca governmentsadmncplteinmngnifrtutreehbiaio projcts.Howeer,manof the joscete r emoay
2.16 In summary, the existing regulatory and policy framneworkfor the labor market is reasonably supportive of job creation. There is considerable scope, however, for piloting and extending different formnsof support to the work able poor, in the areas of micro-credit and micro-enterprise support, and by expanding public works program.s.
The role of education
2.17 In view of the high level of education of Armenia's population and the lack of raw materials, protecting A-rmenia's investment in human capital is particularly critical for both growth and poverty reduction. Protecting access of the poor to quality education may be the single most important factor in ensuring increased equity in the economy and society. An increasingly strong correlation should be expected in the future between low education level and poverty.
2.18 Access to basic education is not a major issue at this stage for the poor in Armenia: enrolment rates have remained very high (around 99 percent) despite the fiscal crisis, although there is some evidence from qualitative surveys that attendance may be less regular among poor children (reliable data on attendance rates are not available). The most crucial concerns in this sector are the quality of education received by the poor, and their access to higher education. The education assessment system is still too weak to allow objective measurement of differences in the quality of education offered in public schools, either between districts or between poor and non-poor children. Nevertheless, there are several reasons for concern. First, the shortage of public funding makes schools dependent on private contributions from parents and community sponsors to meet essential costs. As a result, substantial inequities are likely to exist between schools in the quality of education provided, depending on the relative wealth or poverty of the community. Second, the private costs of attending public school, as revealed in the SDS education survey, are substantial. When poor households are unable to pay the charges levied by schools and teachers, including informal pay-mentsas well as formal charges for services outside the minimum core curriculum, there is a danger that a two-tier system emerges within public schools discriminating against poorer pupils. Third, the public secondary school curriculum is not sufficient in itself to prepare pupils for competitive entrance to higher education. Access to higher education depends therefore on private tutoring, the costs of which are beyond the means of very poor households.
2.19 The government is embarking on important reforms of general education, introducing incentives to use teachers and buildings more efficiently, increasing the role of school and -30- community-level in school management, and providing funding to schools on a lump sum, per capita basis. A new system of textbook provision has already been introduced, improving the quality and reducing the costs of books to parents, and ensuring that even the poorest children have access to the books they need. Additional measures are needed to monitor and promote equity in the general education system, including the possibility of adjustment in the new per capita funding formula to account for poverty, as discussed in Chapter 4. Attention is also needed to the linkage between public secondary and tertiary education, and to the allocation of post-secondary scholarships on the basis of need as well as merit.
The role of social insurance
2.20 Social insurance can have an important role in reducing risk and vulnerability, and therefore can potentially be an important component of a poverty reduction strategy. Social insurance typically includes old age pensions, unemployment benefits and health insurance. According to different systems, social insurance schemes can be voluntary or mandatory, state or privately managed. Health care in Armenia is completely covered under the state budget and by direct payments from patients; no contributory health insurance system exists. This section will look at old age pension and unemployment insurance in Armenia.
2.21 There are several constraints to social insurance in the short term in Armenia: the sizeable population of poor; the low levels of public and private savings, due to low incomes and fragility of the formal sector; and the large population of self employed in the infc,rmal sector. As a result, social insurance cannot be expected to cover social risks for households on a universal basis in Armenia in the short to medium term. It will require major strengthening if it is to have an impact in the longer term. This should not be achieved through increases in the payroll tax to finance the contributory insurance system. Despite the reduction of the payroll tax in December 1998, to 28 percent for employers and three percent for workers, this tax is still high and is a disincentive to formal employment. An important objective of labor market policy should be to reduce the level of this tax in the medium term.
2.22 The old age pension system. The old age pension system in Armenia is a pay-as-you- go system (PAYG), financed by the payroll tax. The current system provides an extrernely low flat benefit (averaging US$7 per month, or one third of the 1997 poverty line estirmate). Since independence, the pension system has nearly collapsed, trapped between dramatic drops in contributions and the extensive coverage of the population. In 1997, the system made pension payments to 600,000 people when only 480,000 are estimated to be over age 60. Only 570,000 people contribute to the pension plan. However, in contrast to many other countries, the problems of the PAYG system are due less to demographic changes than to the erosion of the tax-base. Because of fluctuation in revenues of the pension fund due to tax collection problems, the system does not operate as insurance, and the size of benefits changes ainually in anticipation of increases or decreases in revenue collection.
2.23 The government has taken very important steps in instituting reforms to increase sustainability of the PAYG system. In December 1995, it passed the Pensions Reform law which, in addition to streamlining many benefits, introduced a gradual increase in the retirement age to 65 years for men and 63 for women. This increase will be fully implemented by 2011. Despite these reforms, the number of beneficiaries remains high (49 percent of the working age population) and as a consequence the system remains financially fragile. Revenue can be improved, especially by strengthening the system to collect contributions -31- from farmers and the self-employed, but considering the scope of the informal sector it will be difficult to implement.
2.24 Old age pensions do not really protect against extreme poverty, and a pensioner could not survive if the pension were his only source of income. On the other hand, the Household Survey indicates that old age pensioners overall are not at a high risk of poverty relative to other groups because they are in most cases benefiting from important transfers and earnings from assets such as apartments (rent) or land plots. However, pensioners without such additional sources of income or the support of family members can be among the poorest of the poor. Because of strong familial ties and access of many pensioners to non-pension sources of income, the number of single pensioners living in extreme poverty is relatively few. It may be more efficient to help this population group through social assistance programs.
2.25 The old age pension program will, however, be important in providing people an opportunity to save for their old age and it should have an indirect positive impact on reducing the risk of becoming poor. The government needs to put continued efforts into reforming the existing system to prepare for the changes to come. Currently, the government is preparing a pension reform strategy that will project future reform needs for the medium and long term. The Ministry of Social Security has already been working in this area and has been running a pension model to support policy-making. The model reveals that because of the aging Armenian population, the PAYG would not ensure sustainability of the old age pension system. Calculations show that a ffnded system would be more effective in the long term.32 However, the current conditions of insufficient savings and absence of a real capital market preclude the immediate introduction of a funded system.
2.26 The best strategy for the short to medium term would be to strengthen the PAYG so that it can sustain pension payments, especially by increasing collections. In the future, with an established legal system and an economy that can generate sufficient savings to make it worthwhile, the government will be in a better position to introduce a funded pension system, preferably privately managed. Meanwhile, the two systems will have to co-exist during the transition, which may take a generation considering the economy's limited resources. The state could also introduce a third pillar of privately managed, voluntary pension contributions. This would have little impact on poverty, however, as it is typically utilized by individuals with enough discretionary funds to permit them to make additional direct contributions.
2.27 Unemployment benefits. In industrial economies, unemployment benefits are an important part of poverty reduction policies because the correlation between unemployment and poverty is strong and direct. Although this correlation was weak at the time of the 1995 Household Survey, it is becoming somewhat stronger in Armenia. The Pension and Employment Fund provides unemployment benefits and material compensation to the unemployed through the Territorial Employment Centers. The average unemployment benefit in the first quarter of 1998 was US$5 per month. Under the new law on employment that became effective in January 1997, the number of persons who were out of work and receiving unemployment benefits dropped from 17 percent in 1997 to 11 percent in 1998. The unemployed who have worked for at least one year are eligible for benefits over a period of five months up to one year, depending on the prior length of employment. The unemployed
32 Wiese, Patrick. May 1, 1998. "Actuarial Analysis of the Armenian Public Pension System" draft report. -32- are also eligible for a further five months of monetary compensation when no other family member is employed. After this period, individuals become eligible for new benefits only if they have worked a further seven months or longer. The number of registered unemployed totaled around 170,000 in 1998, or about 10 percent of the labor force, which is high by FSU standards. This figure is, however, much lower than the measure of over 25 percent based on the Household Survey.
2.28 The benefits are too small to protect the unemployed against poverty. When the economy is restructured and formnalized,unemployment benefits can begin cushioning the impact of unemployfment.The informal sector in Armenia, however, can be expected to remain strong for many years. Analysis of the targeting outcome of different programs has shown that unemployment benefits are poorly correlated with poverty (see Chapter 3). The government has taken the right step in limiting eligibility to halt further erosion of benefits. In principle, the poverty reduction effort would become more efficient and less distorted if unemployment benefits were suppressed and social assistance increased. The payroll tax could be decreased and compensated by a more neutral tax for employment, to finance an increase in social assistance programs. For political reasons, however, it may be difficult or impossible to suppress unemployment benefits.
Table 4: Unemployment Benefits
Ql Q2 Q3 Q4 Year Ql Q2 Q3 Q4 1997 1998 1996 1______97__ 1998_ Average Benefit 1930 1,899 2,005 2,178 2,003 2,423 2,413 2,366 2,491 2,423 2,543 (Dram per month) Official Unemployment 139,400 149,400 152,600 159,300 150,300 161,40 166,800 169,800 174,292 168,073 170,166 0 (number of people) I I I_I_I Benefit Recipients | so,ooo 41,700 40,800 43,900 32,200 28,900 25,300 26,937 28,334 19,535 (number of people) I __ _I_ _ I______I__ Source: Pension and Employment Fund
The role of social assistance
2.29 As outlined above, and as stated in the previous poverty assessment, ensuring higher and more equitable growth through deepening economic reform is still and should remain the main pillar of the government's poverty reduction strategy. Insurance and risk management will be important to protect the poor in the medium and the long term if adequate reforms are pursued in this area, but are ineffective in the short term. Proactive labor market programs can be designed and greater effort made in support of self-employment, small enterprises and public works. Some action has been taken to protect access of the poor to education and other basic services but reforms must be accelerated and innovative approaches identified and tested.
2.30 In this context, the role of social assistance should not be to increase the incomLeof all the poor. The poor are too many (54 percent of the population according to the Household Survey) and the improvement of their situation depends mainly on improvement of the overall economic situation. Social assistance should therefore focus on the most vulnerable anrdvery poor, those who don't benefit from family support or other informal transfers, and those for whom the risk of falling into extreme poverty is very high. Among the very poor, sociial services should focus on fighting social exclusion and the downward spiral by which the very -33- poor lose community ties and enter a survival mode with a passivity that is often transferred to the next generation. (Industrialized market economies are typically characterized by this type of poverty). Social assistance should not create or promote dependence on charitable support but provide a means by which the disenfranchised can reenter society. This challenge is enormous for three reasons:
(a) This approach is completely contrary to the Soviet principles of social assistance. Poverty and unemployment were marginal issues in the Soviet system and any social assistance was based on supporting specific groups that were viewed as socially deserving of special support and state recognition. This mindset remains entrenched in Armenia where social assistance is closely associated with privilege. Because the poor tend not to be particularly vocal, turning this perception around has proved difficult.
(b) As a result of the depressed economy, both the government and non-government sector have very limited resources at their disposal to implement social programs. These economic limitations also constrain the possibilities for the poor to help themselves out of poverty, through employment and other coping mechanisms.
(c) The large scale of the informal economy, which is likely to remain substantial in Armenia for many years, makes it particularly difficult to identify the poor.
In the following chapters, this study examines the scope for improving social assistance programs and targeting mechanisms to meet this challenge.
3. IMPROVING SOCIAL ASSISTANCE TO PROTECT THE POOR
3.1 Social assistance can be defined as support provided to poor and vulnerable population groups by the state and non-government structures in order to assist these groups in achieving a minimal acceptable standard of living. Social assistance is different from social protection in that it does not include social insurance mechanisms by which some groups can insure themselves against risks, such as lack of revenue associated with old age or unemployment. In Armenia, the Ministry of Social Security is the state structure responsible for social assistance. It manages cash benefits, several social pensions provided through the Pension Fund, family allowances (now replaced by a proxy means-tested Family Benefit), various specialized institutions dealing with vulnerable groups, and in-kind support to different categories of households and individuals at risk of poverty.
3.2 The Ministry also plays an important role in controlling and monitoring the distribution of humanitarian assistance from bilateral and multilateral organizations. Humanitarian assistance was crucial to reducing the hardship on the population during the worst years of the economic crisis, from 1993 to 1996. A number of local Armenian non- government organizations operate a limited level of social assistance programs, often with financial support from external donors. In addition, multilateral organizations and foreign NGOs (including UNICEF, Save the Children, Oxfam, Medecins Sans Frontieres, Care, and Diasporan organizations such as the Armenian General Benevolent Union and the Fund for Armenian Relief) support social assistance programs targeted to the poor. Regions (marzes) manage a few institutions to help vulnerable groups but their role in providing social assistance is limited.
3.3 Social assistance funding is far from negligible in relation to the government's budget. The 1997 state budget contributed an estimated US$32 million, or about 8 percent of government expenditures, to social assistance. This level was increased to 10% of total government expenditure in 1998. Including humanitarian assistance in cash and kind ($24 million of in-kind assistance and some US$2 million from local NGOs and the Diaspora), this amounted to about 3.8 percent of GDP in 1997. Other costs included free health care to the most vulnerable groups through the BBP (Basic Benefit Package) and, more recently, free textbooks for the poorest children, through a program begun in 1998.
The State-run Social Assistance System
3.4 The Armenia government has recently undertaken major reform of social assistance programs. From January 1999, the primary social assistance program is the Family Benefit, replacing all existing cash benefit programs including child allowances and other social transfers. In December 1998, just over 500,000 families applied for the new benefit. The number of recipient families amounted to 221,000 by March 1999 and is expected to reach -36- 230,000 by the end of April. Selection has been based on the vulnerability score calculated through the Paros formula (see Chapter 4). The total budget for the benefit is 22 billion drams for 1999 (approximately $41 million, up from $30 million in the 1998 budget).
Table 5: Government Expenditures On Child Allowances and Social Transfers (in thousand drams)
1995 1996 1997 By Oct. 1998 Child Allowances 9,087,000.0 7,101,757.0 7,504,802.2 5,853,200.0 SocialTransfers** N/A N/A 2,980,527.0 5,275,000.0 Source: Law on State Budget;Ministry of Financeand Economy. *llocated to cover expenditures for both child allowances and social transfers. **Social transfers were introduced in July 1997 to replace state subsidized "privileges " to specific groups.
3.5 The Ministry of Social Security, in conjunction with the Humanitarian Assistance Commission (or HAC, which has been under the Ministry since 1997), oversees the distribution of humanitarian assistance, which has been dramatically reduced from its peak in 1996. The government developed a system of proxy means testing (the Paros Program) to target humanitarian assistance to the neediest. Development of the system was financed by USAID and designed by the Yerevan Institute for Computerization Research and Development, (YICRD). First introduced in December 1995, the system has since beenl used for 18 programs of distribution of humanitarian assistance provided by various donors and totaling US$34.5 million. It is this system that is used now to target the new Family Benefits.
Table 6: Food Aid Assistance to Armenia (thousand USD)33
1994 1995 1996 1997 1998 (planned) 10,538 6,519 57,219 38,632 25,808
Table 7: Emergency and Relief Assistance (thousand USD)34
1994 1995 1996 1997 1998 (planned) 4,118 50,550 93,413 71,999 47,699
33 The estimates are based on the UTNDPDevelopment Cooperation Report database. Note that all the figures reflect both bilateral and multilateral assistance to Armenia. 34 Assistance in medical, non-food commodity and targeted relief supplies. The figure includes financing of medical equipment and medicines to policlinics and hospitals. -37- 3.6 The humanitarian assistance programs were distributed with the support of international NGOs, UN agencies (WFP, UNHCR) and FAR (Fund for Armenian Relief), an Armenian Diaspora Organization that helped with overall monitoring of the system. In addition, the social services center of social security played an important role in Paros registration and in overseeing some distribution.
3.7 Although housed under the marz, the social services centers of social security have some autonomy in the implementation of the policies and programs defined by the Ministry of Social Security. They are also supposed to provide social services which theoretically requires social workers to visit homes of those unable to come to the centers; and offer family counseling, emergency help in finding temporary shelters, and various fonns of assistance to the disabled and elderly. In practice, however, lack of incentives have relegated these to secondary activities.
3.8 The state system is presently lacking in three ways: (i) clear objectives and approaches to social assistance; (ii) funding and proper staff incentives; and (iii) institutional capabilities for outreach. Confusion exists among the population between social assistance and social insurance based on the capacity of individuals or households to insure themselves against risk. The Pension Fund continues to pay out some social pensions that have nothing to do with social insurance. Few people perceive old age pensions as insurance since no link exists today between contributions and benefits. As in other areas of the government, very little financing is available for social assistance, wages are extremely low, and the budget as well as outreach is limited by operating costs and proper incentives (per diem, etc.). Social workers often have inadequate training and few hold a degree in their field. Some retraining has been carried out by USAID and TACIS but is still extremely limited in relation to needs.
3.9 The state's capacity to provide non-cash benefits is limited. The Ministry of Social Security operates six orphanages, three homes for the elderly, and two rehabilitation centers that provide free medical care and psychological counseling to the disabled. Operating on limited funds, they must often rely on humanitarian assistance to complement state funding. The Ministry of Education also runs nine children's institutions for socially vulnerable students and those with minor disabilities; two more institutions for disabled children are operated by the'Ministry of Health. The majority of institutions for children, housed under the marz (regions), also depend on humanitarian assistance and have been expanding in recent years. Many of the children in these institutions do not need to be institutionalized and could be living at home, with some minimal support provided to families, or with fostet parents.
3.10 Where caring for the disabled and orphans is concerned, the government continues to rely on the approach it inherited from the Soviet system of institutionalizing socially unprotected children in special boarding schools. Not only is this system financially inefficient, but it poses severe humanitarian problems. Such children would be better off residing in regular communities and attending normal schools instead of being separated from their community and family and thereby marginalized by society. Conscious of this problem, the government is preparing a strategy to reduce the number of residential institutions for children and replace them with community based services.
3.11 Another major limitation to the state system has been a general lack of local government involvement in the lives of the citizens it serves and in particular in helping the poorest and vulnerable. Organizations such as municipalities and village councils that are elected by the people are more accountable to the population than the central state structure -38- and should have an important role to play, given their strong potential in delivering basic social services. In many countries, local governments provide social assistance programs. Studies of other Eastern European countries show that targeting by municipality and village councils has a good outcome. The system also urgently needs a clearer definition of roles and responsibilities between the Ministry of Social Security, the marzes, and local government bodies.
NGO Programs
3.12 NGOs play a crucial role in the delivery of social safety net projects in OECD countries and their role regarding social assistance in Eastern European countries is growing as well. In Poland and Hungary, the government has contracted NGOs to manage several outreach programs because it recognizes that these organizations are often in a much better position to work closely with the population than are central government offices. In the years since independence, NGO programs have grown in Armenia, many of them created in the aftermath of the 1988 earthquake. More than 1,900 non-govermnental organizations and associations are registered locally and more than 700 local NGOs have received training at the NGO Training and Resource Center (which is supported by the Armenian Assembly of America and funded by USAID). Also, donors such as USAID have funded capacity-building programs. Many local NGOs have also benefited from small grant programs managed by various donors, international NGOs and UN organizations. They are active in areas of elderly and nursing care, child support, employment generation activities, and support to refuLgeesand the disabled. Some local NGOs, such as Mission Armenia (see Box), fill an important vacuum where the state is not at all active, such as outreach for the elderly living alone or support for the home-bound disabled.
3.13 However, the institutional capacities of local NGOs are still hampered by limited funds and operate on a very small scale. They often lack program design skills and capacities in areas such as budgeting, financial management, and reporting or monitoring systems. State collaboration is still at an embryonic stage and NGOs are often viewed more as competitors than collaborators. In some cases, as with Mission Armenia, they are officially recognized and provided with a specific government mandate which has helped them carry out their tasks, but has not increased collaboration between social services centers and NGO programs. Diasporan organizations have also played a limited role in supporting local NGOs but still prefer their own implementation mechanisms or the All Armenia Fund, an autonomous state organization, rather than supporting local organizations. -39-
Mi14ThwArmeniaiesinc1 wen nrupofena plyest NGof thawdoervno CifmeretSotwe nitut tss onfa voluntaryfbasistonhelp t a Nssocnationsars.kharefeshumandthe 1n989rgiarth e victimsby distrbtngfo andproile foogommoitesnt adosn idtngfthe fithscial nservies orAxereaisofl ret a tritn ln 199t3iMAetededsori thece ofnyits arctiest fothr vulanroablevgrousngderp0ensioners, childsen, orpha, lonelymmotrfrm ITn19f934u995c Mr rmanita6i programs.icld keren miastibuationAi Cynrdischoo persosa and mHdCalcrf the edeOy, distribi ofd fho
rfuges. MA has cetednits own dathegofe3000tvulneabe usiungdiferetiont den governmnt to serve5 isabled0 nd0 singl elderly MnschyoflsSinnce 1995 Ecoomsmin madaes hasiblefomedeteivering wihpersonralhme are t cosidereldel peopme.ithrankstowee,thee suprt nofguAidelandes MAllnpovidesa coseticues 3.14tuma900asiangl The legalbedoriddn framework want forhaondisapped NGOs in eHderlArmenia inaYesen is incompleteits hageens;as and unfriendly.establishe mrediaCurrent NGOroomsa lawrgding4 does notctmuna differentiate centersa between tA peovid differentcorrnslytinge types servicewsof NGOsanxprimaytad (i.e. professional toaddes tes associations vs. charitable, humanitarian organizations) in terms of benefits and privileges. Thecotnandependncse government doesMA not malsoofferworks any financialNonstrengethening incentivesofitheinformal or tax breaks netwrksbyte for charitableinolvingprat contributionsnegohborsah norfndreaivns is therein" any supproatingatheedrly legal precedent for Mhanphilanthropichaocs ben reciigwoganizd activity underbyattheyArmeniand Armenian law. Onlywhrie goods Miewniterts are exemptedadeacre fromas aneothfwVAT iforganization.hs purchased for "humanitarian thatnorkfcuins programs."parsotnrsipue wthThe the HsumanitarianAid Coordination Commission (HACC) of the GOA, which is chaired by the Ministry of Finance and Economy, is responsible for determining which programs are considered "humanitarian." However, there are no guidelines spelling out what constitutes humanitarian aid or on what grounds the HACC makes its judgements; even NGOs are unclear regarding the criteria. A new law currently under review is expected to address these issues, but it is not known when the government will take it under consideration. The continual dependence of many local NGOs on external funding has contributed to a desperate "go where the funding is" approach rather than a focus on defining who and what they are and where they want to advance as an organization. This donor focus has also contributed to the erroneous perception that NGOs have formed primarily to make a living for their individual members out of the proceeds of international funding35.
The Status of the Social Assistance Reform
3.15 The government, conscious of the system's shortcomings, has begun reforming social assistance by preparing a law that will delineate a clear separation between social insurance and social assistance and implement the concept of the poverty line. The law also clarifies the respective roles of the Ministry and marz in delivering social assistance programs, which will prove vital to improving the effectiveness of social assistance and supporting old age pension
35 Save the Children (USA). 1998. "Overview of the Operating Environment for NGOs in Armenia". Mimeo. -40- reform. The government has also introduced a method of targeting social assistance cash benefits using a proxy means test. On December 9, 1997, a decree was passed to replace child allowances and other social benefits with a Family Benefit targeted to poor families. As outlined above, the Family Benefit was actually introduced in January, 1999. This step was a major shift from the categorical system oriented to socially deserving members of society to a system focusing on protecting the poor. At the same time, the Ministry of Education and Science is preparing a strategy for de-institutionalization of children, including piloting of community-based support systems.
3.16 With TACIS support, the Ministry is working to improve the capacity of the social services centers. With USAID and IDA financing, the Ministry has computerized the Territorial Centers for social assistance to manage the proxy means testing database for calculating and paying local cash benefits. It has also published, under the TACIS project, a manual for social workers. Yerevan State University, with help from American universities, has created a training program for social workers (see Box below). In November 1997, the government approved a programnto improve social assistance services to single pensioners and the homebound disabled, including support in such areas as household management, legal counseling, medical care and psychological counseling. About 2,000 pensioners are currently served in Yerevan, many by the 350 Medical University students who voluntarily deliver home care, an interesting attempt to improve outreach.
A PROGRAMOF TRAININGFOR SOCIAL WORKERS
Yerevan State University's (YSU) SociologyDepartment, with the support of the EU Tempus program,has initiatedundergraduate (BA) and graduate (MA) programs in social work and social policy. Programcurricula have been developedwith help from foreign specialistsfrom Germanyand the UJK.Experts from the Universityof Connecticut,working together with the YSU Sociologydepartment, have developedand conductedbrief training programs for professionals. Since 1993, 150 specialistshave been trained, including43 heads of social services centers. In 1997,the SociologyDepartment published the Handbookon Social Work.
3.17 A number of fundamental issues regarding social assistance reform must be addressed in order to develop a,long-term vision that will support reforms, some of which have been partially addressed by ongoing reforms. Any social assistance program must remain flexible in order to adapt to future developments; as the poverty situation in Armenia evolves, government revenues may increase and a more sustainable social insurance system can come into being. Recently, the most fundamental change in the system was the focus of social assistance on the vulnerable and very poor, a step that involves targeting the main social programs (see Chapter 3). A second priority is to avoid a deepening dependence on state transfers, which could not only drain the state of its limited resources, but have a negative impact both psychologically for the person receiving assistance as well as for society as a whole. A third effort should involve outreach to identify groups or individuals who, already excluded, are not reached by various ongoing programs. -41- The Role of the Family Benefit
3.18 The initial step is to assess what the role of the Family Benefit should be for both the immediate future and the long term. Cash benefits are designed to help households who have fallen below the line of absolute poverty, enabling them to subsist without fully depleting their and their children's essential assets - which would result in them losing their ability to re-enter society when conditions improve.
3.19 The Family Benefit should target the poorest, be at a high enough level to cover basic household needs, and not be available on a pennanent basis. Cash benefits can easily create the perverse effect of dependency, discourage recipients from looking for jobs (work disincentive effect) or seeking other sources of revenue, and discourage more solvent households from transferring money or providing support to poorer households (crowding out effect). Currently, the risk is minute because in most cases the benefit is so low that families receiving assistance must continue searching for additional support to survive. On the other hand, benefit levels should not be so low as to bring about complete depletion of the assets that can enable households to improve their situation
3.20 Another important question for policymakers is whether people who are capable of working should be eligible for a Family Benefit. Making any family with a work capable member ineligible for the benefit would be feasible only ifjoblessness were very low and if unemployment benefits covered most cases of unemployment. This is not the case in present- day Armenia. However, in cases where some family members can work, benefits could be contingent on their being employed through a publicly managed work fare scheme. Although there is no capacity at the moment to manage such a program on a national basis, this could be an alternative for the future. Work fare should be piloted as a separate program independent of the Family Benefit (see Chapter 2).
3.21 Another issue is how various elements can be factored into the benefits equation to make it an effective tool against poverty while taking into account the state's fiscal constraints. Some projections have been carried out using different scenarios: economic growth, number of poor, and size of benefits. These scenarios assume that the impact of growth on poverty reduction has remained unchanged in recent years and that the level of funding available for poverty benefit will stay the same in proportion to the budget.
3.22 In the first scenario, growth is high at 9 percent per year and social assistance spending represents 44.5 percent of the budget of the poverty gap by the year 2007 as compared to 13 percent in 1998. In a less optimistic growth scenario, 4 percent growth annually, social assistance spending represents 23.9 percent; 7 percent growth annually, brings the latter number up to 35.7 percent. These figures make clear that if growth is sustained and the fiscal situation of the state improves accordingly, in ten years social assistance might become an important tool to protect poor and vulnerable groups (see Annex 4).
Managing the Decrease in Humanitarian Assistance
3.23 Even if not well targeted, as shown in the 1995 Poverty Assessment, humanitarian assistance nevertheless played a significant role in cushioning the effects of the economic crisis on the population because of the sizeable amount of funds available. The rapid decrease in humanitarian support in 1996 and 1997 left many households in very vulnerable -42- circumstances, which offers another argument for improving the targeting of poverty benefits and introducing other programs to help the poorest access food. Targeting humanitarian assistance to institutions such as orphanages, boarding schools, and rehabilitation centlershas helped protect vulnerable groups with few other means of survival. But it has also had the perverse effect of increasing staiFfand attendants attracted by the generous distribution of food to already ineffective institutions.
3.24 The decrease of humanitarian assistance must be done in parallel with an improvement of targeting through self targeting schemes and special outreach programs. Community programs and the creation of employment through food for work programs should be encouraged on the model piloted by WFP. NGOs could be encouraged to develop somle specific outreach programs such as soup kitchens and targeted support such as food delivery to the disabled or homebound pensioners.
The Need to Strengthen Outreach
3.25 Outreach should be an essential dimension of social assistance for a variety of important reasons. One of the gravest risks Armenia could face would be the emergence of long-term structural poverty because people who have been deprived of education, good health and community connections would be unable to reintegrate into society and attain normal living conditions when the economy improves. They are likely to experience permanent social rejection and albandontheir sense of belonging to a community. As the qualitative assessment of the poorest of the poor demonstrates, these individuals have already been marginalized; anecdotal evidence shows that they make up the majority of the very poor, are rarely registered under Paros, often do not receive support from the state, and very seldom get some NGO support. Such cases clarify why outreach is crucial to social assistance, not only so the extremely poor can access some sort of financial and in-kind support, but also to feel that society cares about them.
3.26 Improving outreach should be a critical component of social assistance in order to fight the social exclusion that results from extreme poverty. To bolster outreach efforts, the government should take three important steps:
(a) Increase the role of elected local governments and NGOs in the design and delivery of social assistance programs as well as strengthen partnerships with state structures. The role of local governments and NGOs in supporting outreach for state programs has been limited until recently. They could participate more actively in registering the very poor with Paros, and at the same time social service centers could direct people in need to nearby NGOs for assistance. This is already done but in a limited scale. If local municipalities, urban districts and village councils had stronger fiscal bases they might be encouraged to get training to design their own outreach programs to support the poorest, in such a way as to complement the state run programs. The Ministry of Social Security has recently carried out an information campaign to try and encourage local governments and NGOs to support the process of registration for the family benefit.
(b) Strengthen the capabilities of social services centers, review the structures' incentives to promote outreach in particular by increasing allocation for -43- transportation (see Chapter 4 for proposal). Major improvements would result from: providing a clear objective for the role of the social assistance worker; defining national operating procedures; redesigning the financial assistance program's system for outreach; creating a central inspection at the Ministry level to ensure that outreach is actually taking place; and strengthening staff training.
(c) Create a framework encouraging families and communities to support the poor and avoid depending on the state. This is probably the most difficult aspect of reform because it depends on public information to explain that it is the responsibility of the community as a whole to support the poorest. Stress the independence communities gain when they avoid turning to institutions and other formal structures for help but rely instead on community-based organizations to support people with minor disabilities, children of poor families, and other vulnerable groups.
4. TARGETING MECHANISMS FOR SOCIAL ASSISTANCE PROGRAMS
4.1 The previous chapter has attempted to demonstrate that Social Assistance needs to be focused on the poorest. Inproving targeting should therefore become an essential objective of the government's social policy. This chapter reviews different approaches to targeting social programs of the government. It opens with a brief summary of the general concept of targeting in social assistance programs. It goes on to sketch the Armenian Paros targeting system as it has been used for humanitarian aid and how it can be improved to target the new Family Benefit program. The end of the chapter examines how other mechanisms, especially geographic and community-based targeting, might be used in health and education programs.
The Role of Targeting in Social Assistance Programs
4.2 Targeting directs program benefits to the people who need them most. It serves as a tool to make programs more efficient, not as an end in its own right. Its benefits and costs must be carefully weighed in deciding whether and how precisely to target a specific program because what is appropriate for one program may not be so for another. For a summary of different mechanisms and some of their advantages and disadvantages, see Table 8 below.
4.3 The benefit of targeting is that it ensures resources go to the neediest. In some cases, targeting means that some people (the needy) receive benefits and others the (non-needy) do not. In other cases, the benefit size varies according to need, so the neediest benefit most, and those who are better off receive smaller benefits. With perfect targeting, only the needy are served, and the non-needy do not benefit; no funds are wasted on the non-needy and all the needy are served. There are, however, tradeoffs to be made in targeting.
4.4 The first tradeoff is that, in practice, no program is ever perfectly targeted. Because it is difficult to always accurately establish who is needy and who is not, some of the needy will slip through the cracks and not be included in a given program; these are considered errors of exclusion (or undercoverage). And some non-needy will be included in the program; these are considered errors of inclusion (or leakage). In general, actions that help to reduce one kind of error will increase the other.
4.5 The second tradeoff is that targeting has costs as well as benefits. These are usually grouped under three headings -- administrative costs, political costs and incentive effects. Establishing who is needy is costly, and usually the more precise the examination of who is in need, the more costly it is. Thus, there are always administrative costs. These may be high or low, depending on how the program is targeted and what information and institutions are already in place in the country to build upon. -46- 4.6 Targeting may involve political costs. In general, the more finely targeted an assistance program is, the smaller the population that would benefit from it, which means fewer people would have a direct reason to support a budget for it. Moreover, in mosl. countries, the poorest have relatively little political clout; they are often less likely to be registered voters, or to vote if registered, and less likely to be represented by interest groups that define electoral themes. Where decision-making is not democratic, the poor may be even less powerful. Yet it would be too simplistic to conclude that only those who could inmmediatelybenefit from such a program would support it, i.e. the powerless poor. Other parts of the population may back it if they fear that their relatives or they themselves may need a safety net in the future; they may vote for it because they prefer to live in a more equal society than would be possible without the program, or because their jobs in some way relate to the program. Nonetheless, the politics of who would support a program and what influence they will have on its long-run budget should be weighed. In at least some cases, and possibly generally, a program that serves a wide swath of society may get so much more funding that it can protect the poor as well as a more narrowly targeted one.
4.7 Incentive costs occur when some targeting mechanisms alter the incentives people face in ways that produce economic costs. The classic example of this in many OECD social assistance programs is that if a program reduces a welfare payment for every dollar the recipient earns, then the recipient will have less incentive to work. The magnitude of this can vary, and the precise disincentives that the targeting mechanism produces can be manipulated to some degree, but such costs must always be considered.
4.8 The "target" or "need population" can have various interpretations. Sometimes it refers to all those under the poverty line, but because few assistance programs have enough resources to give useful amounts to so many people, the target population may be the poorest few percent (5 to 10 percent) of the population, even if others fall below the poverty line as well. In cash transfer programs, "need" is usually based on poverty defined in money terms, or some proxy for poverty. But in health interventions, the target population may be tlhose who are ill or at high risk of illness, rather than the poor. In many cases of publicly financed health care, the target population will be the poor, or those poor who are at high risk for illness since the government assumes the non-poor can get their health care needs met in the private market. An analogous situation applies in education.
4.9 In the following sections, these concepts are applied to several specific aspects of social programs in Armenia. -47- Table 8: Basic Targeting Mechanisms
Mechanism Examples Administrative Costs Targeting Errors Targeting to individuals - a means tests, proxy means Costs involved in selecting Highly variable. Have the program official must tests, evaluations by social beneficiaries are the highest of potential to be the best, detennine whether each workers, targeting by any of the targeting depending on caution used applicant (individual or nutritional status, mechanisms and can range up household) is eligible biomedical risk to about 2% of program costs, usually no more than $2 per beneficiary per year Categorical targeting - all The elderly, children under Can be very low if information Precision depends on the members of some easy to five, pregnant and lactating bases already exist strength of the correlation of observe category are eligible, women, registered the category with poverty, where the category selected unemployed are common usually rather low, so is correlated with poverty groups. Many programs targeting is not exact. In that provide services and a geographic targeting using few cash transfers or small administrative units subsidies in kind may be (e.g. a hamaink or rayon geographically targeted, by rather than oblast or republic) only allowing schools, will be more exact but clinics, stores, etc. in poor requires more information areas to participate Self-targeting -- the service Hard physical labor for low Administrative costs to the If wages are set low, it can be is available to all, but wages on labor intensive selection of beneficiaries are, very good for labor intensive something about it public works; subsidies to by definition, zero, but there public works, but the discourages the non-needy foods consumed may be considerable costs to opportunity costs to the from applying disproportionately by the administer the whole program participants can account for a poor; subsidies to medical large share of wages paid if by devices needed only by the taking the job they cannot do disabled any other work, even part- time or on subsistence agriculture. Food subsidies are usually not targeted well as the non-needy consume more than the needy in total, ______even staple goods
Paros, Humanitarian Assistance and the Family Benefilt
How the Paros system works
4.10 In 1994 and 1995, the Armenian government introduced a proxy means testing method called the Paros program to serve as the targeting mechanism for the large quantities of humanitarian aid flowing into the economy.36 Paros was the first proxy means testing system adopted in Eastern Europe or Central Asia, though Russia is now experimenting with it on a pilot basis. The program was introduced very quickly to deal with the emergency. Several government agencies were involved in the program, depending on their comparative advantage. The Ministry of Social Security offices were used to register beneficiaries; Social Service Centers (SSC) were created with the sole purposes of registering families in Paros and helping to distribute humanitarian aid. The Yerevan Institute of Computer Research and Development (YICRD) maintained and managed the database, and did most of the early data entry. The Fund for Armenian Relief provided some technical assistance and monitored the Paros system. These three agencies together comprised "the Paros system." USAID provided some assistance for administrative costs. Many NGOs and several UN aid agencies used information on beneficiaries provided by the Paros system to distribute humanitarian relief.
36 Humanitarian aid is estimated to have been about 12% of GDP in 1994, declining to about 2% in 1996. -48- From 1994 through 1996, individual donors and distributors of humanitarian aid had the option to take advantage of the P'aros program, use it in different ways or not use it at all. In 1996, it became the official system through which all humanitarian aid was distributed in Armenia.
4.11 Humanitarian assistance has declined markedly in recent years and it is now intended that the Paros system be used to target the new Family Benefit, a cash transfer financed by the GOA budget that is scheduled to go into effect in January 1999. Paros might also be useful to target other transfers or fee waivers. In Chile, for example, a single Paros-like system is used to determine eligibility for three different social programs. Putting it to this use, of course, spreads the burden of the administrative structure over a larger program base. The chaLngein the Paros program's purpose makes reviewing its performance, constraints and structLres very timely.
4.12 Scoring. In order to register in the Paros system, a representative of a given household must go to his or her local Social Services Center (SSC) with the required paperwork to substantiate the family's position. Birth and marriage certificates, copies of disability certifications, pay stubs and the like are required. A social worker interviews the applicant and fills out two copies of a "social passport," filing one in the registration and one in the program office. Based on this data, a "Paros score" is calculated for each registered household (see Box 1).
4.13 When the system was used for humanitarian aid, no threshold existed above which people necessarily received benefits. Instead, for example, for each shipment of huma:nitarian aid distributed, those with the highest scores received a ration until the shipment was exhausted. Thus, the threshold has fallen by different point scores at different times. Also, some distributing agencies, either because of the geographic range of their coverage or because of the type of aid they distribute, limit their distributions to households that mLeet certain geographic or demographic characteristics and, within that category, use Paros points as a guideline. For example, if an aid organization set up to work only in an earthquake zone received a shipment of powdered milk, the Paros program would provide a list of households with pregnant women, new mothers or young children living in that zone, with the households ranked according to the Paros score.
4.14 A household's Paros income level was recalculated after each aid distribution based on the Paros system's information about the value of rations received, and all households were re-ranked based on the new scores. This re-ranking following each distribution drove many aspects of the program. It meant, for example, that the scores had to be calculated in a single central office, because the task required that the entire up-to-date database be emnployed to determine the list of those eligible for each aid distribution. It also meant that whethLera family was eligible or not, changed from distribution to distribution, which carried with it the challenge of explaining the eligibility criteria, and informing families of their status for each distribution.
4.15 For the Family Benefit program, the government has appropriately proposed thiata single eligibility threshold be set for a defined period, probably one year. This will allow scores to be calculated in local social services centers, and may simplify the burden of explaining the program to applicants and informing them of their status, as will be discussed more fully below. -49-
Box I' Tkhears Prox formula
Thlecuatent Paresformla iis ompose of fiveactors. Tebasic fbrmua is:
Score = F, *F * F F ,*
Eachftor hasits sb4-formla:
*0i Eahsocialceory'iJha a specificnumerof pit attachedtoit. Table B.i provids a lkisto tecaeoies and poHintsass ignedto 0ea,calclaingtheX social 0categrfatr firtsta poin scoreAis} givenA to eah eronin0the0 household.0 A ero may0fX0Wit omr than one soca aeoy,frea a perWson ihtb simultanosyscn-ere isabled,dit
step,theprsnl household.Voud crei totaed toete 7e foraltehousehod !memesanddvdd by th nube of memer o the 0
* he housingqualty fco ransaight fromTaLbe B.1. * ThelocatIioncrisdrawnstaght frm abl :B :.
* Th houseoldsize factoris calulated as g1 1.0- 0.02n,-0w here n is theVnumberof famlyTnm bes.0i 0 00 * The formulafor the i ctor in iros formulawas designed toequalonewhenincome was equ to theco of
i:owa l0 costfodbakts c;alculwatedinerl ovrywork. Thncm faco biscalulte > as:'.i 0 0$0it
0 S 0:;: ~~~~~~~~~~12 y:g:0;u ;X:-0- :t:0 : Cincomne 1.2- 04 nm
* a0Eis the totl. valueof humanitarianaidreceivd infUS dollars *s isthe total, declaredd monthly inme o f thehouseholi indollars.
* t nii he0.enumberofmmbersintehousehold, 400000000000 f0ttift!0000000000i000000iVi00000
*-0 in is thieminimaum monthlyalryof theReublic ofArenia exprssdn USdolars (about$2). tit0 t 0: d
Highscoresindicate ahigher need thai low sces.ie Note that th fo do nothae ebsout ds.Ngative valuesare possible for thoswith highincomes.At the upperend o the range,ioset laisinly thereis notfa theoreticalmaximum numbera ofindividualsor social ies asso with t a householdc c ontain.Iprciet e hhprfeis anupper plausible budof abouWf7t070 75. S toS0;f; 00Xff0000i0
The formulaas an;0adhc eision mad by prora designrs. Te pointsAassignedtoeahsoital categoywere . originallyeived frm asurvey of to onsof s ers. ou h senormula ?f havebe aesnetepormbgn mogtemseen motn hne a Vta new rulp:Ete ithatsets tozeoh scoreofayhosehldthspua ianycarsince I 93RtheJ fl lof 17, rsobi infrtionfothe ttax authoritytosre as thecinfrain bas fo this, and changedthXescoesof bot4,00 ghousehods}to zero. S8imilarly,scors of houisehol tha dasall busin licenseare set to zero baedonin ionfr te sal businmess lcesng bureau.40 i;; f0 : i;iLLL ;;;;ifLsLa;Lff -50-
Table&I: PointsAssigned for VariottsAttributes in CurrentParms Score
Condition SocialCategory PointsAssigned Housing PointsAssigned category-lessperson 20 none(homeless) 1.05 childof a divorcedparent 26 ernergency 1.04 childof a singlemother 26 tenporary 1.03 unenmployedperson 27 dormitory 1.02 3rddegree disabled 28 permanent 1.0 studentage l6 or older 29 pregnantwoman 30 Location childaged two to eighteen 31 earthquakezone 1.10 pensioner 34 borderregion 1.05 child under2 35 other 1.0 pensionersliving alone 36 twitis(and more) under 5 36 2nd degreedisabled 39 personage 80+ 39 orphan,one-sided 43 disabledchild under 16 48 tst degreedisabled 48 orphan,two-sided 50
4.16 People were eligible to register in the program at any time after the Paros system became active in 1994. After registering, households were obliged to report any charLgesin their status when they occurred. Nonetheless, prior to implementing its new Family Benefit system, the government required any interested households to re-register, starting in August 1997. Based on the sample of SSCs visited by Posarac, the number of households that re- registered is about 70 percent of the number originally registered three years ago, this suggests that about half of the households in Armenia may currently be registered. Program officials attribute the drop in registration to the drop in humanitarian aid and reduced prospect of getting a benefit from registering, to self-targeting, and to emigration.
Targeting perform.ance
4.17 It is now possible to use data from the Household Expenditure Survey to study how the Paros system functioned in the fall of 1996 when used for humanitarian assistance. This, together with information from two qualitative studies (Gomart 1998a and b) will also allow us to make some inferences about how it might work in the future.
4.18 About 71 percent of Armenian households report they were registered with the Paros system in the fall of 1996 (see Table 9). Registration by decile of per capita consumption shows an inverted slightly U-shaped curve. The percentage registered increases from about 71 percent of households in the poorest decile to 79 percent for those in the fourth decile, then falls to 64 percent for the richest decile. This shape indicates very little self-selection, which would have implied that those in higher deciles register markedly less often than those in lower deciles. In many other countries (especially in Europe and Latin America) there is much more self-selection out of social assistance programs by those in the upper half of the welfare distribution spectrum. -51- Table 9: Basic Paros Results by Decile
Estimated Median Paros Score Decile % Registered All households Registered Unregistered I (poorest) 71 35.2 35.0 35.7 2 75 33.4 33.7 31.3 3 75 33.0 32.9 33.1 4 79 20.6 31.0 29.7 5 75 28.8 29.8 24.9 6 73 26.3 26.9 24.1 7 72 24.1 26.9 28.5 8 71 24.0 24.4 24.0 9 67 23.7 24.2 24.0 10 64 22.9 24.0 22.6 Natl 71 28.9 29.8 26.6 Source: Grosh and Glinskaya (1998)
4.19 To get an idea of the accuracy of Paros scoring, Grosh and Glinskaya (1998) compared the ranking by estimated Paros scores among those registered to the ranking by the household per capita consumption of the whole population as reported in the survey. To carry out the comparison, quintiles of those registered as ranked by the estimated Paros score, and quintiles of the whole population as ranked by household per capita consumption, were constructed.37 The cross-tabulation is shown in Table 10. Each cell indicates the percentage of the row's population that falls in the corresponding column cell. If the two rankings were identical, then the diagonal cells (shown in bold here) would be 100 and all the off-diagonal cells would be 0. In fact, the results show that the estimated Paros score ranks people quite differently from the preferred survey-based measure. Of those in the poorest quintile, according to the estimated Paros score, only one-third are in the lowest per capita consumption quintile. And members of this Paros quintile are found all the way up to the richest per capita consumption quintile. The accuracy is markedly lower around the middle of the distribution.
Table 10: Paros and Per Capita Consumption Deciles
Per Capita Consumption Quintiles Paros Quintiles I (poor) 2 3 4 5 L 1(poor) 32 25 16 14 12 100 2 21 24 23 18 15 100 3 24 25 19 17 15 100 4 16 20 22 25 17 100 5 6 14 23 26 31 100 Not registered 18 17 19 21 25 100 Source: Grosh and Glinskaya (1998)
4.20 Errors of Exclhsion. Ideally, the percentage of the poorest decile registered should be high (and higher than for those who are less needy) and for those who registered, their Paros score should show them as needy. The quantitative analysis shows that neither of these outcomes is as good as desirable. Three causes for the errors of exclusion emerge from the
37Note that in thesepopulation quintiles, each contains one fifth of the numberof personsin the population.The numberof households containedin the quintilewill vary,usually with fewer, larger households in the poorerquinbiles than in the richerones. -52- qualitative study. First, Gomart (1 998a and b) documents that am,ongthe poorest the causes for not registering included: possessing insufficient information or understanding of'the Paros system; inability to pay the bus fares, fees and often, under-the-table payments required to get all documentation in order and to register with the Paros system; and difficulty standing in lines for long periods due to disability, pregnancy or child care duties. Of course the degree to which these barriers are felt is highly variable.
4.21 Such barriers are comrmon,indeed almost inherent, in such assistance programs, though of course they do not affect all potential applicants equally. Some of these barrners can be reduced, at least to a degree, by altering how the program is administered to improve the public's awareness of it, shorten registration time, and improve outreach to make it easier for the disabled to get to the offices to register. The Ministry of Social Security has taken some actions already to lower some of these barriers. It carried out a new publicity campaign in 1998 to increase public understanding of the system, using primarily mass media. Many offices organized at least one visit to villages during the period of peak re-registration to make it cheaper and easier for those in outlying areas to register. And households may be registered by proxies -- friends or neighbors, if physical access is a problem. All of these efforts are valuable, and there is potential to carry them further.
4.22 Nonetheless, some of these barriers are likely to remain, at least in the medium term, in part because they are somewhat inherent in programs requiring documentation anrdcentral registration, and in part because the most expensive transaction costs for applicants stem not from the Paros program or Ministry of Social Security itself, but from the costs of lining up documentation -- fees exist, though are low, for much of the official documentation; photocopies are required, and sometimes busfares. These modest costs can be prohibitive for some of the poorest. More significant costs can apply for some individuals who have to line up documentation of disability, which requires medical exams and sometimes unofficial charges. Some of the population also believes that they cannot get documentation of household size or Armenian passports, which are required, without being up to date on tax and utility payments handled by the same agencies that issue the documents (the JEKs). Apparently officials often agree to waive or defer at least part of such arrears, but the practice is not universal or official so some needy may be deterred from arranging their documents and registering with Paros.
4.23 A second problem with errors of exclusion lies in the use of imputations and proxies that are only approximate. As we shall see later, no set of easily measured, objective variables does as well at predicting poverty in Armenia as is feasible in other countries. But even with variables that are, on average, inextricably linked to poverty, Paros faces measurement problems. For households that own land, Paros imputes an income stream, based on the quality and size of holdings. Gomart (1998a), however, reports that some of the poorest of the poor cannot afford to farm the land that they own because they lack labor, seeds, or cash to pay for irrigation, tillage, etc. Consequently, they don't in fact get the funds that Paros assumes they do, and their Paros score understates their poverty. A similar problem occurs with automobiles. Households with cars are assigned zero scores that preclude them from receiving benefits. But the qualitative study suggests that a few genuinely poor households indeed own cars (especially among the disabled who were given priority access to cars prior to 1991), although they often lack the money for gasoline or repairs to run them; but they are struck from the eligibility rolls anyway. -53- 4.24 A third problem appears to lie with how social workers treat potential clients. Apparently, the information provided by the social workers occasionally differs explicitly or implicitly from the Paros formula. The system allows all households to register and includes the working poor and the poor who are able-bodied in qualifying for benefits. However, some social workers discourage or prevent households that do not fit certain social categories, particularly the able-bodied and working poor, from registering or receiving benefits, even though they may be needy.
4.25 Errors of Inclusion. The extent of the benefits distributed through the Paros system and other programs in Armenia are compared in Table 11. The incidence of the simulated Paros program is better than for any of the other Armenian programs included in the HES. Fifty-four percent of a transfer targeted through Paros would accrue to the poorest 40 percent of the population; for state transfers, about 40 percent of the total would get to the poorest 40 percent. The incidence is a little better for child allowances and unemployment benefits. Comparing the incidence from the simulated Paros transfer to international standards, it is somewhat less successful than many targeted programs have been able to achieve, but much more progressive than for general food price subsidies. Among Latin American programs examined by Grosh, the median distribution meant that about 70 percent of benefits accrued to the poorest 40 percent of households (1994). The Chilean proxy means test is the most similar to the Paros program, where about 70 to 80 percent of benefits accrued to the poorest 40 percent of the population. The comparators for transfers in various Eastern European countries show that some produce better incidence than Paros, others worse.
Table I1: Incidence of Different Programs Share of Benefits Accruing to Population Decile (in %) Programn I (poorest) 2 3 4 5 6 7 8 9 10 tTTyT0y,;0000$ffff,$054,,f,,fAriSa-SSESi A777"77e,um1 ;SEiNdg$E g777 Pensions 10 9 11 11 10 II 10 11 9 9 Disability benefits I1 9 10 12 13 9 9 13 7 8 Child allowances 14 11 10 10 10 11 10 9 9 8 Unemployment benefits 11 15 9 15 14 7 12 5 8 4 Student stipends 5 11 8 4 10 12 9 19 15 8 State transfers - total 10 9 11 11 10 11 10 I 1 9 9 Humanitarian aid4 3 5 6 9 10 I I 10 13 13 20
Paros (no cars) 14 15 I I 14 10 9 9 7 8 5 International Extperinence Chile-family subsidy ' 57 26 12 4 2 Chile-pension asst' 50 23 17 7 3 Median of 30 programs in 72 28 Latin America I Algeria - 17 subsidized foods ' 14 17 20 22 27 Sri Lanka-wheat, bread, sugar' 14 17 21 23 25 Estonia -pensions2 3 14 33 28 17 13 Estonia - unemp ben 2 35 25 13 11 7 9 Estonia -social asst 2 13 31 14 8 27 7 Estonia -child ben.2 12 28 17 19 18 7 3 Hungary-fam. allow. 10 10 10 10 10 1o 10 10 10 10 Bulgaria - fam. allow. 3 6 9 10 10 10 11 11 12 13 10 Poland - fam. allow. 9 10 9 10 10 11 11 l 11 12 I FromGrosh, 1994. Decilesare householddeciles, so the lowestcontain slightly more than 10%of the population. 2 FromWorld Bank (1996)Estonia Living Standard During the Transition,Report no. 15647-EETable 3.2 3 FromFajth, 1994. The numbersreported here are interpolatedoff graphs,and thussomewhat inaccurate ft. Note that the numbersrefer to the household'sconsumption after theyhave receivedthe transfer. 4 It is notpossible to tell fromthe calculationspresented here whetherhumanitarian assistance flows disproportionatelyto thoseat the top end of the distribution,or whetherthese transfers are so large that theymove households that wouldotherwise be poor out of poverty. -54-
4.26 Changes in the Paros System. It is necessary to examine how variations in the Paros system affect targeting outcomes and specifically how setting to zero the scores for those with cars affect outcomes, and the importance of the threshold used.
4.27 Poverty measures and errors of inclusion and exclusion for a simulated transfer are shown in Table 12. With the lower poverty line, for example, the headcount is reduced from 17.2 to 14.2 when the cutoff is 32 points and no account is taken of car ownership. In this same case, 17 percent of the whole population count as errors of exclusion because they are poor (log per capita consumption per person per month of less than 8.83) and either chose not to register or are ruled ineligible for benefits based on a Paros formula score of less than 32. Errors of inclusion, 20 percent of the whole population, are comprised of the non-poor (log per capita consumption per person per month of more than 8.83), elected to register and have a Paros score of more than 32.
Table 12: Results of Modifications to Paros
Poverty Line = .5 median pc cons Absolute Poverty Line % hh drains of (5,400 dramnsper person per month) Errors of Errors of (10,784 drains per person per month) receiving transfer FGT(0) FGT( 1) FGT(2) Exclusion Inclusion FGT(0) FGT( 1) FGT(2) Baseline 17.2 4.6 1.8 54.7 21.0 10.5 Uniform 100 337 14.7 3.6 1.3 52.8 19.0 9.2 Paros 32 29 1056 14.2 3.4 1.2 17 20 52.7 19.0 9.0 Paros 35, no cars 20 1522 14.3 3.5 1.3 20 13 52.7 19.0 9.0 Note: this table was calculated including only those farnilies that reported actually being registered in Paros in November 1996.
4.28 Modifications to the Paros program with regard to cutoff score and handling cf car ownership has lowered errors of inclusion from 20 to 13 percent, that is, fewer people with relatively high welfare levels receive transfers under the new scheme. But the new scheme has also raised errors of exclusion, which have risen from 17 to 20 percent. As a result, thle number of truly needy who are excluded from the system has increased. Note that the errors calculated here probably somewhat underestimate errors of exclusion. Because the survey did not contain information on car ownership directly, Grosh and Glinskaya based their assumptions on which households spent money on gasoline or auto repairs (1998). But some poor people may own cars they couldn't afford to use during the month of the survey and so didn't outlay funds for gasoline or repairs. The qualitative study suggests that this phenomenon does occur. These people would not be noted in the Household Expenditure Survey as car owners, but the Paros system, upon leaming from the automobile registry agency that these households owned cars, would set their scores to zero.
4.29 It is interesting to note that the poverty indices resulting from the simulations of the two versions of the Paros program are very similar; changes in errors of inclusion and exclusion offset each other. Therefore, while the political economy of the program has changed somewhat, and administrative requirements are heightened by the need to crosscheck records with the automobile registry, the overall impact on poverty of the program was not changed significantly. The FGI' measures of poverty are fairly constant as the cutoff score vacillates, but the errors of inclusion and exclusion change. -55- 4.30 Incentive Effects. The Paros proxy means test likely produces a minimal disincentive to work. It was not possible to model this formally, because the Household Expenditure Survey does not contain data on hours worked. But understanding the formula and how it is applied would suggest minimal, if any, effect. First, the formula does not rely very heavily on income to begin with; it is only one of the five factors. However, it does include some components of income, but in ways that would likely minimize disincentives to work. Applicants are expected to produce official paperwork to gain formal sector employment, but much of this is very poorly paid and constitutes a small fraction of income (see Chapter 1). Moreover, most formal sector jobs are full-time, though the common wisdom prevails that few workers devote much effort to these jobs and that they are, in fact, often performed on a part-time basis. Thus, a change in the number of hours worked is only tangentially tied, if at all, to income from this source. For agriculture, Paros does not rely on reports of earnings, but instead imputes an expected income based on the size, quality and location of landholdings. Paros asks for, but is in no position to verify, income from most other sources, especially from informal enterprises and transfers. It is commonly known that these earnings go largely unreported by applicants. Since households don't report the earnings, they have no incentive to lower them.
4.31 Paros continues to use various categorical factors that have been pervasive in the Armenian social assistance system for many years and possibly inherited from the Soviets. Disability status, household structure, location and quality of dwellings are capable of being manipulated, whereas age and gender are not. Thus any incentive costs these have are merely continuations of old distortions, and no attempt has been made to measure them for this report.
4.32 Political Economy of Targeting. It is difficult to speak authoritatively on this subject. On the most general level, Gomart's (1998b) study reveals a certain ambivalence in Armenia toward targeting in general. On the one hand, the instances of well-fed, well-dressed people in fancy cars picking up humanitarian assistance transfers negatively affected the citizens' perception of how well targeted the aid was. This suggests a certain desire to avoid, at the very least, the most blatant errors of inclusion in a social assistance program. On the other hand, the concept of giving transfers only to the poorest is not obviously supported. Most of the population has suffered a significant drop in living standards in recent years, and consequently view poverty as the defining difference between "before" and now. According to this criterion, most people are poor and feel themselves deserving of aid. By contrast, targeting focuses on those at the bottom of the current income distribution. Moreover, Gomart (1998a) reports that the poorest are sometimes seen by society as being responsible for their situation; that being economically poor is linked to being intellectually or socially poor. Targeting them is viewed by some to merely reward those who are not perceived as pulling their own weight.
4.33 The qualitative study also suggests that the Paros system doesn't have a good reputation. Many focus group participants were concerned with cases of either inclusion or exclusion errors during the distribution of humanitarian assistance that they had witnessed in their districts or heard about. And they generally considered that Paros lacked clear and well understood rules of eligibility, required procedures, informnationdissemination to applicants regarding their status, making appeals, etc. Specific steps to improve services have already been taken and further steps are discussed below under administration. There will, however, inevitably be a lag between the system's current perfornance and its reputation, which is based on its cumulative performance since its inception. -56- 4.34 Administration. The GOA and agencies involved in Paros very quickly and in the midst of an emergency situation erected an innovative system that reached a very large segment of society, produced a somewhat progressive incidence and had relatively low administrative costs relative to the aid that flowed through it. A July 1996 mission estimate roughly put costs at about US$I per beneficiary. For this they deserve significant congratulations.
4.35 Nonetheless, the program switch from emergency ad hoc distributions of humanitarian aid to medium and long-term distributions of cash allows the program to look at administrative options previously unavailable to it. It also affords Paros the opportunity to build procedures and systems better suited to its new tasks that can be more uniformly implemented and monitored than was possible during the emergency. The next section reviews beneficial changes.
Refining and Reforming Paros for Use for the Family Benefit
4.36 Changes to the proxy formula. The original Paros formula was invented, out of necessity, without recourse to accurate data regarding poverty. However, such data are now available and if Armenia is to continue using a proxy means testing system, it is important to consider whether the targeting formula can be made more accurate. Grosh and Glinskaya perform a number of simulations to deduce how well alternate indicators and weights for them could work (I998). Briefly, the simulations use per capita household consumption as a measure of "true" wvelfare.Using regression analysis, they predict this "true" welfare using a variety of sets of easily observed variables. The regression helps diagnose which indicators are good proxies fcr poverty and then gives the weights to be used for each. The accuracy is then judged by simulating a transfer to those below a poverty line and examining the impact on poverty and errors of inclusion and errors of exclusion.
4.37 Grosh and Glinskaya test several alternative models. The general logic is that each model demands more information and is therefore more difficult to implement administratively than the one preceding it. Within each model, they tested various alternative specifications of the precise variables available from the HBS data set, their definitions and the functional forms. The results of the simulations are presented below in Table 13 and Figure 5. The main conclusions are:
(a) The better models reduce poverty by more than the current Paros system for a given transfer budget and, of course, more than a uniform transfer would do. For example, evaluating the results for the relative poverty line (see Column 9 of T'able 13), a uniform transfer would reduce the poverty as measured by the head count index from 17.2 to 14.7, the current Paros formula would reduce it to 14.3 and proxy formula 6 would reduce it to 13.6
(b) Even using the same indicators, a change in the weights used in the Paros formnulacould imcnprovetargeting. Model 9, which uses only information already available in Paros records but different weights, could be adopted relatively easily because no new information collection or registration would be required, just training for social workers, public outreach and computer programming to recalculate scores. Note that the simulation probably exaggerates how well Paros could target after re-weighing, because the information on income in the survey is quite likely more accurate than what is -57- actually available to Paros administrators. This formula reduces poverty noticeably more for the same size transfer budget than does the current Paros formula.
(c) Several administratively complex options do not perform much better than simpler ones, and can therefore be discarded. Adding the employment and income variables, for example, hardly improves the effect of the transfer, but is quite hard to verify. Paros already asks households to report such information, but has little way of verifying it. In the case of agricultural income Paros imputes an income based on landholdings, and in the case of registered small business owners sets the score to zero, thereby disqualifying the family for aid. The results here suggest that the administrative burden implied by these procedures is not worthwhile. Similarly, using separate formulas for urban and rural areas would be administratively difficult and hardly improves results.
(d) Models 6 and 7, which include information about location, social categories, household demographic characteristics, housing quality and some household assets are the best options among the models that do not use income information. Model 6, the most accurate of these models, uses the most information. Model 7 dispenses with some of the indicators with a weaker correlation to consumption, and so requires less information and would cost less to administer. However, the impact on poverty of a transfer targeted with Model 7 would be slightly less than that of one based on Model 6. Either would be acceptable options.
(e) Geographic targeting, at least at the gross level of detail used here, is not terribly accurate, though considering how low the information requirements are, the results are not too bad.38
(f) The simulated transfer budget, which approximately reflects the actual budget available for the Family Benefit, doesn't contain enough money to lift many households out of poverty, even with a very low poverty line, like the relative line used in the simulations. Thus the main impact of the transfers is not on the head count index, but on the depth and severity of poverty.
(g) Overall, the prediction equations are inaccurate, especially when compared with the degree of accuracy obtained in other countries. While somewhat disappointing, this result is not surprising. In a full market setting, the assets that are the core of a proxies equation (human capital, housing, land, livestock, etc.) are correlated with consumption both because it took past earnings to acquire the assets, and because the assets can generate a return in the present. Since markets in Armenia are newer and less developed the correlation between assets and current expenditure is lower. Moreover, households apparently move in and out of poverty over short periods of time, making poverty very dynamic whereas the indicators available in a survey and easily used in a Paros-type program are more static.
38 Note that in a previous version of Grosh and Glinskaya, geographic targeting performed much worse. That picture was unrealisticallypoor for three reasons. First, the border, conflict and earthquake zones were improperly coded. Second, no corrections had been made for regional price variations, and third, the results were difficult to interpret because the omitted category of the regional dummy variable was poorly chosen. -58- (h) Note that the proxies for poverty and how strongly they correlate to poverty change over time regardless of the country, and might be expected to do so more quickly in a transition economy than a more stable one. Thus, it is appropriate to revisit the proxy formula periodically and change either the weights or the indicators. The 1998-1999 Household Budget Survey will provide new data to firther fine-tune the proxy fornula. The Ministry of Social Security has recently forned and equipped a small policy unit which is being trained to carry out such studies periodically.
Table 13: Results of Different Targeting Formulas
Poverty Line = .5 median Absolute Poverty Line pc cons (10,784 drams per Errors of Errors of (5,400 drams per person person per month) per month) Information Model# FGT(0) FGT(1) FGT(2) Exclusion Inclusion FGT(0) FGT(1) FGT(2) Baseline Base 54.7 21.0 10.5 17.2 4.6 1.8 Uniform Uni. 52.8 19.0 9.2 0 47.2 14.7 3.6 1.3 (simulated) Paros 52.7 18.9 8.9 17 17 14.2 3.3 1.2 (social categories) numberofhouseholdmembers 1 53.1 19.0 9.0 20 12 14.3 3.3 1.2 in each social category, household size (location) dummyvariablesforthemarz, 2 52.7 19.0 9.0 21 12 14.1 3.4 1.2 the strata in the sample, the earthquake zone, the conflict- affected border zone and interactions between the latter two and rural areas. (social cat. And 3 53.0 18.9 8.8 18 14 13.8 3.2 1.1 location) (Model 3 + hh household size and its square, 4 53.2 18.8 8.8 16 15 13.9 3.1 1.1 demographic the dependency ratio, the age, characteristics age squared and gender of the head, and the educational level of the most educated member (Model4+assets) land,livestockandaproxyfor 5 53.2 18.7 8.7 14 17 13.9 3.0 1.0 car ownership (Model 5 + size of the dwelling, presence of 6 53.2 18.8 8.7 13 18 13.6 3.0 1.0 housing water, electricity,heat, characteristics) telephones,the type of dwelling and type of ownership. (all categories, uses variables in Model6 from 7 52.7 18.8 8.7 14 18 13.6 3.0 1.0 fewer variables) each category that are the best predictors and most readily verified;number of pieces of informationrequired is reduced from 39 to 20 (Model6plus manyemploymentvariables, 8 52.8 18.7 8.6 12 18 13.4 2.9 1.0 employment and whether or not the household income) has received remittances,and the amount of agricultural production sold and the amount of food from home consumption (allcategories, models6and7onthesample 6U/R 52.7 18.8 8.7 13 19 13.7 3.0 1.0 separate urban and split into rural and urban areas rural) separately ParosInformation letsregressionprovideweights 9 52.9 18.7 8.7 14 16 13.2. 3.1 1.1 -59-
Figure 3: Percentage Reduction in Relative Poverty for Various Models
0.5 0.45- 0.4- 0.35-
.~0.25- O FGT(1) ~0.2 U FGT(2) 0.15- 01 0.05
N COro A '
Model
4.38 Benefit Levels. Each beneficiary household (220,000 households in March, 1999) receives a base amount of 3,500 drams, plus a small increment of 1,500 drams per person in the household, making an average amount in the order of 6,000 drams per household per month (about US$12). Based on simulations of such a formulation's impact on poverty, the effect is about as good as those achieved with many other variations on the transfer formula, including options that more closely customize benefits to the Paros score (Grosh and Glinskaya, 1998). In the case of the Paros program, the key to improved targeting is not greater customization of transfers among recipients, but better selection of who the recipients should be.
4.39 Administration. The government has put the SSCs at the heart of the implementation of the Family Benefit and proposes, in the medium term, to broaden their role to perform a wider variety of social work tasks in the delivery of cash and in-kind benefits. To this end, the Ministry of Social Security has moved ahead with creating the framework and building capacity to carry out the new Family Benefit program. The necessary decrees were passed, job descriptions written, a publicity campaign carried out, social workers received a week's training in the procedures and rules for the Family Benefit, and new computer software has been installed and operators trained in its use.
4.40 One welcome change is that households' Paros scores are now calculated in the SSC. This is made possible because, for the Family Benefit, a single eligibility threshold would hold for the whole year, in contrast to the case of humanitarian assistance when scores were re-calculated, the lists re-ranked and new cutoff points set for each aid distribution. This decentralized score calculation should permit social workers to inform families of their eligibility or not when they apply for benefits instead of later, greatly increasing the transparency of the program and eliminating a source of complaint on the part of its clients. -60- 4.41 Local municipalities (hamaynks) are closely involved in outreach and identifying households. Candidates identified by hamaynks are scored for eligibility and communmity quotas constitute five percent of the total number of benefit recipients. Updating of information and re-registration of all households in Paros is to be completed over a 1]2-month period. There is a mandatory requirement for all social workers to make home visits and check the real situation of those registered. The written conclusions of the social workers are attached to files and can play a crucial role in determining eligibility. The benefits are home delivered through the local post offices. hispection in the hamaynks is carried out by employees of the Ministry of Social Protection, helping with problems which arise as well as checking on implementation of the Ministry's directives.
4.42 The evaluation of institutional capacity (Posarac, 1998) endorses the role of the SSC in the Family Benefit and notes the preparatory work that has been carried out. The main resources required are available to SSCs. The 54 centers are well spread through the country, have adequate staff (545), and have recently acquired adequate computers, software and printers. Better access to photocopy and fax machines would be helpful. Offices are functional. Space and furnishings are often far from ideal and local initiatives to upgrade them may be helpful, but this is not the greatest need in most offices. Since decentralization reform in 1996, the SSC are financed from the republican budget through marz budgets. The SSC are responsible to the marz social policy department for organizational, management, financial and staffing issues. The Ministry of Social Affairs guides methodological and policy issues.
4.43 Nonetheless, both the institutional assessment and the qualitative studies interviews with clients point to a number of areas in which operation of the SSC needs to be strengthened or realigned to optimally support the Family Benefit system:
(a) A good deal of work has been done to build the "soft" elements of the system. However, there is a pressing need to further some aspects.
(i) Operational manuals and performance standards need to be put on paper and systematized in order to ensure that cases and clients are treated comparably, and to facilitate adequate staff supervision.
(ii) Ongoing training for social workers is highly desirable as their jobs are transformed from merely registering beneficiaries for humanitarian aid to taking on broader and more pro-active roles in helping the needy solve problems and get access to a variety of programs. Such training should cover three areas: (a) the programs available, so that the workers can council clients appropriately; (b) orientation to a client- focused way of operating that values outreach, referring clients, and gaining them access to programs beyond the Family Benefit that they may need and be eligible for; and (c) teaching social workers how to deal more comfortably and competently with the difficult parts of social work (e.g. handling depressed, angry, senile or mentally ill clients, explaining to the ineligible why they are so, etc.).
(b) The public must have a better grasp of the Family Benefit system thatnit ever had of the Paros structure. Some publicity has been done on the Family Benefit, but additional steps might be helpful. Few of today's SSC have posters or pamphlets that explain the programs. They should be made available -61- in bread shops, hamaink offices, village councils, hospitals, hostels for the aged, NGOs and other places the poor are likely to visit, or through agencies wishing to reach the poor. A series of public meetings through these venues would be particularly useful since a qualitative study found that the poor are not reached effectively through newspapers and radio announcements. The qualitative study found that social workers were often not adept at simplifying the Paros eligibility formula, and relied instead on the explanation that "the computer decides." Proper training and supervision are needed to insure that social workers give correct and helpful explanations to clients. To this end, social workers have just received an additional week of training in the Family Benefit system.
(c) Outreach is required to lower errors of exclusion. Some administrative reforns such as clearer public information, decentralization of scores, and the simpler, ongoing nature of the Family Benefit compared to humanitarian assistance should help lower transaction costs to program participants. For most people, this will be welcome and may help discourage under-registration among the poorest. However, to significantly raise registration among the poorest of the poor, additional measures will be necessary. Social workers must regularly enter communities to register those who have difficulty getting to the SSC as well as helping applicants to gather the correct paperwork required for an application, including disabilities documentation. In turn, this requires that the social workers have money for busfare available to them. Currently most such expenses are not reimbursed, but come from the social workers' pockets. Since their salaries alone are not enough to keep them from poverty it is unrealistic to expect them to do most such outreach. It also appears that the expectations for outreach vary among SSC's, with some directors ensuring greater efforts than others. It must, however, be recognized that in some areas with limited public transport, the need for outreach is greatest, but the possibilities for doing it the smallest. It would also be useful to strengthen the referral network, with other agencies that work with the poor (including NGOs), referring clients for the Family Benefit.
(d) A formal and uniform appeals system must be set up. Few SSC currently have such a system and no written appeals procedures are clearly spelled out (Posarac, 1998). Most appeals are addressed and solved at the SSC director's level. According to Gomart (1998b), clients believe that appeals are dealt with based either on the strength of personal connections the client may have with someone in power, or the amount of noise and nuisance he or she makes in the SSC office. The public does not perceive that appeals are resolved on the basis of corrected or new information, or according to a fair and impartial set of procedures. The appeals system should have firm and publicly available guidelines; it should usually conduct a home visit as part of fact finding about the case; and it should have a con-mmitteerepresenting several bodies -- the SSC, the village council, perhaps a locally active NGO, etc. This will ensure some transparency and safeguard both the decision process and the SSC's reputation. -62- (e) The appeals system must be capable of handling at least the following kinds of cases:
(i) corrections in information. Most of these should be handled by the social workers in office, and the new decentralized data processing will facility this, but in occasional cases, clients make seek recourse to the appeals mechanism.
(ii) making allowance for incomplete documentation. The qualitative study revealed cases where obviously mentally or physically disabled persons were unable to obtain full documentation of their cases. Similarly, women whose spouses have immigrated can have difficulty achieving legal divorce papers. These cases should be dealt with in an appeals procedure.
(iii) a system of appealing imputations. The Paros system imputes an income stream frormland, but the poorest of the poor may lack access to the other farming necessities such as labor, seeds, and money for irrigation and so cannot realize this income. The income Paros assumes they get from land may make them ineligible for the Family Benefit, when in fact they do not realize such an income and are quite needy. Similarly, the Paros system sets the score to zero for anyone who owns a car on thle assumption that only the non-needy can afford a car. While perhaps broadly true, there are certainly cases where it is not so.
(iv) cases of special need. No proxy formula will ever correspond perfectly with need, and as Grosh and Glinskaya's work shows, the proxies in Armenia are not very strong. Thus even with the best formula possible, there will be cases of real need not revealed by the scores from the proxy means test.
(f) There needs to be a permanent system of monitoring and evaluation, which should include the following elements:
(i) spot checks of registrants conducted by home visits, preferably a fixed percentage of cases should be checked each month. The percentage checked may be higher in problem cases.
(ii) a regular system of household surveys that would: (a) allow monitoring of who benefits from the family benefit, and (b) allow periodic revisions of the proxy formula. The Ministry of Statist.ics could easily do this by introducing appropriate questions into a series of Household Budget Surveys.
(iii) periodic qualitative studies to determine whether client service is satisfactory and to address residual problems of reaching the poorest.
(iv) regular reporting on program processes: number of applications processed, number of outreach visits, number of monitoring visits, number of beneficiaries, turn-around rates for various processes, administrative costs, etc. -63- (v) links between performance and rewards.
(g) The program needs to develop a streamlined, credible payment mechanism. Use of a system similar for paying pensions is under consideration. Whatever the mechanism used, it should not require the SSC to handle cash themselves and should be easily monitorable.
The future of proxy means testing in Armenia
4.44 The Paros system is not yet a perfectly implemented proxy means test. A number of concrete steps to improve its implementation, and transform it from an emergency distribution system to a medium or long-term means of targeting the new Family Benefit have been suggested and seem feasible given the political will and administrative acumen. This has been the focus of Chapter 4 up to this point.
4.45 It is perhaps, useful to go back to the big picture of how well a proxy means test can work in a country like Annenia, and for what kinds of programs. As the many sectoral reforms in Armenia lead consumers to pay for many services previously subsidized, it will become increasingly important to have either a cash transfer program or a series of sector- specific fee waivering mechanisms to insure the poor have access to minimal goods and social services in order to prevent the development of structural poverty and the resulting inter- generational transmission. A proxy means test is, in the abstract, an attractive candidate for targeting in either of these cases. Purely categorical targeting is rarely accurate, but correct income assessment is very difficult in an economy with an income structure like Armenia's.
4.46 There are, however, certain inherent drawbacks to a proxy means test. First, as Grosh and Glinskaya show, the correlates to poverty are not especially strong, so that there will be more errors of inclusion and exclusion in Armenia than there would be in many other countries. Moreover, most of the qualitative evidence we have suggests that, in Armenian families, welfare can fluctuate sharply over short periods, often within a year. It would be difficult for a proxy means test to capture such fluctuations since the proxies selected have characteristics that are relatively static. Moreover, even if more dynamic indicators were chosen, dealing effectively with such poverty would require re-registering people several times a year, an intolerable administrative burden.
4.47 Some ideas bom out of other countries' experiences in implementing proxy means tests have not been seriously reviewed in Armenia but deserve more in-depth consideration. First, in all Latin American countries using the tests, evaluation is done by a social worker who goes into the applicant's home to gather information. This has several advantages: it allows the proxy formula to include many factors for which documentation cannot readily be, produced, but the social worker can observe. Important among these are ownership of durable goods and quality of housing. Under this system, indicators to support home visits could be identified using the growing work on poverty in Armenia, especially the qualitative sources. Also, the necessity of a visit to the household would most likely discourage unqualified applicants from applying fraudulent applications. It is, after all, easier to manipulate a piece of paper than to drastically alter a dwelling. Employing home visits would also make inclusion of the poorest easier. Social workers would already be in their neighborhoods anyway, and would, therefore, be more likely to leam of families who could potentially slip through the cracks and to include them at a lower marginal cost. Of course, since a higher percentage of -64- households are registered in Armenia than in other countries, the frequency of home visits may have to be adjusted somewhat.
4.48 Second, it is important to note that the proxy means test could be used for more than the Family Benefit program. In theory, it could be used to grant fee waivers or discounts for other programs, for example, waivers for the textbook rental fee or electricity vouchers. Multiple uses have the advantage of reducing the total administration dedicated to targeting decisions across programs. Where other targeting mechanisms are already in place, careful evaluations should be carried out to evaluate whether they are preferable to the proxy means test and should continue to be utilized. If they produce similar or better targeting outcomes, have low administrative costs, and are more politically or culturally acceptable than the proxy means test, they should remain. If the alternative mechanisms do not have these features, then replacing them with the proxy means test should become an option.
Other Targeting Options
4.49 This section examines the potential of using alternate mechanisms to proxy means testing in targeting benefits to the poor, particularly with respect to allocating public funding and subsidies in the education and health sectors.
Geographic targeting
4.50 Targeting based on geographic location can sometimes be a useful means of targeting benefits to the poor. When regional differences in poverty rates are significant, geographic targeting mechanisms are relatively simple to implement and the administrative costs are much lower than for programs based on means testing. Geographic targeting can be used in a number of ways: subsidized services can be exclusively located, or concentrated, in poor regions: in many countries, free health clinics or stores selling subsidized food are only positioned in urban slums or underprivileged rural areas; or the pool of funds allocated to subsidy programs can be divided up so that poor areas get more than the share that would be due them based on population alone, a technique often used in targeting social investment funds.
4.51 In Armenia, the household survey data point to only limited potential for using geographic targeting. Poverty rates do vary substantially between marzes, are higher in urban than rural areas, and higher in remote mountainous regions than rural flatlands. However, the variations within these areas are more significant than between them. Substantial pockets of severe poverty exist throughout Armenia and poverty rates are liable to vary greatly even between neighboring villages. This means that, to be effective, geographic targeting wvould have to be carried out at the level of small localities, and would require a more disaggregated source of data than the HBS. -65- Table 14: Poverty and inequality indicators by marz
Marz Incidence Average Depth of Severity of Inequality of Of poverty Shortfall by % Poverty poverty income*
Aragacotn 51.1% 35.43 18.12 8.51 0.49 Ararat 54.2% 37.94 20.55 10.47 0.64 Armavir 38.1% 32.79 12.48 5.76 0.74 Gegargunick 48.1% 36.02 17.31 8.53 0.41 Lori 51.5% 35.68 18.38 8.91 0.47 Kotaik 62.4% 40.59 25.31 13.45 0.57 Shirak 63.1% 43.02 27.17 15.17 0.66 Sunik 47.1% 34.87 16.42 8.11 0.56 Vajoc Dzor 61.5% 46.62 28.67 17.50 0.59 . _Tavush 56.1% 46.41 26.05 14.90 0.55 Yerevan 58.2% 39.81 23.17 11.56 0.59 AdRMENIA 54.7% 39.32 21.52 11.08 0.60 * Inequality of distribution of current income within region, measured by Theil mean log deviation index.
4.52 Between marzes, the proportion of poor or very poor in the population varies from 38 percent in Armavir to 58 percent in Yerevan and above 62 percent in Shirak and Kotaik (see Table 16). The regions with the highest proportion of poor also have the most severe poverty. However, because of the great inequality within marzes, these differences are not sufficient to justify targeting benefits or subsidies to marzes with the highest poverty rates. Although income per capita is highest in Armavir, the degree of income inequality is also highest in the area and the incidence of extreme poverty is still important.
4.53 Geographic targeting to high altitude areas, border zones and the earthquake zone has been used by the government for certain specific purposes, such as determining salary bonuses and allocating funding for special programs such as the ASIF, based on assumptions of special needs or hardship conditions in these areas. Survey data confirm the relationship between altitude and poverty (see Table 17), but the differences between zones are small compared to variations within each zone. The Ministry of Social Security and the Ministry of Agriculture are discussing the possibility of establishing indicators of rural poverty according to land type and quality. These criteria could help provide a basis for geographic targeting in rural areas.
Table 15: Incidence,depth and severityof povertyby altitude(for rural areas only)
Poverty indicators Population
Poverty Depth of Severity of Percent of rural incidence poverty poverty population by (percent) altitude Low altitude (under 1300m) 45.7% 0.17 0.09 40.9%
Medium elevation (1300-1700m) 48.4% 0.19 0.10 23.4%
High elevation (above 1700 m) 50.4% 0.21 0.12 35.7%
All rural population 48.0% 0.19 0.10 100.0% -66- 4.54 Survey data also indicate higher poverty rates in the earthquake and border zones (see Table 18), and especially in urban centers within these zones. However, the differences revealed are not any greater than those between marzes.
Table 16: Poverty incidence (among individuals) by location of households
Earthquake zone Border zone High Altitude All Armenia Areas
URBAN RURAL URBAN RURAL RURAL URBAN RURAL Non-poor 37.4% 50.9% 46.1% 48.7% 49.6% 41.2% 52.0% Poor 29.1% 23.8% 26.1% 20.8% 23.6% 29.2% 23.6% Very Poor 33.6% 25.3% 27.8% 30.5% 26.8% 29.6% 24.4% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
4.55 In many countries, geographic targeting and poverty maps are not based on survey data because, as in the case of the HBS, the small samples in household surveys mean their data are representative only for large and heterogeneous areas. To identify pockets of poverty requires using a smaller geographic area than a marz, which necessitates using a datalbasethat has information for such small units. Perhaps the most common source of such data in other countries is the census. Armenia's census, however, is not only old -- completed in 1'988-- but is more than usually outdated. The earthquake and the population migration that resulted from it, the economic transition, and the strife in Karabakh, have combined to make the 1988 census increasingly irrelevant. In some countries, there are other sources of data that are both complete at the small, disaggregate level and closely correlated to poverty. In several Latin American countries with high levels of malnutrition, all children entering first grade are measured, and their nutritional status calculated. This database not only monitors malnutrition over time but forms a basis for poverty maps. Unfortunately, Armenia has few data sources that have both complete coverage at high levels of disaggregation, and a known, strong relationship to poverty. After a new census is taken, the potential for geographic targeting will be greater and the issue should be revisited at that time.
Capitation-basedfunding mechanisms
4.56 Armenia is moving to a capitation principle for public funding of health and education institutions. This raises the question of whether funding formulas should incorporate weighting to reflect differences in poverty level between different client groups. In the case of schools, the shortage of public fumdingmeans they must depend on parental contributions and local sponsorship for heating and building repair, teaching materials and other essentials. As a result, the threat of increasing divergence in the quality of education in different districts is a matter of serious concern. Schools in the poorest communities are often unable to raise sufficient resources to meet even the most basic needs. In some schools in better off communities, on the other hand, parental and community contributions are able to support bonuses to teachers, additional course subjects, new equipment, etc. Until budgetary funding can be raised to a level that fully covers essential costs of providing basic education for all school-age children, an argument can be made for allocating a higher level of public fanding per pupil to schools in communities with an especially high incidence and severity of poverty. Analogous issues arise for health clinics. -67- 4.57 Unfortunately, because of highly localized pockets of poverty throughout the country, weighting the level of per capita funding on geographic criteria using such large areas as discussed above would not be a very effective solution in itself. Using all four characteristics (marz, rural/urban, altitude, and special zones) simultaneously might yield slightly better results. The other alternative is to use a different source of data with some correlation to poverty that is also available at more finely disaggregated levels of geographic area than the Household Survey. One candidate would be to use an index of the number of beneficiaries of the new Family Benefit per Hamaink. Such a mechanism is proposed to be used for the textbook fee waiver system, where a school's portion of the subsidy pool is proposed to be based on the number of pupils, with an adjustment for the number of "socially unprotected families," defined by the Ministry of Social Security.
4.58 Detailed design of a capitation scheme for education is now in progress, to be piloted in about 10 percent of Armenian schools from September 1999. At this stage, it is proposed to keep the formula for calculating each school's funding as simple as possible, while making essential allowance for the high unit costs of small schools in remote, inaccessible areas. Additional allowances for pupils with special needs may also be considered. However, no allowance is made at this stage for geographically-based differences in poverty incidence. Neither does the capitation system developed for allocating funds for health care consider poverty. Given the complexities involved in moving to a capitation system, and the absence of reliable data sources citing strong geographic differences, this is acceptable for now. The issue should not be considered closed, however. Refinements in the capitation system will be needed in its early years of implementation, including the addition of a poverty-related factor to the formula. Further work is needed to determine the most effective approach for calculating this factor, based possibly on the percentage of the Hamaink population receiving the Family Benefit.
Community-based targeting of social sector spending subsidies
4.59 The introduction of fees and charges for some health and education services risks denying essential services to those without the means to pay. Not only is this a danger, but social assessments performed to inform the design of the World Bank-financed health and education projects reveal that fees are a barrier to access for a substantial portion of the population. Within the general public education system, parents are required to pay for food, courses and services outside the core curriculum, and fees for textbook rental. In health care, government funds cover only part of the salary and infrastructure costs and virtually nothing remains for expendable supplies and drugs. Thus a defacto system of under-the-table payments has evolved and patients must pay out-of-pocket fees close to the cost of providing the services.
4.60 The question of how subsidies for school-related expenses can be most effectively targeted has been addressed in the design of the new textbook rental scheme. Consultation with parents, teachers, school principals and regional administrators revealed a broad consensus that decisions about who should be exempt from paying should be made at the school level, where the most complete information on individual students' circumstances is thought to be readily available. This approach has been tested during the first two years of the textbook rental scheme and the school-based revolving fund operation. Evidence so far suggests that the approach has been well received and generally effective. The vast majority of schools have succeeded both in raising the required amount for their revolving fund and in ensuring that every child, including those who cannot afford the rental fee, has a copy of each -68- book. Because the precise selection criteria and decision-making processes used were not specified in detail but were left up to individual schools, these appear to have differed considerably between schools and between marzes. A qualitative evaluation of the scheme is to be carried out in 1999 and will yield more information on which variants of local selection of beneficiaries have been more effective and why, and on the potential for extending school- based selection to other education-related subsidies.
4.61 In the second year of operating the rental scheme, the government has allocated budgetary resources for a subsidy sufficient to waive fees for 10 percent of students in order to assist schools in exempting the most needy pupils from payment. Although the responsibility for targeting within the school will remain at the school level, criteria are needed for allocating the budgetary subsidy between schools. For 1998/99, because of late payment of the government's contribution, these funds are to be allocated to the revolving fund accounts of individual schools on a simple per-pupil basis. However, in principle, this subsidy is to be targeted in favo:rof schools in the neediest communities. The formula. proposed by the government to achieve this involves weighting first at the marz level, according to the registered number of socially unprotected families in each marz, and then between schools, according to criteria that have not yet been clearly specified but will depend on knowledge at the marz level of local conditions. The procedures and subsidy amounts need to be made clear to schools well in advance of the 1999/2000 school year, so that each school knows from the start how many pupils it can afford to subsidize. The issues and options for targeting of the governinent textbook subsidy to schools are very similar to those for the new capitation funding mechanism, discussed above. What is learnt from refinement and piloting of the targeting of textbook subsidies in 1999/2000 will, therefore, have direct relevance for any subsequent inclusion of a poverty factor in the capitation funding mechanism for general schools.
4.62 In the area of health care, it is less clear which targeting alternatives will prove satisfactory. Currently, government officially provides for the poor and vulnerable (beyond services provided free to the whole population) under the Basic Benefit Package, usin.g categorical targeting. The large number of categories included for free health care is not fiscally sustainable however, and it is unclear how well the categories relate to poverty. A few NGOs have experimented with screening at the level of the facility for patients that cannot afford to pay for health care. There is little evidence yet on which to evaluate these experiments, though piloting sirmilartechniques in public facilities and evaluating thern could prove a useful way of learning what might work. The social assessment done in preparing the health project revealed that in fact doctors in private practice and those in public facilities taking informal payments actually already accept different levels of payment from those of different levels of welfare. But the screening mechanisms rely heavily on personal connections between the health care providers and the clients and would therefore be clifficult io fornalize on a wide scale.
4.63 Community-based targeting of social sector spending is more difficult than in education because the notion of a community is much stronger in education than in health care. This is true throughout the country as most people will have been to school and have children attending school every day, whereas everyone hopes they won't be sick or require a doctor. The experience of the Armenia Social Investment Fund confirmed the communities' stronger commitment to education than to health. Under the ASIF, communities are required to prioritize small infrastructure rehabilitation projects and education and water came up as top priorities. Very few health projects have been requested by communities. -69-
CONCLUSION
The study suggests that protecting the poor in the short term will be a major challenge for the government in view of the extent of poverty, the very limited budgetary resources available, and the relatively limited institutional capability. The most urgent step in this area is to improve the poverty focus of social assistance and move from a system that has supported many privileged groups, who are not always poor, to a system that cares for the poorest members of society. In this regard, the government has made a courageous move in replacing the categorical system of cash benefits with a poverty targeted family benefit, introduced in January 1999. The challenge now is to improve targeting of the family benefit and developing outreach, to avoid emergence of the phenomenon of social exclusion. Other improvements in the social protection system such as the development of a public works program, supporting the self-employed and small businesses, better use of food aid to support outreach programs for the poorest, providing greater responsibilities to local government in the management and implementation of social assistance programs, and deepening health and education reforms, can potentially have a positive impact on poverty reduction in the short and medium term.
Social insurance, through pension and unemployment benefit systems, cannot be expected to make a significant impact in reducing the incidence of poverty in the short term. Nevertheless, it is important to maintain the pace in reforming the old age pension system because it has the potential to become a very important tool in the long term, once the capacity for savings has increased in Armenia. The system needs to be developed taking into account the specifics of the Armenian situation, both in terms of the very large informal sector and the constraints to the development of a capital market.
The following table summarizes the recommendations made in the study: (i) general recommendations on the reform of the social protection system, and (ii) specific recommendations for improving targeting. -70- Summary of Recommendations for Assisting the Poor During the Transition
Areas Issues Recommendations
Economic Growth Economic growth needs to be - Remove formal barriers to local and foreign investments. accelerated, more equally - Increase both public and private savings. distributed, and generate more - Reform the civil service to make public expenditures more efficient. revenue opportunities to the - Reduce the size of the state sector and restore credibility of the banking population. system. - Reform the judicial and legal systems to increase transparency. - Pursue sectoral adjustments in particular in energy and the social sectors.
Labor Market The unemployment rate is very high - Lower payroll tax as an incentive to creating jobs. at 25%. Very few jobs have beern - Support for the self-employed and small businesses through technical advice created as a result of recent growth and improved access to credit. and wages are very low. - Expand public works programs.
Social Insurance: Old age pension Currently pensions don't fully - Strengthen the Pay-As-You-Go system by continuing to streamline pensions. protect the elderly from poverty. - Introduce a prtivatelymanaged funded pension system (long term). Family support and transfers seem to - Improve the collection of revenue from farmers and the self-employed. be better guarantees against poverty since the saving capacity is too low.
Unemployment The benefits for the unemployed are - Maintain benefit at the present level or eventually reduce eligibility in order too little to protect them from to reduce payroll tax. poverty and benefits are not well targeted to the poor. Protecting Access to Quality Social Services: Health Care Poverty related diseases are on the - Transform health care financing and strengthen the reimbursement system for rise as the very nonr have prac.tically serices provided under contracts wit' providers. stopped using health services. - Redistribute health care expenditures from hospitals towards primary care interventions. - Identify better targeting for the poor to be covered by the BBP. - Provide free health services through the BBP. -71-
Education Although enrollment rates in basic - Increase the level of per capita financing for schools in poor areas. education are very high, access to - Support school-based management. quality education is a concern for the - Rationalize schools and introduce multi-grade teaching. poor. Furthermore, access to higher - Improve the linkage between secondary and tertiary education and target education is particularly problematic. subsidies for tertiary education on the basis of need as well as merit.
Utilities Tariffs for electricity and water are - Provide adequate compensation through an increase in Family Benefits, when being increased to improve utility prices are increased. Inprove monitoring of the impact of utility price sustainability of the utility increases on the poor. companies, but a large number of poor households are unable to afford the new costs. State-Run Social The state system is currently lacking -- Need to focus on the vulnerable and very poor, and fighting social exclusion Assistance System in three areas: for those who don't benefit from informal transfers of family support. - clear objectives and approaches to - Set clear objectives and approaches to social assistance. social assistance; Define different levels of responsibilities between the marz, central and local - funding and staff incentives; government bodies. - institutional capabilities for - Accelerate the de-institutionalization of children. outreach. - Improve the local govemment's involvement in its citizens' lives, especially in helping the poor and vulnerable. - Inprove the capacity of social services centers. - Avoid a deepening dependence on state transfers. - Increase outreach to identify individuals not reached by on-going programs. - Increase the role of elected local government and NGOs in the design and delivery of Social Assistance programs. - Strengthen partnerships between NGOs and state structures. - Strengthen capabilities of social services centers. NGOs NGOs are still weak and could play a - Increase their capacities in areas such as budgeting, financial management, stronger role. and reporting or monitoring systems. - Reform the legal framework for NGOs. - Provide financial incentives or tax breaks for charitable contributions. Humanitarian Fast decreases have a negative - Need to better manage the decrease of humanitarian assistance. Assistance impact on vulnerable groups. - Encourage cornmunity programs and create employment through food for work programs. - Encourage NGOs to develop specific outreach programs for the very poor such as soup kitchens. -72- Summary of Recommendations to Improve Targeting
Areas Issues Recommendations
Family Benefit Targeting needs to be improved. - Reduce barriers to registering for the program by improving the public's awareness of it, shortening registration time and improving outreach to make it easier for the disabled to get to the offices. - Improve measurement problems, e.g. imputing income based on quality and size of holding or ownership of car. - Improve the reputation of the system: clearly explain rules of eligibility, required procedures, disseminating information regarding status, making appeals, etc. - Change weights in the Paros system. - Decentralize the process of assessing household scores. - Train social workers to clarify the Family Benefit system to the public. - Improve outreach in order to lower errors of exclusion. - Put in place a formal and uniform appeals system. - Set up a permanent system of monitoring and evaluation. Other Targeting Options: Geographic targeting The household survey data points to only - Need to carry out geographic targeting at the level of small localities and limited potential for using geographic use a more disaggregated source of data than the Household Survey. targeting. The potential for geographic targeting will be greater after a new census is taken.
Capitation-based The capitation system developed for - Refine the capitation system and possibly add a poverty-related factor to funding mechanism allocating funds for education and health the formula. care does not consider poverty.
Despite indications from the new textbook - Carry out systematic evaluation of the different decision-making Community-based rental scheme that school-based targeting procedures and selection criteria used so far by marz authorities and Targeting of subsidies can be effective, more individual schools. On the basis of this evaluation, specify in detail the systematic evaluation of this scheme is exemption process for textbook subsidies and assess the potential for having needed. other targeting decisions made at the school level. Community-based targeting is difficult in health care because the notion of a - Introduce pilot schemes to test feasibility of screening the groups to benefit community is weak. from free health care services at the community and facility level. -73-
BIBLIOGRAPHY
Atkinson, A. and Micklewright, J. 1992. Economic Transformation in Eastern Europe and the Distribution of Income. Cambridge, England: Cambridge University Press. Babajanian, B. 1998. "Social Protection in Armenia" Washington, D.C. The World Bank. Processed Braithwaite, J. 1995. "Armenia: A Poverty Profile." ESP Working pare No. 80. Braithwaite, J. 1995. "Armenia: Medium-Term Social Assistance Strategy." Mimeo. Center for Economic Policy Research and Analysis (CEPRA). 1997. "Survey of Household Incomes and Expenditures in Yerevan 1995-1996." An Interim Report. Children's Aid Direct. 1996. "Report on Nutritional Screening (An Approach to Targeted Food Distribution) Martouni, Artik, Goris and Abovian." September-December 1996. Dudwick, N. 1995. "An Ethnographic Report on the Living Standards of the Armenian Population: October 1994-March 1995." European Community Humanitarian Office. 1996. "ECHO: Food and Medical Assessment in Armenia." April-May 1996. European Commission. Fajth, Gaspar. 1994. "Family Support Policies in Transitional Economies: Challenges and Constraints." Innocenti Occasional Papers Economic Policy Sereis, Number 43. UNICEF International Child Development Centre, Florence. Figures 1 and 2. Gomart, Elizabeth. 1998. "The Poorest of the Poor in Armenia." Washington, D.C: The World Bank. Processed. Gomart, E. 1998. "Paros Beneficiary Assessment" Washington DC. Report Gomart, E. 1996. "Social Assessment Report on the Education and Health Sectors in Armenia." Washington D.C, Report Grosh, Margaret. 1994. Administering Targeted Social Programs in Latin America: From Platitudes to Practice. Washington, D.C: The World Bank. Grosh, Margaret and Judy Baker, 1995. "Proxy Means Tests for Targeting Social Programs: Simulations and Speculation." Living Standard Measurement Study Working Paper No. 118. Washington, D.C: The World Bank (available in Russian) Grosh, Margaret and Elena Glinskaya. 1998. "Proxy Means Testing and Social Assistance in Armenia." Washington, D.C: The World Bank. Processed. Hentschel, J., Lanjouw, P. and Poggi, J. 1997. "Combining Survey Data with Census Data to Construct Spatially Disaggregated Poverty Maps." Mimeo, Policy Research Department, The World Bank. Holt, S. 1995. "Using Land as a System of Social Protection: an Analysis of Rural Poverty in Armenia in the Aftermath of Land Privatization." Keshishian. 1996. "Paros Two: Voluntary Social Registration Program Evaluation." United States Agency for International Development: Yerevan. Grant No. 111-0001 -G-00-5015. Klugman, J., ed. 1997. "Poverty in Russia: Public Policy and Private Responses: Introduction and Overview." EDI Development Studies. Lanjow, P. and Ravallion, M. 1995. "Poverty and Household Size." Economic Journal 105: 1415- 1434. -74- Nelson. 1993. "Household Equivalence Scales: Theory Versus Policy?" Journal of Labor Economics 11:471-93 Ravallion, M. 1994. Poverty Comparisons. Chur: Harwood Press. Ravalion and Bidani 1994. "How Robust is a Poverty Profile?" World Bank Economic Review 8(1) 75-102. Rimashevskaya 1997. "Poverty Trends in Russia: A Russian Perspective in Poverty in Russia: Public Policy and Private Responses." Schmidt M and Marc A 1998. "Social Investment Funds in ECA, Opportunities and Risks" Washington, DC The World Bank. Processed. World Bank. 1996. "Armenia: Confronting Poverty Issues." Report No. 15693-AM. World Bank. 1997. "Republic of Armenia: Health Financing and Primary Health Care Development Project SAR." Report 16475. ANNEX 1
Main Results from the Household Expenditure Survey ANNEX 1 Page 1 of 25
Table 1: Distribution of incomes and expenditures in Armenia by deciles: results of household survey, November-December, 1996
Percapita Current Percapita Total Incomes Deciles Net Expenditures Current Incomes Percapita
Poorest 10% 2.1% 0.3% 0.3% 20% 3.4% 1.3% 1.2% 30% 4.3% 2.3% 2.0% 40% 5.2% 3.3% 2.8% 50% 6.2% 4.4% 3.8% 60% 7.5% 5.9% 5.1% 70% 9.1% 8.0% 7.0% 80% 11.5% 11.3% 9.7% 90% 15.7% 17.4% 14.6% Richest 10% 35.0% 45.8% 53.4% Gini coefficient 0.4436 0.6021 0.6529 Theil mean log deviation 0.3377 0.5994 0.7659 Coefficient of variation 1.3445 1.9127 4.686 ean D 14-,4. 984 15,539 ''.r. mdia'; ' ' ' - . . 9^.w}{9,90(, 5 6.8175 1st decile/median 0.31 0.06 0.07 10th decile/median 5.15 9.03 12.08
Notes: population deciles ranged by percapita expenditure (for expenditure Lorenz curves) and percapita income (for income) total income includes revenue from sales of assets and valuables ANNEX 1 Page 2 of 25
Table 2: Relative Poverty Line
2752 55.93 9934 51.19 2168 44.07 9473 48.8:1 49t20 100.00 19407* 100.0(
4326 87.93 16665 85.87 594 12.07 2742 14.13 4920 100.00 19407 100.0
_ ~~~~~~~~~~~~~~~~~~~~~~~~
4550 92.48 17749 91.46 370 7.52 1658 8.54 49'20 100.00 19407 100.00
Mean Current Expenditure Per Capita 14542 drains 2/3 of expenditure = 9694 drains 113of expenditure = 4847 drams Median of Mean Current Expenditure Per Capita = 9900 dramns 40% of median 3960 dramns * Number of present members in surveyed households
Table 3: Absolute Poverty Line
Non-poor 2461 50.02% 8785 45.27% Poor 1271 25.83% 5252 27.06% Very poor | 1188 24.15%1 53701 27.67%
Poor: percapita monthly expenditures higher than food line, but lower than national poverty line Very poor: percapita monthly expenditures less than food line
National Poverty Line 10784.18 dramns National Food Line = 6612.35 dramns ANNEX 1 Page 3 of 25
Table 4 Poverty line basket structure and caloric value
Grams (per Cost (drams per Produce day, per month, per KCal KCal% capita) capita) 1 Rice 17.19 149 71 3.4% 2 Beans 18.03 169 44 2.1% 3 White flour 19.64 120 67 3.2% 4 White bread 427.39 2244 1124 53.5% 5 Macaroni products 25.62 187 89 4.2% 6 Lavash (national bread) 28.62 262 76 3.6% 7 Beef 17.82 513 39 1.9% 8 Poultry 4.07 117 3 0.2% 9 Fresh water fish 15.00 146 11 0.5% 10 Milk 27.12 143 18 0.9% i Yogurt 18.27 110 14 0.7% 12 Hard cheese, cow milk 12.48 317 51 2.4% 13 Eggs 7.60 223 10 0.5% 14 Butter 3.46 141 26 1.2% 15 Oil 6.53 98 59 2.8% 16 Melted butter 19.70 621 165 7.9% 17 Apples 44.24 159 19 0.9% 18 Grapes 4.96 28 3 0.1% 19 Citrus fruts 3.30 24 1 0.0% 20 Compots 14.92 45 11 0.5% 21 Cabbage 45.85 69 12 0.6% 22 Onions 12.19 33 4 0.2% 23 Potatoes 192.45 560 115 5.5% 24 Suar 16.93 134 67 3.2% TOTAL61I ZO~~40 National Food Lhine(*.i~s 64
Share o.f ou4ood g. -san%
N, sericst, nal nPo,e,, Overty , Lint,,k b ,,,,,,,~, ', ' . ,,,§.;'0784 '.i":'' ANNEX 1 Page 4 of 25 Table 5: Calories intake and food consumption by deciles
PRODUCE (gr. per day per capita) l Deciles KCal (per day, Bread Potatoes Apples Beef Butter (incl. Cheese Milk per capita) l melted) Poorest 1 | 261 137 16 3 9 5 16 2 1 311 136 17 6 12 6 14 3,6.2 344 149 24 6 13 7 9 4 1,7 350 150 37 10 17 9 19 5 1 381 152 31 12 18 9 13
______382 200 42 2 1 22 12 27 7 ~ ~ 212370 167 43 20 24 14 35 8 227395 171 48 28 22 16 37 9 2 404 193 48 39 26 21 45 Richest 10 445 193 78 44 30 22 57
AerageforwS N>all 20 36 166 39.20 $12 28;
Table 6: Poverty incidence (among individuals) by location of households
37.4% 50.9% 46.1% 48.7% 49.6% 41.2% 52.0%
29.1% 23.8% 26.1% 20.8%1 23.6% 29.2% 23.6%/
I;,et-tI33.6% 25.3% 27.8%1 30.5%l - 1 26.8% I 29.6% 1 24.4% ol 00r0% 100.% 100 10G0-.0% h 100.0% 00% 00L0% ANNEX 1 Page 5 of 25
Table 7: Poverty Indicators by Marz
;an 0~ sh--- I~ep~hof Sefey: a Z!'~~~~~~~~~~~~~~~~~~~~~~. ,.: Aragacotn 51.1% 35.43 18.12 8.51 Ararat 54.2% 37.94 20.55 10.47 Armavir 38.1% 32.79 12.48 5.76 Gegarqunic 48.1% 36.02 17.31 8.53 Lori 51.5% 35.68 18.38 8.91 Kotaik 62.4% 40.59 25.31 13.45 Shirak 63.1% 43.02 27.17 15.17 Sunik 47.1% 34.87 16.42 8.11 Vajoc Dzor 61.5% 46.62 28.67 17.50 Tavush 56.1% 46.41 26.05 14.90 Yerevan 58.2% 39.81 23.17 11.56
Note: number of poor in this table is the sum of poor and very poor
Table 8. Poverty and household size
--:__-::_-._- Household size (persons) Children per family Elderly per family Ne9n!poor -: 3.57 1.07 0.57 Po¢r 0 4.13 1.35 0.62 Very NPor 4.52 1.55 0.64 T41 3 .94 :: 146. .-
* Note: for present household members ANNEX 1 Page 6 of 25 Table 9: Poverty incidence by household types
Household composition Non-poor Poor Very poor. Total 1 Single person, elderly (over 60) 248 63.8% 75 19.3% 66 17.0% 3 0
2 Single person, ( less than 60 years) 165 75.7% 32 14.7% 21 9.6% X 8 1 l
3 Single parent with children 73 56.2% 30 23.1% 27 20.8% 1
4 Elderly couple without children 181 47.9% 108 28.6% 89 23.5% 3 1 l
5 Couple without children ( less than 60 years) 95 60.5% 30 19.1% 32 20.4% E 1*3. l
6 Couple with one children 124 54.6% 56 24.7% 47 20.7% l 2
7 Couple with two children 307 50.7%1 181 29.9% 118 19.5% NO 10 l
8 Couple with three or more children 227 44.5% 144 28.2% 139 27.3% 5 10%
9 Three adults with one or more children 277 44.9% 171 27.7% 169 27.4% 6 0
10 Four or more adults with one or more children 300 40.9% 201 27.4% 233 31.7% 7 0
11 Three or more adults without children 377 52.7% 187 26.2% 151 21.1% C 4
12 All households with 8 or more person 87 36.4% 56 23.4% 96 40.2%°/
Table 10: Poverty incidence by education
-- ~.atiei , Highereducation Secondar special Secondar general Primary ia ' Wr E1407 53.9% 16821 48.0% 2469 43.1%/ 445 41.5% r 5 X 24.8%647 954 27.2% 15471 27.0% 312 29.1% 58 0 b2i1.4% 870 24.8%1 1716i 29.9%1 314j 29.3%
Note: excluding children ANNEX 1 Page 7 of 25 Table 11: Poverty incidenccby gender
Male Female Non- 4209 45.9% 4576 44.7%
Poor 2477 27.0% 2775 27.1% Pory 2481 27.1% 2889 28.2%
Total 9167 100.0%N 10240 1Af0.f0%
Table 12: Poverty incidence by age
______Less han 7 7 -16 17 - 22 23 - 29 30 -39 40 - 49 50 - 59 Ovcr 60 Non-poor 908 40.9% 1732 43.6% 769 48.3% 790 45.0% 1449 44.4% 1167 49.3% 707 49.6% 1263 44.9%
Poor 589 26.5% 1124 28.3% 410 25.8% 469 26.7% 898 27.5% 642 27.1% 326 22.9% 794 28.2%
Ver Poor 724 32.6% 1113 28.0% 413 25.9% 497 28.3% 915 28.1% 557 23.5% 393 27.6% 758 26.9% -___- _-.- -. -- _--i -_ N -_ Total 2221 1 )000%3969 100% 1502 t100 : 175 100.0% 362 IO0.0% 2366 100.0% 142 100.0% 2815 l,t%
Table 13: Poverty incidenceby labor market status
Inactive Unemployed Employed Non 5273 43.3% 739 36.1% 27731 53.5% 3386 27.8% 567 27.7% 1299 25.1% 3521 28.9% 739 36.1% 1110 21.4% I >: 2: 10:0 51i2 I0080% ANNEX 1 Page 8 of 25
Table 14: Structure of income for poverty groups
Average incomeper household (Drams) and hare oal1ieid Wages and Self-Employment, Private Transfers Sales of Property Salaries Rent and Interest State Transfers and Humanitaria In-kind Produce and Valuables Other income Aid ______2.7% $ 6,141 7.2% 19,227 22.7% 2,088 2.5% 16,70S19.7%/ 8,3561 99% 29,982 35.4% 2,301 2.2% 92 1 4,672 11.9% 6,248 15.9l 2,561 6.5% 8,476 21.6% 3,9026 9.99 12,484 31.8% 882 3,412 9.4% 4,157 11.5% 2,797 7.7% 5,4801 15.1% 2,250 6.22% 17,540 48.4% 577 1.6%° 2
Table 15: Labor Force Participation by Age and Gender
Labor force Labor force Labor force Age group participation, participation, participation, total men women
From 17-24 yrs. 44.5% 55.80% 36.60% 25-49 years 73.0% 89.10% 58.70% 50-64 years 42.1% $9.4Q% 28.10%
Table 16: Poverty and land ownership
All Armenia Urban residents Rural residents 48.3% 16.4% 90.1% wo I 0 2634.6% 11.4% 82.7% /_U.0% 1.1+74 65.8% I~~~~*LU.070I ~ ~ 1,10046* ANNEX 1 Page 9 of 25 Table 17: Unemployment and labor force participation by regions
Labor force Unemployment Marz participation rate for Unemployment rate among the registered with the working age rate youth (17-25 years employment offices population old) employment_offices
Aragacotn 63.2% 21.7% 18.4% 3.2% Ararat 62.4% 15.1% 18.6% 16.1% Armavir 69.3% 22.7% 49.6% 16.7% Gegargunick 64.5% 17.2% 28.9% 14.1% Lori 70.1% 35.4% 53.8% 21.6% Cotaik 51.7% 27.4% 50.9% 15.7% Shirak 65.3% 37.6% 53.8% 41.7% Sunick 68.4% 40.4% 60.5% 51.8% Vajoc Dzor 69.4% 27.1% 57.7% 4.8% Tavush 72.4% 14.8% 38.7% 27.4% Yerevan 60.9% 33.8% 52.8% 22.5% A1MENTA - - 63.9% 28.3% 45.8% 2
Note: working age population is between 17 and 60 years (inclusive)
Table 18: Unemployment by Age and Gender
Age group Unemployment rate, Share in total Unemployment rate Share of female Agegronp percent to labor force unemployment among women unemployment
From 17 to 24 years 46.4% 21.1% 50.9% 48.3% 25 - 49 years 28.1% 68.7% 28.8% 42.7% 50 - 64 years 18.8% 9.2% 11.9% 36.8% rai 7o-64yedr** :9)Z% 1)..1% 30.1% 42.9% Table 19: Poverty and per capita living space ANNEX 1 Page 10 of 25
All population Urban Rural 15.87 12.67 20.06 12.34 10.32 16.48 11.18 9.43 14.69
Table 20: Poverty and housing conditions
Urban Areas Apartments Own houses Dormitories contai or Other To % sq.m. % sq.m. % sq.m. % % sq.m. 46.8% 11.03 44.8% 16.78 30.0% 8.62 49.2% 11.03 45.9% 9.43 Vti0000 -toor ^ 28.6% 9.13 26.2% 13.66 32.5% 6.91 33.8% 9.04 27.0% 7.13 246 % 3879 29.0% 11j43 37.5% 5.28 16.9% 7.64 27.0% 5.33
Apartments Own houses Dormitories Wagon or Other
&W= g iSg ^ 0 g ~~~~~~~~~sa.m. sa.,%qs.m. % sa.m.% sqm =)~~~~M 51.0%1 17.221 57.1%1 21.201 53.8%1 17.851 50.6%1 8.781 58.8%1 i O.41 0000:00 |2 4 .8%1| 12 .28 |2 1.8% |1 7 .901| 15 .4%| 7 .73 |2 9 .9% | 6 .641| 1 9 .6% |10 .52| 09000124.3%1 9.751 21.1%1 16.201 30.8%1 11.551 19+5% 6a37 21.6%1 6.711 ANNEX 1 Page 11 of 25 Table 21: Poverty and household utilities: running water
e, Percent of loutsehold wvithnormallv fhinctionniig water suppliy L, .< S .A:§:: All population Urban Rural 88.2% 94.6% 78.7% 87.1% 93.9% 73.8% 86.2% 93.8% 71.6%
Table 22: Cost of utilities and incidence of payments
...... - ANeragge per otiwschnold All uTotilitiesandrentElectricity Rent Wood for heating (T otafl)______Percent Drams Percent Drams Percent Drams Percent Drams Urban : reporting when reporting when reporting when reporting when expenditures paid expenditures paid expenditures paid expenditures paid 96.6% 9,131 91.0% 3,443 39.1% 1,928 21.7% 26,166 t6#r- '~ ' -,,,, - 93.6% 4,174 86.1% 2,588 29.1% 1,625 7.8% 9,115 84.8% 2,967 76.7% 2 329 30.3% 1,432 2.3% 9,2 1
. utilities.: All and rent Electricity Rent Wood for heating (Total Percent Drams Percent Drams Percent Drams Percent Drams >;-* R < <:: reporting when reporting when reporting when reporting when expenditures paid expenditures paid expenditures paid expenditures paid MA*W 96.1% 11,964 91.3% 2,637 2.6% 2,615 40.3% 40,883 92.5% 3,525 88.1%1 2,095 0.9% 2,333 18.2% 10,093 88.1%l 2,169 81.2% 1,871 0.3% 1 333 4.9% 20 163 N | E i tf.~~~~~~~, :,-A1i11.F ANNEX 1 Page 12 of 25 Table 23: Poverty, incidence of illness and use of health services
Of which: Percent seriously sick Of which: did not had to cure to all population seek a consultation themselves 39.9% 44.3% 47.7% 41.8% Poo.r ~~~~~~32.8% 47.3% 61.4% 33.3% e Poorr37.3% 59N5% b63.1%o 36.5%
*Note: for healthsurvey sample (978 households, 3498 respondents)),November-December 1996
Table24: Average private cost of completed medical treatment per patient fornon-poor, poor and very poor
All ty es of treatment Of which: hospitalcare N Number Number of For those paiddremeiedicralsan arg Km~ Number~ ^niecnnaof of Forom those Numberof persons who iS persons se~~~~rvieatetspersons who paid:s rainpersons whosrvices paid painpaid: .~~~undergoingwho paid dramnsper that were for dramns medical for ptethsiaie eia e procedures medical painsosiai edrmeical patert Iservices srie ain Non-poor 411 332 82,995 131 131 198,296 Poor ~~147 93 14,647 27 27 36,278 Ve,.Poor 121 76 24,3 31 20 79,750
Note: only for health and education survey (number of respondents 3498) for completed treatment over the last 12 months ANNEX 1 Page 13 of25
Table 25. Distribution of private health expenditures and humanitarian medical aid between non-poor, poor and very poor.
W. y4te"healMOmor v eoWk bydy
1:-DS:SU'd.. =a
'..o'- ' 8 ', ,, -'''''n'.-''''' - - ' , '- '"
NQu.___ 2,447 10.1% 39.7% 20,842 4.5% 9,856 9.2% 57,070 8.0% 5,632 1.4% 26,203 27.7% 5,789 8.2% 5,732 244 2.9% 26.4% 3,386 2.0% 4,340 3.9% 7,201 4.8% 2,011 0.8% 5,032 18.6% 1,690 6.5% 1,720 eryPor ' 88 1.9% 15.0% 2,158 0.8% 2,721 2.0% 4,941 4.0% 1,687 0.4% 5,560 8.9% 1,117 5.0% 1,468 - SD- S-h- u survey ...... - .. li~~oiPl ;i 1g49 X.2 3-3 -467 2.9 8-5 ...... W. 4471 6,2 ' - 1.0 I989r 20 Sn%4,30 70 ,2
Source. SDS household survey ANNEX I Page 14 of 25
Table 26: Main sources for financing health expendituresfor those who paid for services over the last 12 months
u U 5t4i.1% ,7.7% 9.t% 11.0 46.0% 27.6% 8.7% 17.1% 0.6% ~~~~38447.2% 35.6,21.4% 10.1%9.6% 19.1%137 ffi _2.72.2%
Table 27: Enrolment rates by age groups for non-poor,poor and very poor.
N 1nx 864 845 98% 522 517 99% 346 314 91% 1130 328 29% 552 537 97% 359 358 10% 213 198 93% 620 139 22% 1 '~ Ve ~~~~~~577557i 97% 356 3471 97% 180 159, 88%1 611 99, 16% 12 19~~1939 97%.fi 123 1222'~0 99 19 71 91 26 56 4% 43f ANNEX I 15 of 25 Table 28: Private cost of education per student by age groups for non-poor, poor and very poor. Page
_,~~~~~~~~~~~~~~~~sJneldelweof expentitue o~eils'ihcfde .g,. ,mnin te correspohoingags group ad vre lhild. ram s .__.__.__ ___ .; . ___: ___ __ ._E__: m onthly cst peir Private lessons (for Schools (primary) Schools (secondary schools) secondary school High school .______-______-______children) Drams Percent Percent Drams Percent reporting Drams Drams per reotngreotnrpr expendituresexpenditures per child reporting per child child expenditures perdchildsexpenditures child Nop:oor 45.6% 2758 50.0% 3492 71.6% 4130 17.0% 34932 2387 VPor 41.4% 1227 29.5% 1465 36.4% 1287 4.1% Very oo 28.7% 759 34.1% 732 20.5% 2021 3.6% 2642 Allho'useholds: 40.3%/ 20609F 40.9% I340 30 7.0 33A10% 2S
Table 29: Decomposition of Inequality by, within and between regions.
RegIon 1~~~~~~qu~aofty ClfrIbIC
Aragacotn 9,434 0.49 3.3% 16,929 0.37 4.5% Ararat 7,866 0.64 9.2% 14,144 0.31 7.9% Armavir 16,269 0.74 10.9% 18,685 0.30 8.0% Gegarqunick 11,637 0.41 5.4% 14,751 0.25 5.9% Lori 9,800 0.47 7.3% 15,533 0.30 8.1% Cotaik 8,874 0.57 7.2% 12,897 0.36 8.0% Shirak 9,942 0.66 12.3% 11,509 0.28 9.4% Sunick 12,086 0.56 3.7% 14,737 0.28 3.3% Vajoc Dzor 8,426 0.59 2.2% 11,542 0.39 2.6% Tavush 8,814 0.55 5.4% 12,993 0.35 6.1% Yerevan 8,343 0.59 29.6% 14,797 0.38 33.8% Betwveen 3.7% 2.4%
Urban 8,014 0.55 57.5% 14,032 0.34 63.2% Rural 12,879 0.61 38.3% 15,416 0.33 36.5% Between 4.5% 0.1% Note: Inequalityis measuredby Theil mean log deviation index (L) ANNEX I Page 16 of 25
Table 30: Incidence, depth and severity of poverty by altitude (only for rural population)
MM'm2S~Yov a r
MMP^0 45.7% 0.17 0.09 40.9% Me4i!~ elQi13Q~N1GQjn)48.4% 0.19 0.10 23.4% ili;I~ (kvi 50.4% 0.21 0.12 35.7%
Alrra. 4% 090.0- ANNEX I Table 31: Poverty Profile by the Employment Status of Household Head Page 17 of 25
NubrPersons Preto in these me1mbe4 Percent POulation: 4 louselhold Htead of house- Percent 7f 2 13 U /6.that c honotworkimlIlds households 4 are P toor 1 1nmployedand At work 1823 8266 42.6% 51.7% 24.,7%o 42% 34.0%%
2 Employedon leave 89 419 2.20o 59.% 28.4% 2.4%/'o 2.2%
3 Employedon adminleave 107 465 2.40o XS.% 413% 3,j% 3.6%/, 4Self-employed,workin 720 3105 16.0o 47.6 2O.2% 13.% 1.7%
5 sel.einployed,~idle 30] 1321 6.80 53.4% ~35.0% 6.6% 8.6%
6 R~etired,not working 1165 3175 16.40 61.4%~ 33.4%.> 18.3 197%
7 Vnemnployed,registered 142 585 3.000 65.5% 28.7% 3.%3.1%
8 Unemployed,not registrd. 342 1323 6.8% 60.3% 36.2-% 7.5 89%.
9 IflscouragedVoorker." 100 364 1.900 60-% 29.9%K" 2. 1%0 2,0%
10 1osk*pr83 275 1.400 59.:6%~ 33.--8% .%17/
11 Mn~~~ctlvead~~~il#. ~4 13 0.100 69.2%. 3.% 0.1% 01
12 ul~hed.;notrlg26 4 030 7% 2&%.%0%
13 _tudent 4 9.0%6} 0.000 (t0ki.69.3%
14W~kln~teaiter 4 18 0.1% 100 Y0/ .%00 $ O*h~~~~~~r 1~I0 23 0.10o $2%01
4920TtV 19487 1811.0f 54.7%o 27.7% &% 101. 0% 100.(0 10%0.% Notes In this table poor are the sum of very poor and poor individuals Poor - all below national poverty line, very poor - below national food line, extremely poor - below 40% of national median expenditures Householdhead is defined as primary earner in a household. Palge I S of2'
Table 32: Poverty. pirorile by employment status and location of individuals
WPersons Percent
t l' B ~~~~~1811 9.33% fl,
& wzf fl v J~340 3.76%f i, 2
000 Zb_ 1 ~~~4244 21.87% k -'''., _; S E
~~~~~~~14 7.446%6i1W:!
~~~~~~~177 0.91%' / ~~~~~~~3942.03%g l? h
17 1]63 e 85%327e0-65 _ ~~~~~~2467 12.71°9%; EXE
7@32 3.77 =%f06S
_222 ~~~~31 1.7%X;IwIeri
; j = ~~~~~~1290.59% ^ lf6W 104 0284% |C u00rr¢ X,i;LN 72833.75%6%
§ 121§6 68~~23 3520%
387 1.99% ; . °_ l ANNEX 1 Page 19 of 25
2128 10.97%z-:->, -- <2- [ 42~~~372.05/o%i I;||-
297 0;15% / 0l1 0 - 18 0.09% 4. bl - .- ; --- ; . ; s; ~~8 0.04% 00+;.....lS. .% -- :-f-:00. . .8. .3 0.02%...... 4 .. ::-; -- i- qft,: -. ;]457 2.35% ,,.|2m.~
17~~~~~~~~760 0.397°%ol i All 19407 l l)A. %0 5 4.7 % 2 7.7Z.4 8&5%5 0{).W}%, I00.QsY. ,00.O Note: Poor - below nationalpoverty line, very poor - below national food line, extremely poor - below 40% of nationalmedian expenditures; in this table poor are the sum of very poor and poor individuals;for present householdmembers. ANNEX I Page 20 of 25
Table 33: Poverty profile by employment status and location of individuals: FGT measures
_ 1Mg.}ww...... 1811 .9.33% ratfig
£? 5~~~~~~~544 2.80% §
~~~~~~~~4244 21.87%__ y,fr_'.
.. Qg' QiS}}S} 1662 ...... 8.56/,w=%_Q ,Q'E ~~~~~~~~680 3.50% __ 0"W MOW A M , A,.IN6
~~~~~~~~394 2.03%_ Q' _QM¢i_ .72A,D gI'9R.,& ,, ~~~27 0.65% Wyi lj:W 9
_ ~~~~~~~2467 12.71%
.. . ~~~~~~331 1. 71%So~|/;;K3
_ j ~~~~~~6333.26%
; 98 L028%
~~XX1!000~22L14%28oU k
~~~~~~~~684 8.68%1
511 2.63%_;!Lq [Q! 2 ''Yi: 2~~~37° L994%<8P YX ANNEX 1 Page 21 of 25
Privatese1f-eMpliyed 2128 10.97% 44.7% 15.9% 748/ - .0M :- :7.7% .Yer.vazz 397 -.05% 49.4% - 9.0% 1. 1 ;% 1,7% Ciherur 424 2.18% 514% 18.09' 84% 2.% 1% 1.7%-- Rural 1307 6.73% 41.r/ 14.3% 7I2% :51% 4 -5%44%4 Jovdfo*reIgWS 29 0.15 %41.4%13.4% 5.7% --- - 'X4%-- Yerevan 18 0.09% 44.4% II.% 8.9% 01%/ - 0.1% 0. Oh erur 8 0.04% 75.0% 5.2% 1.1% 00%- 0% 0.09' ural 3 0.02% 66.7/ 13-4% 3.6% -0 0.0% 0,i0%;'. Otheremloyed 457 2.35% 51%/ 0.6% ;%i Yrev 111 0.57% 57 11. 0 (tAerurba 76 0.39% 50.0/ 17.6$ 78% #.4% 03% 0,3% ---..ral 270 139% 49.649 207% 11.6 13% 1.3% , 5% L_ i54.7%9 215% 11.I J0I 00.0% 1.00.OV 100.0% No t e: i n t hi s t ab l e p oo r ar e eth s u mo f r_ve y o.por . a nd. p.o or. nd.v.d ua.s ;.f or.pr e se nt.ho us e ho ld.m e mb e r s. Note: in this tablepoor are thesulm of verypoor and poor individuals; for preserithousehold members. ANNEX 1 Table 34. Public opinion in Armenia on the extent of poverty Page 22 of 25
Responses tothe question "what is the likely share of households that are poor in Armenia?": Actual status Between 31 and Between 51 and Between 71 and Between 91 and Dntko of respondent 50% 70% 90% 100% Non-poor 30 5.4% 105 19.0% 175 31.6% 204 36.8% 29 5.2% 11 2.0% Poor 11 4.9% 17 7.6% 76 33.8% 102 45.3% 13 5.8% 6 2.7% Very Poor 7 3.5% 19 9.5% 80 40.2% 86 43.2% 5 2.5% 2 1.0%
Note: UNDP health and education survey, 976 respondents; sample matched with SDS household expenditure survey
Table 35. Poverty and subjective evaluation of living conditions by households
Current Economic Situation UIYXJ I lp Rather bad Bad Non- 751 30.5% 972 39.5% 737 30.0%
Poor 233 18.3% 577 45.4% 460 36.2% Very 154 13.0% 467 39.4% 565 47.6% Poor
Table 36. Expected changes in the economic situation
- l In The Future the situation will get Better lStay the Same WWrse Don't known Non- 1311 5.3% 909 37.0% 667 27.1% 753/ 30.606
p o o r ______Poor 49 3.9% 415 32.7% 396 31.2% 409 32.2% Very 31 2.6% 331 28.0% 384 325% 436 369% Poor _ _ Figure ) .ANTNEX I Page 23 of 25
Rsk of pove y and nunber of dependants
70%
670% ___ _
50%
3. 0%0%__ __ _
20 ______
Io %_ __ _
20%
0 1 2 3 4 5 6 7 Number of dependants in a household Figure 2 ANNEX 1 Page 24 of 25
Household structure and poverty
100% - --. = - - .: . .. .. :--- 9~~t ~~ ~ ~...... ~ ~~ ~ ~ ~~~~~~~~~~~~~~...... L-.... K~ ~ ~ ~ ~~~~~~ ~ 80% t - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..----.0f--l......
1.. .- 0 -. - ...... A....X~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...... *~60% - ^°o60%j0 . = _ _ _ ; _ ...... r = .s
._...... _...... _: Non-poor 4071 4~ ~ ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~ ~~~~~~~Poor v,,ry P.oor
200
0% -h _ - - I-+ - - I - t- - i ';Y , - S X;~~0)0 °0 - >°. C. S0 S '), I c0 .°
~~~ -~~~~~~~ 0~~~4 . COn ~~~~~~~~~U -, 0)' 0)~~~~~~~~- rr_
4~~~~~~~~~~~~~~~~~0 Of)~~~~~~~~~~~~~~~~c7:
L___ ~~~~~_ __ _ _ Figure 3 ANNEX 1 Page 25 of 25
Labor force participation: age profile (Males)
1 _ 0.9 0.8-
0.5 - /;~~;/%~ CMDiscouraged workers 0.4 - E Employed
0.3 - / '' Non-registered unemployed 0.2 UMRegistered unemiployed 0.1 0
>s~~~~~~>E z ) o m u O 0 0 Cn 0
rs N 0~~~~~~~~~~~~~~~~~~'q m Itq m Ir
Labor force participation: age profile (Females)
09 -
0.8 -
0.7 _ _ _ _
0.6-
0.5 - /01 I Discouraged workers
0.4- EJmEmnployed 0.3 N~~~~~~~Non-registered unemployed o ~ /'~/ U Registered unemployed 0.2
0.1
0~ ~ ~ 0~
cq6, ° <, $) F m
Note: As a proportion of the correspondingage group; discouragedworkers are individuals without work, able to work, who would like to work, but not actively searching for a job. ANNEX 2 Page 1 of 14 MEASURING POVERTY IN ARMENIA
Description of 1996 HouseholdSurvey comparedto 1993-94Pilot Survey 1. The 1993-1994pilot survey conductedby a joint team from Yerevan State University's Sociologydepartment and the State Departmentof Statistics (SDS) was unique at the time because it was one of the first attemptsby an FSU countryto accuratelymeasure household income and expenditurebased on a representativesample of the country as a whole. The pilot surveyprovided the database that was later used to draw the poverty profile for the Poverty Assessment.' The poverty profile must be updated for s number of reasons and, fortunately,new representativehousehold data are available.
2. The pilot survey's methodologyis fully describedin Braithwaite(1995). The survey was not without limitationsthat the new Household ExpenditureSurvey was designedto overcome,in particular: (i) the sample was drawn to be representativefor the country as whole, includingrural and urban areas, but not regions, limiting its value to inform regional policies; (ii) the recall period for food expenditureswas a single day as comparedto a week for other expenditures, making expenditure data not truly representative,and likely making all measures relying on the variance (includingpoverty measures)overstated; and (iii) the questionnairedesign was different for urban and rural parts of the sample, and datasets were not strictly comparablesince the rural data included the imputed values of the respondents' own consumptionof produce and livestock from their plots which the urban data did not; differentrelative poverty lines were applied to both regions to overcomethe distinction.
3. In addition, the year timeframe for implementingthe surveywas long. The country went through a period of hyperinflationduring 1993 and because no reliable price deflators existed, part of the dataset (related to 1993)could not be used for the analysis. Consequently,the representativenature of the results were somewhatreduced. Finally, the questionnaireswere not pre-coded for the different types of currency in circulationin Armenia, which unquestionably increased the measurementerror, especially given the extreme exchange rate swings during the long time span of the survey. As a result, due to technical problems related to dispersionof expendituresin the dataset, only relative poverty lines based on the medians were used to produce the pilot poverty profile.
4. It is important to note that the pioneeringnature of this work produced these shortcomings, indicating that results of the survey are not strictly comparableto other transition economiesor to the new Household ExpenditureSurvey.
5. The new household survey conductedby the SDS in November-December1996 drew heavily on lessons from the pilot survey. Although the SDSteam designed the survey,The World Bank and external consultantsprovided substantialtechnical assistance.
6. The survey covered 100 villages and 28 towns and was designed to be self-weighted.2 It was representativeof the administrativemarz, or regional, level as well as of both urban (by the size of cities within urban areas) and rural areas (by the elevation of rural ones). The sample size included 5,040 households of which 4,920 responded - a very high response rate -- making it the largest household survey carried out to date in Armenia.
Armenia:Confronting Poverty Issues. ReportNo.15693-AM.
Detail on the samplingsee in the report by the SDS: (1998). ANNEX 2 Page 2 of 14
7. A randomly selected quarter of respondentskept a diary and made daily entries of their expendituresand consumption;three-fourths of respondentsfilled out a questionnairebased on recalls for the last month. Most of the questionnairewas similar for both parts of the sample and included sectionson householdcomposition, housing conditions,labor market status, income and transfers, family business (includingland use and livestock),saving and borrowing, food stocks, and their subjectiveevaluation and expectationsof the current economic situation. The questionnairealso included explicit, detailed questions of in-kind consumption and transfers, and provided pre-coding for different currencies. All of Armeniawas included in the survey in the last two months of 1996, a relativelybrief period of time. The SDS team performed the data entry and cleaning; it completed the constructionof main aggregatesand definition of poverty basket during a visit to Washingtonin September-October1997.
Definition of Poverty; Unit of Analysis; Consumptionand Income
8. What is poverty? In the broadest definition,poverty is the economic status of a person who falls short of a reasonableminimum level, either in absoluteterms or by the standards of a specificsociety. Even this narrow definitionposes serious measurementproblems. Before examining the state of poverty based on the HouseholdBudget Survey data, several assumptions reflecting an approachto defining poverty should be clarified. General concepts of measuring well-being, choosing the unit of analysis (individualsor households), and determiningthe poverty line are discussedbelow. Extensiveliterature exists for dealing with these issues3 and it will be discussedbriefly below in the context of the Armenian data.
9. Measuringwell-being. Income and consumptionare consideredthe typical measures of well-being. Their time profiles may differ because as families save or borrow, their measured poverty status may be different the two approaches. The generally preferred indicator of householdliving standard is a comprehensivemeasure of current consumption that includes all sources, includingpurchases, gifts, stocks and the household's own production. Consumptionis preferred over income for three reasons:
10. (i) First, current consumptionis usually taken to be a better indicatorof the current standardof living, since the household's welfare during the observationperiod is likely to depend primarily on that period's rate of consumption. Consequently,the consumptionmeasure should be as comprehensiveas possible. (ii) Second,current consumptionmay also be the best possible approximationof averagewell-being in the long run since households typically "smooth" their consumption even though incomes vary sharplyover time. In other words, householdstend to save during periods of high income and to consumefrom those savings when income is low. Also, some households can borrow from either relatives or private lenders. (iii) Third, any observed differences between income and consumptioncan result from respondents seekingtco conceal their income to avoid taxation and for other concerns. In the socialisteconomy, most informal activities were illegal and residual fears may induce householdsto underreportincomne. Because taxes on many entrepreneurialactivities are rarely paid, households may fear that statistical bodies will disclose such informationto tax authorities4. The empirical work based on a number of countries has shown that relative ranking of households by reported consumptionis a better indicator of their true standards of living than reported income (see Deaton 1998).
See, for example, see Ravallion (1992) for a survey
For the new Armenian Household Budget Survey mean per capita current expenditures were higher than current average per capita incomes almost by 50 percent. This discrepancy is, however, reduced to only 5 percentage points, once total incomes (i.e. including incomes from valuables and property sales) and total expenditures (including durable goods purchases) are compared. ANNEX 2 Page 3 of 14
11. Unit of analysis. The analysisin the profile focuses on poverty among Armenian households. If the household was deemed poor, all its memberswere counted as poor. This was based on the implicit assumptionthat all individualmembers of a householdbenefit equallyor in a constant proportion from the household'stotal incomeand expenditure.
12. In reality, change in householdconsumption may effect the welfare of different members in different ways depending on their age, gender or education. Data on the actual differencesin living standards within a given household are rarely available,and the Armenian Household Budget Survey was no exceptionin this respect. This limitation shouldbe kept in mind in interpretingthe profile's quantitative findings since it has implicationsfor policy and measurement,such as that household-basedmeasures may underestimatethe true extent of poverty among individuals (see Haddad and Kanbur 1990;Nelson 1993).
13. Issues in measuring consumption. Complicationsarise in defining householdexpenditures and consumptionin FSU countriestoday. The most significantconcerns are: socially-based, publicly-awardedin-kind benefits, including those received from enterprises or as private transfers; and consumptionof home-producedgoods and commonproperty resources.
14. The household survey included a very explicit section on goods received in-kind from the State, NGOs, employers and individualsas well as those given by the householdto others. Normally, individualswere asked to specify the monetary values of benefits received in-kind from employers(output produced,food, transportation,health care) and aid from humanitarian organizations(food, non-foodgoods, kerosene, medicine). The respondents' valuationsof these in-kind benefits are, of course, subject to criticism,but parallel market prices exist for most of the goods and services and most of the responses are close to shadow values. However, services given for free are by their nature much more difficultto pin a fixed rate to.
15. The source of primary concem is housing. Most of the housing in Armenia has been privatized by now and utility prices are close to production costs levels. This was not true, however, at the time of survey. Fortunately,little differenceexists in the ownership or quality of housing between the poor and non-poor,according to the profile. Therefore, the study introduces only a slight measurementerror by omittingthe imputed rents for owner-occupiedhouses. The questionof how to treat arrears on utility payments is related to this issue because a great many households indicatedusing electricity and water but did not report expendituresfor them. Unfortunately,it is impossibleto quantify the amount they should have paid in order to get a rough estimate of their consumption,however in this case, aggregate consumptionwill tend to underestimateactual well-being.Most of these omissionsare similar to the survey data gaps in other FSU countries. Within this regional perspective,consumption computedfor Armenian households is not likely to be severelyunderestimated.
16. The second issue, how to measure in-kind consumptionof home-producedgoods, could be more adequatelydealt with by using the survey instrument. The questionnaireaddressed a number of points about accessto and use of land plots, and respondentsrecorded all products and amounts in great detail. Respondentswere also asked to evaluatethe market value of home consumption. Since local prices derived from the expenditure segment of the questionnairesand diaries were available,this information was used to check the self-reportedtotal value of agriculturalproduce consumed in-kind, and the values for outliers were properly corrected. Interpreting the results from commonproperty resources proved a bit more problematic. The questionnairedid not specificallyask for goods that were not obtained from their own land, for example a fish caught from a river, or fuel collected in the forest. Wild herbs collected in wastelandsand then dried constitute an important componentof consumptionin some rural areas, ANNEX 2 Page 4 of 14 especially for the poorest households. This is less of a concern in accurately estimatingthe poverty basket, since it is based on actual consumptionof households as recorded in their dairies.
17. The current total monthly expendituresused as a measure of consumptioncomprise: food and current non-foodpurchases; in kind productionand consumptionof food products; the value of net in-kind transfers. It does not, however, include consumptionfrom food stocks. Data on1 consumptionfrom stocks were unavailable for three-fourthsof the sample since only households in the part of the sample that filled out the daily diary were reminded to include all produce consumed from stocks in their total consumption. A specifictest was carried out to determine the extent to which this omission biased the expendituremeasure. For those with daily records, purchases,production and consumnptioncould be separated. Using the diary sample with daily records of consumption in-kind for about a dozen of the main food staples, it was possible to constructthe distributionfor purchases, own production and consumption(including the use of food stocks). As a result, during the month of observation,the amounts consumed from the fciod stock and that consumed from monthly purchase (or production used to replenish food stocks)are roughly equivalent. Thus, consumptionwas not dramaticallyunderestimated since it included all purchasesregardless of whether they went to consumptionor to stocks to be consumed in later months.
18. Expendituresrecorded in diaries are by design more comprehensivethan estimates based on recall given during oral interviews. The implicationis that for all lower deciles the Lorenz curve of current expendituresfor diaries dominatesthe one for questionnaires. For almost all decile groups up to 9th decile, currentexpenditures recorded by the segments of the sample that filled out the diaries were somewhathigher. But this discrepancyis normally within a reasonable range: for any percentilethe differenceis between 5 and 20 percent of per capita expenditures. This property of the dataset has implicationsfor measuring poverty that are discussedin the section on robustness checks for the poverty line.
19. Defiition of povi-Xyline. Two approachesexist for setting the poverty line; one uses an absolute standardand the other uses a relative approachto poverty. This profile is based on an absolute line: How to derive a cost of normativenutritional requirementsand make allowances for non-food consumption? One popularmethod is to determine the consumption expenditureat which the average individualachieves the food energy requirement. This can be readily estimatedfrom a graph (relating caloriesintake to actual current expenditures)or regression. Price data are not required and the method automaticallyincludes allowances for non-food consumption.
20. Although acceptablefor a single national poverty line, this method can yield inconsistent poverty comparisonsacross sub-groupsbecause the relationshipbetween energy intake and expenditureswill shift dependingon affluence, tastes, activity levels and publicly-provided goods, and nothing guaranteesthese differenceswill remain relevant for poverty analysis. For instance,poverty lines derived with this method tend to be higher in richer regions where householdstend to buy more "expensive"calories and may cause a completerank reversal and inconsistenciesin the poverty profile. When a person migrates from a poor to richer region it could lead to an increasein the aggregatepoverty measure even though he or she is better off in terms of real consumption(see Ravallion and Bidani 1994).
21. An alternate method attemptsto directly measure the local cost of a normative food and non-food consumptionbundle. The food bundle is anchored to nutritional requirementsand is consistent with the consumptionhabits of the poor, and its value is estimatedat regional prices. The food line then becomes a reference point to estimate the share of non-food items in the poverty basket. This was the method used to estimateArmenian poverty lines in this study. ANNEX 2 Page 5 of 14
22. These variables make clear that some arbitrarinessis unavoidablein trying to define the poverty line in practice. Given the uncertaintiesin settingthe poverty line, it is dangerousto focus on a single line. To avoid this problem in the Armenian profile, a basic robustnesscheck was first conducted, and the group decided to rely on three lines rather than a single one.
Setting the poverty lines for Armenia
23. The minimum food bundle was defined as a standard food bundle for the basic group, and because it is based on actual per capita consumptionin the 3d-7 deciles, accuratelyrepresents the consumptionof the poor. Only that sectionof the sample with daily records on food consumption was used to produce these per capita amounts and per capita values were obtained by'dividing total household consumptionby the number of present members. The actual bundle was then reduced to 24 essential food staples in the diet of the poor, and their observed amount was "blown-up"to determine the minimumcaloric value per capita per day of 2100 Kilocalories as well as to insure their primary nutrient intake requirements(see Annex Table 4 for the compositionof the poverty basket). The averageregional prices derived from diary records of purchases were used to value this bundle. This method produced a food line for every region in Armenia. Differences in food basket costs between regions were not large, given the relatively small size and homogeneityof the economy.
24. To evaluate the share of non-fooditems, the study selected the one that gave a lower bound estimate.' The estimate of food share thus obtained -- about 65 percent -- is close to actual spending on the non-food goods and servicesin the 3rd decile, for which all current per capita expendituresare close to the food line. The study obtained region-specificpoverty lines based on regional shares of food and, again the variationin poverty lines across regions was not large.
25. A national poverty line and a national food line were computed based on regional lines. Given the limited variation of prices between regions, those conducting the study chose to take an average of the regional lines using the number of householdsas weights.
26. The first robustness check is designedto determine the extent to which averagingprices across regions changes the extent of poverty and relative ranking of regions (see Figure 1). Although extremes (regionswith highest and lowest incidence of poverty) preserve their ranks, a fair amount of re-ranking occurs in the middle of the spectrum. However,all this re-rankingis going in a predicable direction. The capital city with the highest price levels is poorer when the regional poverty line is used whereas agriculturalpoverty at regional lines is usually lower than when the national line is used. This reflects lower local prices for food in agricultural areas,but discrepanciesare usually very small, and the benefits to having a single national line obviously outweigh costs.
5 The share spent on non-food items is roughly comparableto the amount spent on food. Conversely,the share of non-food expenditurescould be gleaned from those whose spending on all goods was as much as the minimumfood basket costs. Obviously,the latter is lower than the former. To obtain an estimate that is consistent with the model of demanddeveloped by Deaton and Muellbauer the study group would have to estimate a regression that would give a rough amount of food share in the poverty basket as: food share ij=aj + bj log(currentexpenditures/food line) + uii,where i-th household is located in j-th region; u is an error term; estimated coefficientsfor aj are specific for each region and would give the share food expenditures for those who could have just achieveda nutritionalminimum. With regional dummiesthis regression gives a satisfactory fit, with a statisticallysignificant estimate of food share at 65 percent (95 percent confidenceinterval is between 62 and 68 percent). (see Ravallion 1994 for details on assumptionsfor this estimation). ANNE,X 2 Page 6 of 14 Figure 1.
Poverty incidence with national and regional poverty lines (regions are ranked by poverty incidence implied by the national line) 70.00%
60.00% 50.00I ONationalpoverty line (10784 40pendit00esis equal 0.5 -- very lose to 1 - which meas an extra Dramsper capita) ~-30-00 o8 A Regionally-specificpovertylines
20.00%
27. ntaddition to the food line, used to identify the very poor, a relative line set at 40 percent of the mredianwas also used. This one was intentionallyset using a method similar to the line for the pilot survey and happenedto be the lowest line; it was used to identify the ultra or the extremelypoor 6. This definition of extremelypoor also correspondsto the idea of the following behavioral threshold for hunger: the elasticity of expenditureon food with respect to total current expendituresis equal 0.95 -- veryclose to 1 -- whichmeans an extra dramwould almostentirely be spent on food.
28. A second check of the acclracy of the poverty line would be to examinethe sensitivity of the poverty measure to a change in the level of the poverty line. While inequality at both end of the distributionline seems to be high, households appearsto be fairly evenly distributedalong the poverty line (see Figure 2) with the exception of two regions.7 Decreasing the poverty line by 20 percent would reduce the headcountby nearly a quarter, from 54.7 percent to 42.3 percent for the country as a whole; decreasingit by 10 percent would reduce the headcount by 11Ipercent. Thie elasticity of poverty incidencewith respect to increases in the poverty line is even smaller. Increasing the poverty line by 10 percent and by 20 percent would cause a headcount to increase by 9 and 17 percent respectively. Such roughly proportionalchanges suggestthat the distribution was not especially concentratedaround the poverty line and that it was measuredwithin a reasonablemargin of error.
6See also endnote 9 in the main text that gives an absolute value and nutritional intake associated with thia relative line.
Sunick and Vajots Dzor; note that Vajots Dzor is the smallestregion in termrsof populationand has the fewest observationsin the sample. ANNEX 2 Page 7 of 14 Figure 2.
Sensitivity Analysis of Poverty Incidence (Regions ranked by poverty implied by national line)
5 70- - - K .- E5 70% v-A--- -20%higher poverty line
4 0% *-_A+-__-t-X povesty line 550% + 0%/ohigher 84 0 % ------I--- -- N-a--oional poverty line (1 0784 .+---t- ~~~~~~~~~~~Dra-npee capita) 0 30 !/ ------+-- 10%lover poverty line
20% ------20%lo,er poverty line _1 0O %j% ------I------
t O%~~~8 < #> S go0 < 8 8 > >
29. A third check of the accuracyof the poverty line is to test the extent to which the results would change, if the differencebetween the part of the sample derived from daily records and the part from oral monthly recalls are incorporatedinto the analysis. The poverty basket was derived from consumptiondata that came only from diaries. The diary sub sample has higher current expenditures. If we apply the poverty line only to this part of the sample and adjust the poverty line for the rest of the sample accordingly(that is downwards),the national poverty incidence would drop only slightlyfrom the observed 54 percent to 50 percent. Such a small changein the overall headcountwas judged too minor to bother with applying two different lines to two parts of the sample, therefore, one national line was adopted regardlessof whether the household filled out a diary or answeredthe questionnaireduring the interview.
Equivalencescales and economiesof scale in the household
30. Income and consumptiondata from household surveys are usually collected at the household,rather than the individual,level. This means that in attributing to the individualswho comprisethe householdtheir share of householdresources, an adjustmentbased on some allocationrule must be imposed. The most commonlyapplied "rule"is that each family member receives an equal share of householdresources, which means householdconsumption and income are divided by household size to get a per capitameasure consumptionor income. Although simple,this allocation rule is not necessarily correct, therefore other allocationrules, known as equivalence scales, are often proposed for a more accurate reading. Despite little available guidance in choosing among the wide range of possible scales, it is important to examinethe sensitivityof poverty comparisonsto the particular allocationrule selected.
31. Because equivalence scale is usually distinct from scale economies of consumption within the household, they will be addressed separately.' In many developing countries,commodities with economiesof scale in consumptionaccount for a small part of consumptionbudgets of the poor because their consumptionis primarily made up of goods such as food and clothingfor which few scale economiesexists. Consequently,the literature on poverty in developing
'Although Jenkins has recently demonstratedthat any equivalencescale should in fact be proxied by an economiesof scale parameter 0, in other words by changing 0, one can obtain any number of equivalentadults using the formula: Na=N0 , where Na - number of equivalentadults, N- number of household members; 0 is also known as a parameter for economiesof scale. Value of I would imply per capita measurement(no economies of scale), value of 0- that all household expenditures are fixed costs and do not dependon the number of people (infinite economiesof scale). ANNEX 2 Page 8 of 14 countries has tended to use flat equivalencescales, most conmmonlyper capita measures. As a first-order approximationit is also defensiblefor Arrnenia,but certainlyneeds to be carefully checked.
32. To illustrate how the incidenceof poverty and the poverty profile are sensitive to changes in assumptionsabout the economiesof scale, we will apply the OECD, Georgian and Russiart equivalencescales to the Armenian dataset.9 All three have limitationsand advantages. The OECD scale is widely used for intemational comparisonsand is judged suitable to most developedmarket economies. The Russian equivalencescale is the only one developed for transition economiesbased on direct measurementof individualconsumption within the household. Its disadvantageis that, being based on 1992 data, it is relatively outdated. The Georgian equivalencescale has been developedusing only expertjudgments, unlike the other two, but still has validity when applied to Armenia since it shares many similarities in lifestyle with neighboringGeorgia.
33. Note that the following experimentsare carried out purely for illustrativepurposes. To get a meaningfulset of results the originalpoverty line had to be changed accordingthe concept of equivalent adult as opposed to per capita measurement.10
Table A2. Poverty incidence among individuals,by type of households and location underdifferent equivalencescales
Percent of members who are poor and very poor Household composition Share of Per capita OECD Russian Georgian population scale scale scale scale Single person, elderly (over 60) 2% 36.2 45.0 23.1 34.2 Single person, working age 1% 24.3 29.4 27.5 28.9 Single parent with children 2% 49.6 40.2 54.8 38.6 Elderly couple without children 4% 52.5 50.9 38.8 44.8 Couple without children (working age) 2% 40.6 38.6 48.0 42.3 Couple with one child 3% 45.7 36.6 52.8 35.5 Couple with two children 12% 49.6 34.4 54.7 36.8 Couple with three or more children 13% 55.5 37.7 60.1 39.3
Extended families with one or more children 48% 60.4 47.9 63.1 48.9 Extended families without children 13% 49.1 42.2 53.7 46.3 TOTAL 100% 54.7 43.3 57.6 44.3 Urban 62% 58.8 47.7 61.9 48.7 Rural 38% 48.0 36.0 50.4 37.0
OECD and Russian scale are presented in detail in Klugman 1997 and are forthcomingfor Georgia. In OECD scale every adult household head has a weight of 1, all other adults- 0.7, children - 0.5; Russian scale gives to every adult approximately1.2, each child 1.01, and each pensioner0.7. Georgian scale gives different weights to different demographic groups forfood consumptionwith children and pensioners getting0.8 of the equivalentfor adult, dependingon age and gender. It also implies a "mutual consumptioneffect" or economiesof scale for non-food componentof the poverty line, and large and progressive economiesof scale for the householdsize. For households with 4 members,for example,each would have to have to spend on non-food only a half of the amount for a singleperson household. On aggregate,Russian scale does not imply economiesof scale, OECD implies large economiesof scale (0=0.7), and Georgian implies a combination of Russian scale (relatively high weight to children) and economiesof scale impliedby OECD.
10 Applying OECD scale would require, for example,re-estimating the minimumconsumption basket and expressing all figures in consumptionper equivalentadults. There was no attempt to re-estimate the food minimum bundle itself, so the adjustment:is very approximate and based on the "price per calorie" of the standard Armenianbasket. Applyihgthe share of non-food expendituresproduces a poverty line for an equivalentadult based on household composition, or number of equivalent adults as implied by the equivalencescale. ANNEX 2 Page 9 of 14
34. Table A2 presents the results of a comparisonby household types (for which equivalence scales are designed on purpose). The overall headcount changesbetween different methodologies are quite dramatic,but the relative risks of poverty are less affected. The per capita measures that were used for Armenian extended familieswith children that had the highest incidence of poverty were the same on the Russian and the Georgian scales. The OECD scale ranks pensioner couples living alone as facing the highest risk of poverty,but even on this scale extended families with childrenrank second in terms of poverty incidence. Coupleswho have increasinglynumber of children are also at greater risk of poverty for all scales, except OECD. Rural areas are consistentlybetter off regardless of the assumptionsabout economiesof scale used.
Econometrictests to determinethe existenceof economiesof scale in Armenian households
35. The frameworkadopted for this section is taken from Lanjouw and Ravallion (1995) and based on a demand model proposedby Deaton (see source for details of the underlying model and discussion). Simply summarized,the main question is to determine whether larger households need less per member or whetherthey spend less per member simply because they are poorer.
36. Introducinga welfare metric is essential and the most widely used method, the Engel approach,jointly estimates the equivalencescales and economiesof scale whereby the share of spending devoted tofood becomes an inverse indicatorof wealth. Ravallion and Lanjouw(1995) follow the commonLeser-Working model in which the food share is regressed on the log of expendituresper person and a set of demographicvariables. The basic form tested on Armenian data can be obtained by adding parametersfor the effects of household size independentlyof these variables:
wi=a+bln(xi/ni0)+Zj=1llcjeji+ regions' relative prices + residual.
Where wi denotes the budget share devoted to food by household i, eij is the proportion of persons in householdi who belong to categoryj. In that specification,the compositionaleffect cj (equivalencescale per se) is estimatedalongside the size elasticity 0 (economies of scale effect), by isolating the pure compositionaleffect from the effect of household size n.
Specifically,the estimated coefficientand the basic output layout are the following: Coefficients: Name Dependent vari.: wi foodsh Explanatoryvar.s: Log household expenditure X Incurex Log household size Y lnmemb Demographics: Children share Cl chish Old share C2 oldsh Log of price level (poverty line) P lnpr Dummyfor rural areas R rural The estimate of theta is 0 =Y/X. The size and significanceof cj suggestswhether some difference in needs between demographic groups that require the introduction of equivalencescale.
37. Below are the printoutsof estimates. The food share is computed as total expenditureson food (includingin-kind consumptionfrom land plots and net transfers) to total current household expenditures. The printout reports basic tests for omitted variables bias and heteroscedasticity. It ANNEX 2 Page 10 of 14 also provides a test of the hypothesis consistent with theta equal to one, which has evidently not been accepted. Alcohol and restaurant food was likewise excluded from total food expenditures, but results were similar to the ones reported below.
Source I SS df MS Number of obs = 4915 ---- +------F( 6, 4908) = 244.46 Model | 58.8848584 6 9.81414307 Prob > F = 0.0000 Residual | 197.039683 4908 .040146635 R-squared = 0.2301 ------+ ------Adj R-squared = 0.2291 Total | 255.924541 4914 .052080696 Root MSE = .20037
foodsh | Coef. Std. Err. t P,|t| [95% Conf. Interval] lncurexp J -.1387909 .0036986 -37.525 0.000 -.1460419 -.1315399 lnmemb | .0920774 .0066408 13.865 0.000 .0790584 .1050964 oldsh | -.0015093 .0101878 -0.148 0.882 -. 021482 .0184633 chish | -.011366 .0157103 -0.723 0.469 -.0421653 .0194333 lnpr | .2288241 .0684572 3.343 0.001 .0946173 .3630308 rural | .0472532 .0064849 7.287 0.000 .03454 .0599664 cons | -.8201935 .8285695 -0.990 0.322 -2.44456 .8041734
Ramsey RESET test using powers of the fitted values of foodsh Mo: model has no omitted variables F(3, 4905) = 89.34 Prob > F = 0.0000 Cook-Weisberg test for heteroscedasticity using fitted values of foodsh Ho: Constant variance chi2(1) = 41.54 Prob > chi2 = 0.0000 test lncurexp=-lnmemb ( 1) lncurexp + lnmemb = 0.0 F( 1, 4908) = 54.05 Prob > F = 0.0000
38. The values estimated suggest that parameter of scale economies as implied by data is near 0.092/0.139=0.66 (the 95 percent confidence interval is between 0.54 and 0.80), a very substantial effect and one consistent with the OECD scale. Demographic variables turn out to be insignificant, pointing out that what matters is household size, but not its demographic composition. Based on-the econometric test, a per capita measurement is inappropriate for Armenia.
39. However, these results don't come without some doubts and qualifications. The first one comes from the data itself. Dividing the sample in two parts -- bottom half and richer half (in terms of per capita consumption) -- we can see that for the poor half there is no significant effect associated with the size of household. In fact, results for the sample as a whole are driven by the richer families, which appear to be the only ones with some economies of scale.
40. Repeating the same procedure separately for each marz produces mixed results. Only three regions offer evidence of positive scale economies: Yerevan, Gegharkunik and Ararat. Not surprisingly, many regions have a substantial number of wealthy families, which, as pointed out earlier, are likely to drive these results. The hypothesis of constant scale economies is not rejected in three other regions. Others produce inconsistent estimates.
41. Thus, accepting the scale economies on empirical grounds is uncertain. On the theoretical level, limitations to using this test as a definitive argument are also present. Before concluding thlat there are some economies of scale, it is wise to reflect on the assumptions that underlie it. Two problems stand out: (i) the method is only valid under special assumptions about the property of the consumer's cost function, for example, unit price elasticity (see Lanjouw and Ravallion 1995). The share of expenditures devoted to food is not the best indicator of utility for many reasons, therefore, the importance attached to these results are dependent on subjective beliefs; (ii) intra-household ANNEX 2 Page 11 of 14 inequalitiesare not taken into account. Even if the food sharewas a valid indicatorof average welfare levels withinthe household,there might be better indicatorsfor specific sub-groups,such as adults or children,and those indicatorsmight respond differentlyto householdsize. The alternativeRothbarth method of settingthe scale (used for constructingthe OECD and Russian equivalencescale) takes this explicitlyinto account,using consumptionof "adult" goods as a welfaremetric. Alternatively,the scale could be anchoredto child welfare. All those methods require,however, a lot of research time and effort,and the results are again inconclusive.
42. The strategyadopted in the case of the Armeniapoverty profile was not to set the "correct" scale. Instead,it was adoptedto see how robust conclusionswere on correlatesof poverty to measurementassumptions, which poses the question:What changeswould arise in demographic characteristicsof the poor if the premise of the economiesof scale impliedby the estimateis accepted? First, unlike in the per capita-basedmeasurement, both larger and smaller householdsare at equallyhigh risk of poverty,whereas medium-sized ones are less likely to be poor (see Figure 3).
Figure3
Values of economies of scale parameter and poverty incidence by size of household
6S000%~
600Y -.- / z i=
eC39%~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-n-0=00
400D96-*-- ~
Note: withchanges in the parameterfor economiesof scale the povertyline has beenchanged each time to keep the averageincidence of povertyconstant.
43. Where the structureof poverty is concerned,only miinorchanges relate to introducing economiesof scale. Someincrease in the share of pensionersamong the poor and a decreasein the number of childrenis shown in Figure 4, but both effects are marginal. ANNEX 2 Page 12 of 14 Figure 4.
Economies of scale and composition of poverty by demographic groups
Z r-_ Adult inactive and unemployed Adult 50% ~~~~~~~~~~~~~~~~~~~~~~~~breadwinner
.09_., .. _.... _ ...... -.- : _ ...... ,.,..zElderly
20%/, - _ - _ _ ' -Children
9=1 8=0.9 9=.8 0=7
44. More importantly,the numberof dependentsincluding children, the elderlyand unemployed is closelyand positivelyrelated to poverty risk, whatevervalue of theta in a plausible interval is used. Figure 5 illustratesthis point. For each class, given by the total number of dependentsin the households,it showsthe percentageof householdsthat are poor. A range of economiesof scale adjustmentis used, as in Figure 4.
Figure 5.
Number of denendants and risk of Dovertv for a
70.00% 60.00%
50.00% / = 40.00%, 30.00% A3=.8 20.00% :
10.00% - 0
0.00% I 0 1 2 3 4 5 6 7 and more Number of dependants
Note: with changes in the parameter for economies of scale the poverty line has been changed each time to keep the average incidence of poverty constant
45. Finally, and most importantly,the number of employedor self-employedbreadwinners in the householdacts as a very strong determinant of povertyregardless of the assumptions about economiesof scale taken into consideration,as Figure 6 illustrates. ANNEX 2 Page 13 of 14 Figure 6.
Number of breadwinners and risk of poverty for a household
60.00% : 50.00% ------
, 40.00% ------t--Iw O 9
5 320.0 0 % ------
30.00% 7
0 1 2 3 Number of breadwinners
Note: with changes in the parameter for economies of scale the poverty line has been changed each time to keep the average incidence of poverty constant.
46. What about the socioeconomicprofile of the poor? Becausethe economiesof scale adjustmentis basedprimarily on householddemographics, changes in this parameter shouldnot, in principal,effect the povertyprofile of the main socioeconomicgroups, and indeed they have a very small impact on the relativerisks of poverty,as Table 3A shows.
Table 3A. Relative risk of poverty and economiesof scale adjustment Parameterforeconomies ofscale Household head: 0=1 (per 0=0.9 0=.8 0=.7 Number of capita) families
Employed 0.87 0.88 0.89 0.89 1823 Self-employed 0.75 0.75 0.77 0.78 720 Unemployed, registered 1.20 1.24 1.27 1.27 142 Unemployed, not registered 1.02 1.03 1.05 1.07 342 Retired 0.94 1.04 1.14 1.24 1165 Familieswithalleastoneunemployed 1.10 1.11 1.11 1.11 1824 Education of h/h members Not relevant - no active members 0.85 0.97 1.07 1.18 1084 all have secondary or primary education 1.03 1.04 1.05 1.07 1421 at least one with special secondary 0.90 0.90 0.93 0.92 1249 at least one with higher education 0.83 0.83 0.85 0.85 1166 Location: in Yerevan 0.99 1.01 1.04 1.08 1424 in other urban centers 1.00 0.99 0.98 0.97 1591 in rural areas 0.85 0.85 0.86 0.87 1905
47. The averagepoverty risk for householdsis taken in this table as 1. Values higher than 1 indicatea higherrisk of poverty among householdsin a particulargroup and-valueslower than I imply a lowerrisk of poverty. Unsurprisingly,the primary conclusionsreported by the profile remainunchanged. The one exceptionis when demographicsand socioeconomicconditions are ANNEX 2 Page 14 of 14 closelyintermingled, as in the case of pensioners,where if they are head, the householdis usually small. This is why as larger households"gain" affluencewhen the economiesof scale are introduced,and their numbers among the poor populationare reduced as a result, familiesheaded by pensionerstend to be over-representedamong the poor. Sincetheir numbers are also sizeablein Yerevan,the risingpoverty risk coupledwith the introductionof economiesof scale explainsthis effect. Bearingthis caveat in mind, all other characteristicsof the poor as reported in the poverty profile remain valid.
48. Settingeconomies of scale is a very approximatescience. It relies heavily on normnative assumptionsgenerally accepted by society. Given Armenia's strong tradition,government officials involvedin the design of social policiesand public opinionare not ready to relinquishthe per capita measurementstandard. Therefore,the per capitaequivalence scale was used in the report. But as experimentingwith a wide range of parametersfor economiesof scaleshas demonstrated,some conclusionsconcerning the poor are not qualitativelyaltered. However,others are very sensitiveto even minor adjustmentsfor economiesof scale in consumption.This issue is particularly important in light of demographiccharacteristics of the poor. ANNEX 3 Page 1 of 16 ARMENIAN LABOR MARKET: ADJUSTMENTS AND MISALIGNMENTS
The Labor Market Situation and Economic Trends
1. When viewed in contextwith the FSU, the Armenian labor market possesses some unusual characteristicsand shares some common trends. The FSU is characterized,most strikingly,by an asymmetricalemployment response to output contraction, that is, a large drop in the GDP that has not been matched by a correspondingfall in total employment. Armenia shares this asymmetry,but it is more extreme because the elasticityof employmentwith respect to output is amongstthe lowest for all FSU countries. Accordingto official statistics,total employmentdeclined only slightly, by 14 percent, in 1996 comparedto 1991's highest levels of employment,resulting in a net loss of 200,000 jobs. The official numbers for GDP and total employmentshown in Figure 1 record significantlabor hoarding and suggest a steep fall in productivity. This demonstratesthat the brunt of the adjustmentwas felt in terms of real wages, not employment. It also means that it will take a while for economic growth to impact on measured employment since many workers' hours or productivity have been dramatically reduced and could be restored without rising numbers in employmentas the economy takes off.
Figure 1
100 90 80 70 o60 O ~~~- GDP it50 -Employment 0~40 30 20 I10 0 1991 1992 1993 1994 1995 1996 ANNEX 3 Page 2 of 16 2. However, there has been a considerable shift in the reallocation of labor: agricultural employment has doubled since 1990, whereas industry jobs have been cut in half. On the other hand, the unemployment (as measured by number of job seekers registered by the employment service) soared by the end of 1996 to reach nearly 160,000. At over 10 percent, the rate of registered unemployment is the highest for all FSU countries, but remains moderate compared to transition countries in Eastern Europe that have been hardest hit by unemployment. However, official figures may fail to accurately capture the true size of employrnent and unemployment.
EmploymentAdjustment, Unemployment and Participation 3. Official employment statistics fail to take into account the broad extent of adjustment to individual working hours in which a substantial part of those who are technically employed are put on forced leave, leaving them attached to their jobs in name only. A 1996 SDS survey established that 23.3 percent of the total urban workforce employed on functioning enterprises is on administrative leave with little or no pay, and an additional 7.4 percent of the salaried workforce is employed at businesses that wer e not functioning at the time of the survey. An October 1996 SDS Labor Force survey revealed that 25.7 percent of all formally employed workers were on forced leave, 80 percent of whom were not receiving any pay. Finally, the Household survey that relied on actual employment rather than forrnal attachment to classify the labor market stattis found that even with a stricter definition of employment, 8 percent of employees were still not performing any work. Consequently, at any given time, the number of employed persons who are actually at work (including those on leave) is smaller than the number notionally employed in the economy. Table 1 illustrates this discrepency in the official data on labor market status and estimates for the entire country based on the Household survey.
Table 1: Armenia:Labor Market Statisticsfrom Different Sources (October1996) Un- Employment Thousandpersons Sources Rate (%) Labor Registered UB Discouraged Force unemployed recipients workers Officialbased on 10.0 1435 154 1589 154 39 the register Estimationbased 29.lt 1125 462 1586 114 102 on LFS Estimationbased 28.3 1077 425 1503 110 34 126 on HH Survey Source:Official SDS reports, household survey results and authors' calculations Note: Both estimatesbased on LFS and SDS surveys results use officialpopulation numbers Note: LFS-labor force survey (2,584 respondentsof working age), HH-householdsurvey (10,702 working age respondents). ANNEX 3 Page 3 of 16 4. What emerges from this data? The collapse in output has lead to significant labor changes from temporary layoffs in the form of administrative leave rather than open redundancy. The reasons that companies might hoard labor are numerous (see Commander, et al. 1996). In Armenia's case, severance pay that is required by law to go to laid-off workers could be the most immediate reason for cash-stripped enterprises to hoard labor.
5. Consequently, a significant number workers who are formally considered employed and are still on the payroll lists (often with zero wages) are, in reality, either unemployed or have dropped out of the labor force altogether. Aggregate employment figures based on enterprises differ from survey-generated numbers by about 300,000 people. In other words, actual employment at the end of 1996 was lower than the official estimate by at least 20 percent. Part of this discrepancy is explained by seasonal factors, but breaking this gap down by sectors shows the main contributor to be industry - where they tend to keep workers on the books after they have long since lost their occupations. 1 Considering the survey-generated figure, the drop of employment appears much closer to the compound change in GDP and would bring net labor shedding over the period of transition to 40 percent.
6. Unemployment levels measured by labor force Household surveys stand at much higher levels than are suggested by the registration statistics. Registered data on unemployment fails to take into account about 3/10 of a million unemployed, exactly the number of "missing" employees. However, "missing" employees and the non-registered unemployed, though numerically identical, are not necessarily the same persons. The important point is that the unemployment rate measured by the Household surveys exceeds 25 percent, whose numbers may be comprised of those who are officially considered inactive as well as only the formally employed.
7. A 26 percent unemployment rate is very high by any standard and astronomically so for an FSU country. But the drop in actual employment by 40 percent during the transition from a communist to a capitalist economy would have generated even higher unemployment rates if all the released workers continued active participation in the workforce. In fact a substantial segment has been absorbed by non-participation, and as elsewhere in FSU, participation rates fell. In addition to the unemployed large groups of discouraged workers want to work but have given up the job search. The sizeable fall out of active participation was not equally important for different age groups. Older male workers were more likely to hang on to their jobs to the disadvantage of younger, female workers and new entrants. The next section explores ways in which the slow integration of younger workers into the labor market is a particularly acute problem in Armenia.
Outcomes 8. Unemployment coupled with the lack of participation by the majority of the working-age population means that at any given time Armenia is without productive levels of employment. The gravity of the situation is illustrated in Table 2, which is
1 The law requires that a worker sent on forced leave due to economicreasons must receive one-third of the minimumwage, as low as 720 drams at the time of the survey, however even such a meager half a dollar monthly rate was actuallypaid to only 1/4 of the workers affected by administrativeleave. ANNE'X 3 Page 4 0f16 based on labor force survey results. It breaks down the labor survey non-employment2 estimates by age group for Russia in 1995, Bulgaria in 1996, the Eastern European country most affected by unemployment and drop in participation, and Turkey in 1996, the country in the region with charactenrstics most similar to Armenia.
9. Armenia's statistics lie outside this group. Almost half of prime working age adults (25-49 years old) do not have gainful employment. Non-employment of new entrants (15 to 24) is also the highest among these four countries. The fact that separates Armenia even from countries with low participation rates for the population as a whole is low employment rate for males.
Table 2. Non-employment rates for Armenia and selected countries in the region (percentages)
Armenia Age group Total Male Female 15-24 82.0 76.5 86.2 25-49 47.6 35.5 58.2 50-60 59.3 45.0 70.7 Total 57.9 46.6 67.4 Russian Federation Age group Total Male Female 15-24 62.3 60.4 64.3 25-49 19.6 15.9 23.2 50-60 26.7 16.2 44.4 Total 29.6 26.6 32.8
Bul2aria Age group Total Male Female 15-24 80.1 79.8 80.5 25-49 25.2 22.8 27.5 50-60 34.6 37.0 30.1 Total 40.5 39.5 41.6 Turkey Age group Total Male Female 15-24 65.4 60.9 69.6 25-49 38.6 10.6 67.2 50-60 45.1 30.7 69.3 Total 46.9 24.4 68.1 Note: non-employedare unemployedand out of the labor force Source: Armenia - SDS HH survey, OECD, 1998
2 Non-Employment = Unemployment + Non-Participation ANNEX 3 Page 5 ofl6 10. Two phenomena appear to be responsible for low employment, and they play different roles for two main age groups: new entrants and prime age adults. Among new entrants a low participation rate is to blame for low employment, whereas for most work age adults unemployment is the primary cause. Most striking in a country like Armenia is an unemployment rate as high as 28 to 29 percent in a labor force where only about half the working age population is gainfully employed.
ThePuzzle of EHighUnemployment and Low Participation 11. It is possible this regime could be sustained for a long time only in a society that depends on extensive intra- and interfamily transfers. But before adopting this premise, other possibilities related to measurement issues must be explored.
12. The official statistical practice was not to count as employed able-bodied members of rural households that own land, but SDS abandoned this approach when conducting the labor force survey. This across-the-board adjustment in the aggregate employment statistics for formal land owners is not fully justified because Social assessment reveals some households that received land during privatization aren't able to work it, but don't sell it because taxes are prohibitively high. However, not all farming is limited to rural areas; some urban households, especially in small towns, are also landowners. Therefore, applying such an adjustment to rural areas only would be a mistake. Finally, and most importantly, the statistical practice of counting all rural landowners and their family members as employed does not take into account an economic criterion of labor market classification based on actual behavior rather than formal characteristics. Unemployment may be concealed in an agricultural household when the marginal product falls below the reservation wage and members could actively begin looking for jobs, thereby exerting pressure on the labor market. But since the official employment number includes these cases such adjustments could be attempted as an experiment.
13. If households owning rural land were excluded from the ranks of the unemployed, as current legislation dictates, the unemployment rate for the country would drop to 23 percent (from 14.9 percent to 1.4 percent in rural areas). If only those who work their land (in both rural and urban areas) were considered employed - producing a more accurate adjustment -- the unemployment rate in rural areas would be drastically reduced to 4.8 percent, but only marginally to 33.1 percent in urban areas. The unemployment rate for the whole country would similarly drop -- from 28 percent to 23 percent -- still very high. The conclusion emerging from this statistical exercise is that factors other than poor measurement or reporting are behind the high unemployment rate.
14. Three possible explanatory factors are presented in detail below: (i) extended family as safety net, (ii) flow of transfers from outside the household, and (iii) casual, one-time occupations.
15. Extended family. A large household may, in fact, play a role in the pooling mechanism and act as a security net for unemployed members that may cushion the effects ofjob loss. In response to high unemployment, for example, young adults may remain at home longer. The prevailing family structure, in which several generations ANNEX 3 Page 6 of 16 share an extended household, makes clear why the huge unemployment rate does not have a more pronounced impact on living conditions.
16. The actual distribution of the population by household types shows that over half the population lives in extended families. The specific employment and unemployment rates reveal that members of extended families are more likely to be outside the labor force or unemployed, particularly for working age males. Conversely, in less than I percent of extended households no one is employed as opposed to 30-40 percent among nuclear or incomplete families. Therefore, unemployed and inactive working age adults have someone in the family who directly supports them.
17. This effect of large households becomes particularly striking when we look at age- specific unemployment risks in relation to the type of household the individual belongs to. The distribution of individuals for different types of households and age groups plus their specific unemployment risks is shown in Table 3. Two effects are immediately clear: First, most young adults live with their parents until age 26. Even for the prime working age (between 26 and 50) only half the population belong to nuclear families and over a third still pool their resources in multigenerational households. It becomes clear that age primarily affects unemployment risks depending on various types of families. Young adults, especially those living in extended households, are at maximum unemployment risk and this effect continues until age 35, but as they grow older and become primary earners, the risk falls considerably. Hence, demographics can account for part of the high unemployment problem.
Table 3. Unemployment rates for prime age workers by household demographic type and age group (percent)
Under 26 years old Between 26 and 35 years From 36 to 50 years old Between 50 and 60 old Demographic type Unemploy- Distribution Unemploy- Distribution Unemploy- Distribution of Unemploy- Distribution ment rate of population ment rate of ment rate population ment rate ofpopulation population Extended with children 52 47 38 27 25 28 23 35 Extended w/o children 41 29 35 11 24 15 20 26 Work. Age couple with children 42 16 24 53 26 46 16 12 Work. Age couple w/o children 33 2 15 1 32 3 23 6 Work. Age single female 46 1 38 1 26 percent 2 27 percent I Work. Age single male 12 1 24 1 percent 31 percent I percent 24 percent 2 percent Retired with or w/o children 0 0 0 0 0 0 0 9 Work. Age sing. female w. depend. 33 3 29 4 26 4 18 3. Work. Age sing. male w. depend. 83 1 53 1 43 1 9 6 Total 46 100 30 100 26 100 20 100 Note: for present family members between 17 and 60 years Source: SDS household survey
18. Transfers. Once the household receives support through transfers or remittances, its members are more likely to remain inactive or to take longer to look for a job, thereby pushing up the unemployment rate. Private transfers play a particularly important role since the State provides relatively little support to the unemployed or poor. As much as ANNEX 3 Page 7 ofl6 30 percent of the population lives in households that receive transfers, and even when allowances are made for the demographic type of family, transfer recipients are much less likely to be employed. Transfers effect male employment figures most strongly, resulting in 6 percentage points difference in job rates between members of households that do or do not receive transfers.
19. An even stronger effect is seen where remittances are concerned. By their nature, they are a highly unstable source of income, and since the Household survey was conducted for only a single month, data on actual receipt of remittances may be incomplete. Therefore, another criterion should be used instead; for example, the absence of a working age member from the country. If the family that remains in Arinenia eventually gets support from this member, it could be used as a proxy for receipt of remittances. About 7 percent of Armenians live in households in which someone could potentially provide such support. Again allowing for demographic types and gender distinctions, the employment rate is almost halved for those who receive remittances.
20. Temporary occupations. Most unemployed Armenians are, by their own account, without work for at least one year. Given the economy's informalization and significant entrepreneurial activity it is quite plausible that some of these periods of unemployment have, in fact, been briefly broken by temporary, casual work or jobs (often unpaid) related to activities of an employed member of the household. Such "side" labor is difficult to pin down due to its very nature and to the fact that it usually doesn't offer a substantial income. Nevertheless, irregular jobs maybe the only coping mechanism for some of the unemployed given the fact that unemployment benefits are low and private transfers are not received by all who need support.
21. Labor force surveys typically don't provide any insight into the labor activities of the unemployed since all respondents who have some kind ofjob during the period of observation (even for only one hour in the last week or month) are automatically classified as employed.3 Fortunately, in the case of Armenia, a separate survey on different issues4 was applied to the same households and included questions about time spent on different activities, such as work outside the house, work on family farm, etc. Consequently, the labor market status of individuals found in the income and employment section of the Household survey can be checked against their reports on actual time spent in a different survey.
22. It appears that when any work (paid or unpaid, in or outside the home) is accepted as a criterion for classifying unemployed or inactive person as employed,5 rural employment and unemployment figures are powerfully effected, but urban employment levels experience no dramatic reduction. Figures are also altered by counting as employed those classified as out of the labor force (primarily family members of
3 The SDS was fully aware of this problem, having published a report on the LFS results. The approach used involved interpreting all the unemployed who were out of work for over a year as employed in the informal economy, thereby halving the observed unemployment rate. However, as with any across-the-board adjustments this methodologydoes not take into account the actual status of the unemployed and the heterogeneity among them. 4 UNDP survey on health and education conducted around the time of main Household survey. 5 But not counting employed as unemployed if they report zero hours. ANNEX 3 Page 8 of 16 agricultural households), rather than by reducingthe actualstocks of the unemployment. With thesenew settings,the unemploymentrate for the countryas a wholewould be reducedto 20 percentof the laborforce and the employmentrate would increaseto 57 percent.
23. Another method for measuring concealed labor is to take onto account income from sales of assets and valuables. There is strong support for the assumption that a substantial part of this income in fact represents proceeds from unregistered trading activities.6 Qualitative assessment methods outline an informal credit arrangement when a household sells some products, such as cigarettes, soft drinks, etc., at retail street prices and lives on the income (see Dudwick 1995). Another form of this activity is shuttle or suitcase trade. These occupations typically lack job security and few consider it employment, which is why it is not fully reported in surveys. Indeed, in the SDS Household survey half the households that do report income from such sales don't declare themselves as employed or report earnings from self-employment.
24. Operating on the assumption that such sales activities involve all family memlbers in one way or another, all unemployed or inactive adults are counted as employed in a famnilyenterprise or as entrepreneurs when sales income was reported. This reduces the unemployment rate for the country as a whole to 16 percent (i.e. more than by 10 percentage points), and increases the employment rate to 60 percent. This adjustment primarily effects urban areas wvhere95 percent of such "employment" is found. However, it should be noted that in half of these adjusted cases the income from sales is less than the cost of a minimum food basket per adult, underscoring that such activitiesare low-income,low-productivity, casual occupations.
25. What if both adjustments are made simultaneously,i.e. taking into account any labor activity and any incomes from sales of valuables? Since the two adjustments often effect different types of households, the combined effect is indeed very large. In sum, the unemployment rate as a result of both adjustments drops to 10 percent of active population and the employment increases to 70 percent of working age population. This is on the order of the magnitude to be expected in Armenia given its income level. Note that this result was achieved by applying a very "soft" definition of employment and a restricted definition of unemployment.
26. It is noteworthy that a large number of those considered employed have no work to do and receive no earnings, but are instead on involuntary leave. The SDS Household survey reveals that 2/3 of such employees do not consider themselves "employed" and have lost any attachment to their former work places although they formally remain on payroll lists. The remaining 1/3 is quite heterogeneous, which makes any across-the- board adjustments inappropriate.7 In fact, some have found other employment or been recalled by their employer, as occurs in 25 percent of cases, as the UNDP survey data on use of time suggests. Another 25 percent manage to survive on informal sector casual occupations. The remaining half is probably in worse shape compared even to the unemployed, since this group can't register for unemployment benefits.
6 In the SDS Household survey, results indicate a big disrepancy between the total amount of valuables bought and sold (the former is only a fraction of the latter) as reported by repondents and interprets such income as informal sector self-employment income. 7 This contradicts SDS report on LFS assumption that all workers on administrative leave are unemployed, arriving at a high unemployment rate. ANNEX 3 Page 9 of 16
27. Consequently, the puzzle of high unemployment and low participation can be explained by different economic phenomena. A clear demographic effect in conjunction with the impact of transfers and remittances make the rate for sustainable unemployment higher for a given income. But it is doubtful whether the exuberantly high unemployment and low participation should be taken at face value. Informalization and marginalization of employment are the primary causes of much joblessness due to a great deal of urban petty trade and rural barter economics, both of which are not considered as much employment as survival tactics. Because these activities are statistically invisible they are particularly difficult to measure with any precision. If assumptions about this invisible marginal employment are indeed accurate, it accounts for about 40 percent of the Armenian workforce, in which case not genuine unemployment, but underemployment, is the issue in Armenia. It is also clear that the unemployed are a group with different degrees of adjustment to the labor market situation. This specific issue will be explored in greater detail below.
Characteristics of Armenia's Unemployed 28. The above makes clear that being unemployed in Armenia means different things to different people. However, the unemployed share some pronounced characteristics that set them apart from the employed. First, this section will explore a profile of the unemployed that emerges from the labor force statistics; it will then examine the characteristics of specific unemployed groups according to their coping strategies of relying on family networks, temporary occupations such as petty trade. And finally, the section will look at those unemployed who are without any earnings opportunities.
29. As measured by the Household and labor force surveys unemployment is mostly urban. The unemployed live in rural areas, too, but they appear to have little support and are particularly destitute when they are either landless or incapable of working their land.
30. In urban areas, those hardest hit by unemployment are younger workers and new entrants. In analyzing unemployment by age, Armenia has difficulty integrating younger generations into the economy: 27 percent of unemployed are new entrants to the job market. The problem of unemployed youth is particularly acute in urban areas where between the ages of 17 and 25 unemployment reaches 60 percent. In Guymri and Vanadzor, the largest cities after Yerevan, it's as high as 70 percent. The breakdown according to educational groups is marked, mostly affecting those who graduate from secondary school.
31. One commonly held view was that unemployment was characterized by a disproportionate high female unemployment rate. While this is true for those who register at employment offices, the labor force and Household surveys suggest that female and male unemployment rates are roughly equal.
32. Classifying the unemployed by the sector of origin does not show any particular sector-specific risks; unemployment equally affects all sectors of the labor force, with the possible exception of agriculture. About 40 percent of the unemployed have been laid off in redundancies, and 10 percent have quit their jobs, statistics that are in line with the ANNEX 3 Page 10 of 16 overall shift away from manufacturing and public service jobs. This suggests that most laid-off workers haven't dropped out of the labor force but instead moved on to other types of work.
33. Most of the jobless are long-term unemployed. Over half are out of work for :12 months or more, and as much as 5 percent are unemployed for 5 years. Given the problematic nature of these data on duration, this report will devote little attention tc, it, but will focus instead on specific groups among the unemployed.
34. Only 25 percent of the unemployed look for work by registering at employment offices. According to the LFS, the avenue more often relied upon -- 53 percent of the time -- is through family member, relatives and acquaintances. This is in striking contrast with many other transition economies where personal contacts are relied on much less frequently and suggests a great deal of insider power in Armenian firms.
35. As previously mentioned, the unemployed who constitute unpaid labor in family enterprises and petty trade make up a substantial part of the total unemployment pool. The Household survey data indicates that, according to the formal definition, slightly less than half the unemployed may be involved in such activities. It is interesting to note that no apparent differences in individual characteristics in terms of age, education, gender or family type exist between the "working" unemployed and the rest.
36. Over a half of Armenia's unemployed live in extended households. This share is particularly high for unemployed young adults and pre-retirement age groups, 80 percent of who are dependents in large families. One-third of the unemployed receive private transfers, but only 3 percent are supported by a family member working abroad. Among all the unemployed, 24 percent live in households with no apparent source of income, that is, no members are employed, no land is worked, no transfers are received from state or other households, and no one is working abroad. Such groups are termed the "excluded" unemployed.
37. They possess a distinct demographic profile: 50 percent are couples with children or single parents, and the majority are of prime working age, between 35 and 50 years old; and 60 percent are males. Not surprisingly, 75 percent of this group is poor, andl25 percent are extremely poor. They are predominantly urban; only 12 percent live in mral areas, but all of the "excluded" rural unemployed are poor. Most strikingly, 24 percent of this group has a higher education, a share significantly greater than for all unemployed (18 percent), and 47 percent posses a general secondary education. As much as 60 percent of them were unemployed for 12 months or more. And of this percentage only 30 percent were registered at an employment office, making most of them "invisible" to the official statistics.
38. But even within this group inequities exist. For example, relatively few of the unemployed, about one-third, reported income from selling valuables primarily because their income from such property was below the poverty threshold. This sub-group of casual workers has a somewhat lower incidence of poverty and is almost exclusively urban. ANNEX 3 Page 11 of 16 39. Regardless of the different viewpoints on unemployment or underemployment in Armenia, it is plain that, for various reasons, a considerable percentage of the unemployed fail in their attempts to find any source of income. And those who succeed manage to do so mainly through activities that reflect the precarious state of employment in the country.
Structure of employment
40. The structure of Arnenian employment that emerges from this analysis is characterized by a clear dichotomy. Out of the total estimated employment of 1,750 thousand there are about 800 thousand marginal workers, or those who work as unpaid family labor, in casual occupations, or in petty trade plus those temporarily laid off from their enterprises who are on administrative leave. Most of these people have random, irregular and unstable occupations and part of their employment is also statistically invisible, but not all marginal workers are in informal sector.
41. The remaining "core" group of about 950 thousand employed enjoy greater job security, but not necessarily in the formal sector or in full-time work. Between 25 and 50 percent8 of those who have their own businesses had not registered it at the time of the survey. On the other hand, the LFS revealed that during the week of the survey, about 9 percent of those employed.(according to ILO definition) had one-time or seasonal jobs and between 2 and 15 percent of regular employees at formal sector firms are working part-time.9
42. Additionally, some employees in the private sector hold multiple jobs or work overtime. The extent of multiple job activities is not as broad as in other, more dynamic transition economies. The LFS found that about 5 percent of those employed have more than one job.
43. Since most of the data sources do not fully capture marginal employment, it is difficult to find consistent data on labor allocation according to sector. Therefore, this section will combine official and survey data to pin down the main trends.
44. When the ownership structure is taken into consideration, the private sector seems to overtake what is traditionally the largest employer in the country, the State sector (see Table 4). But in attempting to break down total employment by ownership types, the result turns out to be not as encouraging as the aggregate picture may suggest. Armenia's biggest expanding employment sector is self-employment, mostly agricultural, which accounts for about 50 percent of total employment. The government still directly employs about 16 percent of the total workforce, mainly in health, education and public administration, while de nuovo private firms are far behind with 6 percent of total employment. Table 4 does not include large parts of the marginally employed, namely those in petty trade, because including this group would definitely inflate the private sector share.
8 Depending on whether one uses LFS (the former figure) or Household Budget survey (the latter). ANNEX 3 Page 12 of 16 Table 4. Employment by ownership type in 1994 and 1996: official and survey estimates (percentage)
Sector Official, 1994 Household Survey, 1996 Total employment 100 100 State and under privatization 53 43 Private 47 57 of which: - private firms employees and 4 6 employers - self-employed outside agriculture 12 11 - private agricultural workers 31 39 Note: According to official methodology all inactive or unernployed members of rural land-holding household of working ag, are counted as self-employed in agriculture. The same adjustment has been applied to survey-generated estimates. Source: SDS household survey, SDS official report, and 1997.
45. Labor was reallocated primarily when informal, individual, low-productivity businesses and family enterprises absorbed released workers and not through more formal growth areas such as new private investment firms. In the absence of sizable formal private sector growth in the country, the government seems to play the role of employer of last resort for urban dwellers unwilling to become individual entrepreneurs in marginal trading activities.
46. During transition a substantial reallocation of employment between government branches took place. Interestingly, survey-generated numbers and official reports each provide similar estimates of the sectoral allocation of labor, with the exception of industry, which as noted earlier, effectively employs fewer workers than are kept on the lists. The appropriate corrections for industry and construction would reduce their shiare to 10-15 percent, more typical for a low-income, post-socialist country. As official data suggests, employment in agriculture has almost doubled, followed by a much modest rise in the services sector (see Table 5). It is typical and reflects strongly on the quality of such job creation that 60 percent of all agricultural output in Armenia is consumed by rural households which produce it.9 Nearly all the net losses in employment were concentrated in industry. Most FSU countries are undergoing a similar process in which the growing percentage of total employment figures devoted to subsistence agriculture is often a last resort income activity for rural and semi-urban population groups.
9 Two percent belongs to enterprise survey results; 15 percent is from the UNDP survey of health and education. ANNEX 3 Page 13ofl6 Table 5. Structure of employrnentover tlie transitioin:official estimates Employment by sector (thousands) Sector 1991 1995 1996 Net change
Agriculture and forestry 389 552 536 +147 Industry and construction 635 379 374 -261 Transport, trade, communications 218 167 166 -52 etc Other services (private and public) 429 379 363 -65 Total employment 1,671 1,476 1,439 -232
Source: SDS reports. Note: 1996 -- estimate
47. The structure of employment that emerges from the surveys is typical for a transition economy. At 40 percent the share taken up in agriculture seems a bit high when Armenia is compared, for example, to neighboring Georgia where fertile land employs 42 percent. Additionally, the services sector remains underdeveloped and the its share of employment, in contrast to more dynamic transition economies, has not increased. The inclusion of marginal employment in trading activities would, of course, considerably inflate the share of this sector in total employment figures, but great dynamism in Armenia's labor market is not readily apparent outside the informal marginal occupations.
Labor Migration
48. The SDS Household Budget survey estimated that about 110 thousand family members were temporarily absent. In 85 percent of the cases, they people of prime working-age, and 75 percent were men. Since 5 percent of the original place-of- residence addresses were replaced because the inhabitants were out of the country during the month of the survey, the tctal share of the registered population that was outside the country at the end of 1996 was about 9.5 percent. According to Dudwick, the majority of able-bodied males are involved in labor migration (1995). 49. As the qualitative assessment and results of the November 1995 SDS survey on external migration suggest, most of it is work-related. It is primarily directed to other CIS countries, mainly Russia, and attracts skilled labor and professional occupations (see Dudwick 1995). A worker with comparable skills could earn a much higher salary abroad than in Armenia.
50. Consequently, outside eaming opportunities and remittances are an important source of income; the survey revealed that 13.2 percent of current income comes from remittances. In fact, remittances dominate domestic earning opportunities compared to wages, which constitute only 13.1 percent of current income. This means that in terms of wage earnings from employment the external labor market is at least as important as the internal one. ANDiEX3 Page 14 of 16 Wages and Self-employment Incomes
51. The two main reasons that 10 percent of Armenia's workforce is employed abroad are slack labor creation and low wages. Table 6 below, based on the Household survey, gives a very bleak picture. The average wage reported in the survey is actually slightly higher than the official average wage (9,500 drams) based on wage bill data, since this figures includes all bonuses, in-kind payments, etc. Not only are wages very low, but they are also paid irregularly even to employees who are actually at work. The number of workers in relatively well-paid occupations is extremely low; even private firm salaries are barely sufficient to support a family with one dependent without slipping into poverty.
Table 6. Monthly wages reported by employees in Household survey
Sector Average Average Percent of Structure of monthly monthly workers wage wage, drams wage, US subject to employment dollars wage arrears (percent) SOE and privatizing 9,520 22 4 64 firms Private firms 20,888 48 5 12 Government 9,028 21 9 18 Joint ventures 17,359 40 0 1 Foreign firms 58,987 136 0 0 Other 12,212 28 8 2 ,Total 11,143 26 9 1 Source: SDS household survey
52. Despite such obvious wage compression, a broad range of salaries exists between employees. First, the private sector normally pays a substantial premium (a factor of 1:2 compared to State or privatized enterprises) when allowances are made for workers' different occupational branches and educational backgrounds. A clear, observable gender gap means that for the same sector and education level, females are paid about 40 percent less than their male counterparts. Age also effects wage levels; for the same branch and education, each year brings a wage increase of about 40 drams. This is especially true in the State sector. Within the same sector, university graduates typically earn a premium of 20 percent. These earnings profiles are nearly identical to Russia, and every other transition economy in the region, except that Armenia's base wage is much lower.
53. Self-employment income is typically higher than that derived from wages (about 30,000 drams), but is much less regular. In the Household survey, about half the self employed reported zero income in the month of the survey. When this irregular income flow is taken into account, it turns out that the self-employed usually earn the equivalent of the average jobholder in a month. The size of self-employment income, however, varies little between different sectors. Interestingly, when the self-employed were reporting that their businesses were not registered both their incomes and their ANNEX 3 Page 15 of 16 consumption were somewhat lower on average when compared to the formal sector. The income of those who are only marginally employed is usually far below the wage level and even less regular than the income of those who are self-employed.
54. Such low wages in combination with educated and abundant labor are a potentially advantageous source if other elements are in place. But the overall economic environment has so far not been conductive to private sector development or significant investment in Armenia; consequently such potential has yet to translate into the rapid economic growth and government resources are too limited to remedy to the situation.
Government Labor Market Policies
55. The State employment service, established at the onset of transition like many FSU countries, collects unemployment registration data. Figure 2 shows a rapid increase in the number of registered job seekers between 1992-1997 with a dip in 1994 due primarily to the denial of unemployment status to people who failed to re-register as unemployed. It has, however, rapidly climbed back to its initial trajectory and shows no tendency to tail off despite slack job creation in the country. The graph also doesn't show the typical seasonal pattern observed in Russia, for example, because the register recorded almost no outflow; in 1996 only 4,000 unemployed were placed in jobs by employment offices. Therefore, unemployment has all the features of stagnant pool, slowly accumulating over time.
56. The registered unemployment rate is higher in Armenia than in any other FSU countries. On top of this, the country also has the lowest vacancy rate with over 300 job seekers for each single registered vacancy. This is a reflection of the country's poor record ofjob creation, domination by insider power, and informal labor hiring arrangements, factors that exist even in the larger enterprises of the formal sector. Since incentives to register with the employment services are low and eligibility rules are similar to FSU guidelines, Armenia's high unemployment cannot be blamed on overly attractive benefits that are more appealing than employment opportunities. At the time of the survey, the average unemployment benefit was 2,000 drains, a mere fraction above the poverty line, and benefits were of limited duration. No more than one-third of the registered unemployed receive benefits, but even this sum can be essential for households without any cash income. However, only half of recipients get the benefits on time without arrears.
57. This obvious dearth of funding for employment policies means resources for active labor market policies, training or public works are likewise depleted. The function of employment offices is effectively reduced to a mere provider of unemployment-linked social assistance, but chronically under-funded offices are unable even to carry out this function efficiently. Whereas many of the truly unemployed aren't registered at employment offices, a substantial number of the registered unemployed actually work. Referring back to the comparison in Table 1 of registration numbers with survey-based estimates reflecting the actual labor market status of individuals, it appears that about one-third of the registered unemployed are in fact employed somewhere in the economy. And applying the definition of employment in the LFS or Household survey, they likely make up the "core" employment group. Even among those still classified as unemployed ANNiEX3 Page 16 of 16 who are registered with employment offices, about 5 percent are in fact working full- time. This measure of the failure of the service's monitoring capacity is similar to other countries, and because of the low level of unemployment benefits, self-targeting through low levels is superseded by the impossibility of surviving on such meager transfers. At the same time, registration at the employment offices triggers other assistance, primarily humanitarian aid, which explains why so many people bother to register when there are no obvious incentives.
Figure 2
Unemployedregistered with the employmentservice
180.0
1600
140.0 -
120.0
100.0
A 80.0
60.0
40.0
20.0-
~0.0 ~ ~ ~ ~ ~ ~ ~ 0
-- Total Receiving benefits
58. It would, however, be unfair to characterize labor offices as only an element of the social assistance system the way it functions now in Armenia. Employment offices clo occasionally provide the unemployed with assistance that is related to their functions. Labor offices also play an important role in helping laid-off workers claim the severance pay they are entitled to by law but are often refused by private enterprise. Such legal assistance is invaluable to workers who still possess a very limited understanding of their rights.
59. The resources for active labor market intervention are limited because their source of financing, payroll taxes, shrinks with low wages, and because a growing part of the labor force is employed outside the tax veil. Current labor market dynamics support this trend, which suggests it will continue to be the case into the future. - ANNEX 4
Fiscal Sustainability of Family Benefit ANNEX 4 Page 1 of3
Armenia: Main Economic Indicators and Poverty Projections Baseline(6% growth)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(IDP (Bil Drams) .522.3. 660.3 777.5 924.3 1050.3 1182.4 1336.9 1511.7 1701.3 1914.7 2154.9 2425.2 2730.1 GDP growth(%) 5.4% 5.8% 3.3% 5.2% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Inflation (average) 176.7% 18.6% 13.9% 13.0% 7.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% Inflation (end of period) 31.9% 5.7% 21.0% 9.0% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2%
(in % GDP) Government Revenue 19.9% 15.1% 15.5% 17.7% 18.6% 19.6% 19.7% 19.6% 19.5% 19.7% 19.8% 19.9% 20.2% o/w: Tax Revenue 12.7% 10.7% 12.4% 14.0% 16.1% 17.4% 17.6% 17.7% 17.7% 17.8% 17.8% 17.9% 17.8% Government Expenditure 29.8% 23.7% 22.2% 23.1% 22.6% 22.6% 22.5% 22.3% 22.0% 22.1% 22.1% 22.1% 22.4% Fiscal Deficit (Incl. Grants) 1/ -9.9% -8.6% -6.7% -5.5% -4.0% -3.0% -2.7% -2.7% -2.6% -2.4% -2.3% -2.3% -2.1% Fiscal Deficit (Excl. Grants) -13.5% -10.1% -8.3% -7.8% -5.2% -38% -3.1% -2.8% -2.6% -2.4% -2.3% -2.3% -2.1%
CPI 100.0 113.0 121.1 128.6 136.6 145.0 154.0 163.5 173.6 184.3 195.7 PovertyLine Projections (constantinreal terms, Dram/month) 10784.0 12185.9 13063.3 13873.2 14729.2 15638.1 16603.3 17628.3 18716.6 19872.4 21104.5 Expenditures of the Poor 6543.7 7778.9 8839.3 9950.6 11198.5 12602.9 14183.6 15962.7 17965.1 20218.9 22760.9 Demo Project (millions) 3.7 3.7 3.7 3.8 3.8 3.8 3.8 3.8 3.9 3.9 3.9 Shortfall in expenditures of the average poor (assuming distributio 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 Expenditures of all the Poor 6543.7 7394.4 7926.8 8418.3 8937.7 9489.2 10074.9 10696.8 11357.3 12058.6 12806.2 Poverty incidence 0.547 0.520 0.491 0.463 0.437 0.412 0.389 0.367 0.346 0.326 0.308 Poverty Gap, bIn. 103.0 111.2 113.0 113.8 114.5 115.3 116.0 116.8 117.6 118.4 119.2 Poverty Gap to GDP 13.2% 12.0% 10.8% 9.6% 8.6% 7.6% 6.8% 6.1% 5.5% 4.9% 4.4% Poverty Gap to Government expenditure 59.7% 52.0% 47.6% 42.5% 38.1% 34.2% 30.9% 27.6% 24.7% 22.1% 19.5%
Share of social assistance spending for 1998 Total spending for family allowances (billion dram) actual 1998, estimate othe 14.9 16.5 18.7 20.9 23.4 26.1 29.5 33.2 37.4 42.6 Total government spending 213.9 237.4 267.8 300.4 336.7 375.1 423.0 476.8 536.8 611.0 Share out of total expenditures 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Share out of total GDP 1.6% 1.6% 1.6% 1.6% 1.6% 1.5% 1.5% 1.5% 1.5% 1.6% Social assistance spending as a share of poverty gap 13.4% 14.6% 16.4% 18.3% 20.3% 22.5% 25.2% 28.2% 31.6% 35.7%
Notes: EXAMPLEOF CALCULATION:1996 Necessaryspending to bring up every poor person to at least thepoverty tine (povertygap as percent of GDP) Calculatingthe poverty gap for 1997 pl/po z n. months population(official) Poverty incidence billiondram % of GDP 0.393 10784.0 12.0 3700000.0 0.5 102.983 13.245 averageper capitaexpenditure checkingagainst implicitly higher GDP** 17195.6 12.0 3200000.0 89.1 11.462 in the HH survey 0.1596 14542.0 Expendituresof all the poor Is t-pl/po*z 6543.7
1/ Govt. balance on accrualbasis does not match IMFprojections as of October 1997--wedon't knowwhy but we guess therevenue projections are different. *1 The poverty shortfallis based on the surveyresults; but GDP per capita andexpenditures in the surveyare not exactlycomparable - in the survey theestimate of population is 3.2 min, instead of 3.7 official ANNEX 4 Page 2 of 3
Armenia: Main EconomicIndicators Scenario of Lower Growth (2%)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
GDP(BilDrams) ~,_ 660.3 7775 924.3 1050.3 1182.4 1336.9 1511.7 1701.3 1914.7 2154.9 2425.2 2730.1 GDP growth (%) 5.4% 5.8% 3.3% 2.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Inflation (average) 176.7% 18.6% 13.9% 13.0% 7.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% Inflation(endofperiod) 31.9% 5.7% 21.0% 9.0% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2%
(in % GDP) Government Revenue 19.9% 15.1% 15.5% 17.7% 18.6% 19.6% 19.7% 19.6% 19.5% 19.7% 19.8% 19.9% 20.2% o1w: Tax Revenue 12.7% 10.7% 12.4% 14.0% 16.1% 17.4% 17.6% 17.7% 17.7% 17.8% 17.8% 17.9% 17.8% Government Expenditure 29.8% 23.7% 22.2% 23.1% 22.6% 22.6% 22.5% 22.3% 22.0% 22.1% 22.1% 22.1% 22.4% Fiscal Deficit (Inel. Grants) 1/ -9.9% -8.6% -6.7% -5.5% -4.0% -3.0% -2.7% -2.7% -2.6% -2.4% -2.3% -2.3% -2.1% Fiscal Deficit (Excl. Grants) -13.5% -10.1% -8.3% -7.8% -5.2% -3.8% -3.1% -2.8% -2.6% -2.4% -2.3% -2.3% -2.1%
CPI 100.0 113.0 121.1 128.6 136.6 145.0 154.0 163.5 173.6 184.3 195.7 Poverty Line Projections (constant in real terms, Dram/mt 10784.0 12185.9 13063.3 13873.2 14729.2 15638.1 16603.3 17628.3 18716.6 19872.4 21104.5 ExpendituresofthePoor 6543.7 7542.3 8408.8 9287.3 10254.8 11323.1 12502.8 13805.6 15244.3 16833.0 18591.7 Demo Project (millions) 3.7 3.7 3.7 3.8 3.8 3.8 3.8 3.8 3.9 3.9 3.9 Shortfall in expenditures of the average poor (assuming d 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 ExpendituresofallthePoor 6543.7 7394.4 7926.8 8418.3 8937.7 9489.2 10074.9 10696.8 11357.3 12058.6 12806.2 Poverty incidence 0.547 0.536 0.516 0.496 0.477 0.458 0.441 0.424 0.408 0.392 0.377 Poverty Gap, bln. 103.0 114.7 118.8 121.9 125.1 128.3 131.6 135.1 138.6 142.2 145.9 PovertyGaptoGGDP 13.2% 12.4% 11.3% 10.3% 9.4% 8.5% 7.7% 7.1% 6.4% 5.9% 5.3% Poverty Gap to Government expenditure 59.7% 53.6% 50.0% 45.5% 41.6% 38.1% 35.1% 31.9% 29.1% 26.5% 23.9%
Share of social assistance spending for 1998 Total spending for family allowances (billion dram) actual 1998, estimate 14.9 16.5 18.7 20.9 23.4 26.1 29.5 33.2 37.4 42.6 Total government spending 213.9 237.4 267.8 300.4 336.7 375.1 423.0 476.8 536.8 611.0 Share out of total expenditures 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Share out oftotal GDP 1.6% 1.6% 1.6% 1.6% 1.6% 1.5% 1.5% 1.5% 1.5% 1.6% Social assistance spending as a share of poverty gap 13.0% 13.9% 15.3% 16.7% 18.3% 19.8% 21.8% 24.0% 26.3% 29.2%
Notes: EXAMPLEOF CALCULATION:1996 Necessary spendingto bring up every pooTperson to at least the poverty line (poverty gap as percent of GDP) Calculatingthe povertygap for 1997 pl/po z n. montbs population(official) Povcrty incidence billiondram % of GDP 0,393 10784.0 12.0 3700000.0 0.5 102.983 13.245 average per capita expenditure checking against implicitlyhigher GDP*' 17195.6 12.0 3200000.0 89.1 11.462 in the HH survey 0.1596 14542.0 Expenditures of all the poor Is l-pl/po*z 6543.7
1/ Govt. balance on accrualbasis does not match IMF projectionsas of October 1997--wedon't know why but we gLuessthe revenueprojections are different. ** The poverty shortfall is based on the surveyresults; but GDP per capita and expendituresin the survey are not exactlycomparable - in the survey the estimate of population is 3.2 miln.instead of 3.7 official ANNEX 4 Page 3 of 3
Armenia: Main Economic Indicators Scenario of Rapid Growth (3%)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
GDP (Bil Drams) S2Zl 660.3 777.5 924.3 1050.3 1182.4 1336.9 1511.7 1701.3 1914.7 2154.9 2425.2 2730.1 GDP growth(%) 5.4% 5.8% 3.3% 2.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9-0% 9.0% 9.0%
Inflation (average) 176.7% 18.6% 13.9% 13.0% 7.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% Inflation (end of period) 31.9% 5.7% 21.0% 9.0% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2%
(in % GDP) Government Revenue 19.9% 15.1% 15.5% 17.7% 18.6% 19.6% 19.7% 19.6% 19.5% 19.7% 19.8% 19.9% 20.2% o/w:TaxRevenue 12.7% 10.7% 12.4% 14.0% 16.1% 17.4% 17.6% 17.7% 17.7% 17.8% 17.8% 17.9% 17.8% Government Expenditure 29.8% 23.7% 22.2% 23.1% 22.6%/. 22.6% 22.5% 22.3% 22.0% 22.1% 22.1% 22.1% 22.4% Fiscal Deficit (Incl. Grants) 1/ -9.9% -8.6% -6.7% -5.5% -4.0% -3.0% -2.7% -2.7% -2.6% -2.4% -2.3% -2.3% -2.1% Fiscal Deficit (Excl. Grants) -13.5% -10.1% -8.3% -7.8% -5.2% -3.8% -3.1% -2.8% -2.6% -2.4% -2.3% -2.3% -2.1%
CPI 100.0 113.0 121.1 128.6 136.6 145.0 154.0 163.5 173.6 184.3 195.7 Poverty Line Projections (constant in real terms, Dram/mt 10784.0 12185.9 13063.3 13873.2 14729.2 15638.1 16603.3 17628.3 18716.6 19872.4 21104.5 Expenditures ofthe Poor 6543.7 7542.3 8813.0 10201.8 11806.1 13662.7 15811.5 18298.4 21176.7 24508.0 28370.0 Demo Project (millions) 3.7 3.7 3.7 3.8 3.8 3.8 3.8 3.8 3.9 3.9 3.9 Shortfall in expenditures of the average poor (assuming d 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 0.393 Expenditures of all the Poor 6543.7 7394.4 7926.8 8418.3 8937.7 9489.2 10074.9 10696.8 11357.3 12058.6 12806.2 Poverty Incidence 0.547 0.536 0.492 0.451 0.414 0.380 0.349 0.320 0.293 0.269 0.247 Poverty Gap, bin. 103.0 114.7 113.3 111.0 108.6 106.3 104.1 101.9 99.8 97.7 95.6 Poverty Gap to GDP 13.2% 12.4% 10.8% 9.4% 8.1% 7.0% 6.1% 5.3% 4.6% 4.0% 3.5% Poverty Gap to Government expenditure 59.7% 53.6% 47.7% 41.4% 36.2% 31.6% 27.8% 24.1% 20.9% 18.2% 15.7%
Share of social assistance spending for 1998 Total spending for family allowances (billion dram) actual 1998, estimate 14.9 16.5 18.7 20.9 23.4 26.1 29.5 33.2 37.4 42.6 Total government spending 213.9 237.4 267.8 300.4 336.7 375.1 423.0 476.8 536.8 611.0 Share out of total expenditures 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Share out of total GDP 1.6% 1.6% 1.6% 1.6% 1.6% 1.5% 1.5% 1.5% 1.5% 1.6% Social assistance spending as a share of poverty gap 13.0% 14.6% 16.8% 19.3% 22.1% 25.1% 28.9% 33.3% 38.3% 44.5%
Notes: EXAMPLEOF CALCULATION:1996 Necessary spendingto bring up every poor person to at least the povertyline (poverty gap as percent of GDP) Calculatingthe poverty gap for 1997 pl/po z n. months population (official) Poverty incidence billiondram % of GDP 0.393 10784.0 12.0 3700000.0 0.5 102.983 13.245 average per capita expenditure checkingagainst implicitly higher GDP** 17195.6 12.0 3200000.0 89.1 11.462 in the HH survey 0.1596 14542.0 Expenditures of althe poor Is l-pl/po*z 6543.7
I/Govt balanceon accrnal basis does not natch IMF projectionsas of October 1997-we don't knowwhy but we guess the revenueprojections are different ** The poverty shortfallis based on the survey results;but GDP per capita and expendituresin the survey are not exactlycomparable - in the survey the estimate of populationis 3.2 min. instead of 3.7 official ANNEX 5 Page 1 of 8 THE POOREST OF THE POOR IN ARMENIA
Executive Summary
1. In December 1997, The World Bank undertook a qualitative study of the poorest of the poor in the Republic of Armenia (RoA) to provide data to complement the Armenian State Department of Statistics' Household Budget Survey (SDS survey hereafter) describing extreme poverty in Armenia. The study's immediate objectives were to understand, improve targeting of, and protection for of the poorest. Another goal was to provide information at a crucial time in the design of policies and programs in the RoA. Fieldwork for the qualitative Social Assessment of the Poorest of the Poor in Armenia consisted of in-depth interviews with 1 10 households that were identified through qualitative indicators as the poorest households in each of 18 sites throughout Armenia. Additional interviews were conducted with local officials, NGOs, and other key sources. Where relevant, the findings are juxtaposed to those of the SDS survey.
2. Poverty in Armenia is both deep and widespread. The SA focus on the poorest of the poor described characteristics, living conditions and coping mechanisms and made brief recommendations. In the early 1990s, the country's economy suffered a multitude of compounding blows: the aftermath of the 1988 earthquake, the demise of the Soviet trade system and All-Union subsidies, and an economic blockade upheld by its neighbors who sided with Azerbaijan in the war over Nagorno Karabakh. Macroeconomic stabilization, achieved in the mid- 1990s, accompaniedby macroeconomic growth of 3-6 percent per year has improved the situation. However, this growth has been notably unequal and today over half of Armenia's population (54.7 percent) remains below the poverty line with another quarter (27 percent) below the food line.
What Does Poverty Look Like in Armenia?
3. In this context, it is not surprising that the poorest of the poor are unable to meet their most basic human needs: food, warmth, education and health. According to the qualitative study, while there was no widespread malnutrition, the poorest of the poor are unable to meet their basic food needs. The main findings included: - the most affected are urban, though hungry rural households also exist; - children were most affected by the food shortage in terms of their health and education; - poor households reduce consumption by rationing food; - seasonal hunger or fear of hunger is most common in the late winter and early spring; - households are limited to a monotonous diet with poor quality produce; and - rural households are often limited to what they or their relatives can grow themselves, which can in turn be limited in terms of the diversity of produce and its quantity. Many households were therefore reduced to eating under a handful of food items, namely potatoes, bread, oil and a few collected greens. These findings were confirmed by quantitative nutrition and other studies conducted in Armenia.
4. Poor households dramatically limited their use of electricity for lighting and heating purposes. With severely limited regular income, electrical expenses represented an important share of expenses, usurping the income available to meet other needs, such as food. Indeed, in urban areas, respondents had experienced having their electricity cut off and generally had difficulty meeting their light and heating needs because of the lack of alternative energy sources. In rural areas, households used electricity only for lighting, reported lower usage levels, and had ANNEX 5 Page 2 of 8 an easier time meeting their needs. Other households had never been able to afford an elect.ic counter nor had their electricity indefinitely cut off due to non-payment. Many households seemed unaware of the stepped pricing system introduced for electricity.
5. Shelter type was not considered a good indicator of poverty. Instead, the home's general state of repair (peeling paint and lack of upkeep) was a better indicator. Indeed, not only did the poorest households forego maintenance and repairs on their own property, they often scavenged construction materials to meet daily needs, such as burning floor planks and doorframes for heat, selling roofing materials to pay off debts, and tearing down walls brick by brick to sell in order to buy food.
6. Education is still regarded as a priority for the poor. Attendance and enrollments are high, however there is a problem with regards to the quality of schooling available. Private lessons, textbooks, supplies and appropriate clothing are heavy burdens on the budgets of the poorest. Children and parents also felt that teachers discriminate against the poor in the classroom.
7. Access to health is limited by the high cost of medical care. The poor are unable to afford treatment, even though the government has financed a package system of free health services for them. And poverty itself - poor nutrition, insufficient heat, lack of adequate shoes and clothing, and lower access to health care - promotes chronic poor health, making health care for the indigent a vicious cycle.
8. Households reported spending some of their income on cigarettes. These expenses represented a substantial part of the budget even among households that were far from meeting their basic food needs. Cigarette purchases caused much tension between spouses who disagreed over the best use for the money. However, they didn't discuss the health implications of smoking - either in the form of health care expenditures or foregone income from illness. Some income was received in-kind as alcohol and consumed rather than sold or bartered for food.
Why are the Poorest Unable to Cope?
9. The coping mechanisms of the poorest of the poor are, as might be expected, limited and insufficient to lift the households out of extreme poverty. The most striking commonality among the poorest is that they share an inability to benefit from the most widespread income-generating activities available in the country, either from trade, land or remittances. In response to this exclusion, the poorest reduce consumption (as cited above), and if possible, increase their dependence on formal and informnalsupport systems, deepen their indebtedness, and sell off assets and personal belongings to survive.
10. Labor market. At the level of the household, the lack of well-remunerated local employment opportunities is viewed as the main cause of poverty. This perception is based on two main points. First, unemployment is high in Arnenia. The SDS survey estimated unemployment at 28.3 percent of the total labor force and 45.8 percent for youths between 17 and 25 years old. Second, obstacles to obtaining employment include the necessity of personal ties who will extend an "invitation to work," and the need for cash to use as bribes to secure a position. Similarly, in the informal and private sectors and in work abroad, employment and income-generating activities require start-up capital to facilitate bribes for employment and ties. In addition, cultural and psychological factors also act as self-imposed barriers to adopting the ANNEX 5 Page 3 of 8 new capitalist economic order. The pervasive post-Soviet mentality still views free trade as distasteful and values employment in now poorly remunerated but still prestigious government institutions and agencies. Employment choices are also commonly determined by what is deemed appropriate based on gender and age. While some people have overcome these societal constraints, these issues remain entrenched and widespread. Even when the head of household has work, salary size is irregular and payment is often delayed; work is often part-time or erratic even in formal enterprises; and wages are too low to support a family.
11. Self-employmentis not a viable solution for the poorest of the poor. Income from self- employment was sporadic, involved incurring health risks, and was poorly paid (4000 drams per month on average according to the SDS survey and the qualitative work). Self-employment requires good health and mobility since most opportunities open to the poorest are limited to tugging, lugging and pulling. And it requires free time above and beyond other activities and responsibilities as well as the personal connections that open invitational doors.
12. Trade is one of Armenia's primary income-generating activities. Urban households (or rural ones without quality land) who do not trade are often pointed out as poorest at the community level. Some of the poorest households that had attempted to trade but failed to make a profit then became indebted or lost major assets in the process. Others were reluctant to wager their limited assets or their health in a risky, highly competitive venture. Other reasons for avoiding trading activities were pregnancy, childcare, health problems and the low prestige of trading. The poorest sometimes become involved, not on an ongoing basis but to a limited degree, in trade by marketing sporadically to cover specific needs as they arise, such as electricity or school supplies.
13. Finding work abroad, especially in Russia, is one of the main means of subsistence for Armenian families today. An estimated 20 percent of the population has left Armenia over the last five years because of the worsening economic and social situation. According to our study, however, the poorest, who stand to benefit the most from working abroad, were commonly those whose breadwinners were least able to afford the trip to Russia or, once there, were unable to earn enough money to support their families left behind in Armenia.
WOtking abroad is not an option for all because it requires an expnsive initial investment. Thus emigration is belivd tobe concentd aogtid work*0labrad, a s
- citalfravel andinitial expenses; - ties;in the ity choice residents of asame Armenianvillage will often tra to specific ssncitesadreloong-standng supprnet of Axrenians alrey work there; -someassuranest attherewillbe wkincity choice; X0 000000000i;0of f-goodealth eauelaborin Russii ost y physcal; and t:0 ; V :i : 0 0 t ;
14. Debts incurred to finance the trip, the cost of a return ticket and, most importantly, debts incurred by the family during the wage earner's absence were often cited as impediments to his return to Armenia because once the wage earner rejoins the household, creditors demand repayment. With the wage earner absent, formal and informal networks are likely to provide a modest amount of support for the family (see Informal Support Networks). ANNEX 5 Page 4 of 8
15. Land. Again, the situation in rural Armenia is different from other regions where rural households have been farming land for generations. In Armenia, large factions of rural residents own land, work it to subsist, but do not consider themselves farmers. They don't intend to make a profit from land cultivation, but simply to supplement their income, so their land merely provides an additional "social net." This perspective dictates a preference for such food staples as potatoes and wheat that are consumed solely by the household over the cultivation of higher value crops for profit marketing. It also explains the limited attempts to rationalize cultivation.'
16. Poverty and landholding are intimately linked in the rural economy. Landless households were likely to be very poor since home production is the main source of income for the majority of rural households. The landless are rural residents who did not receive land during privatization (in some cases because none was available to the village), or returned their land to the municipality.
17. However, landowners are also among the rural poor. According to the qualitative study, landowners experience many limitations to effectively cultivating their land, including: - possessing only a small quantity of land; - low quality and poor productivity of the land; - decreased land productivity due to prohibitive cost of materials and inaccessibility of essential inputs (water, fertilizers, pest control, equipment, and poor seed quality or depleted stored seed); - need for additional sources of income to finance land cultivation costs; - lack of male labor availability in the household; and - weather disasters such as hail, drought, flooding.
18. It is striking to note that while households are free to sell or lease their land, some households refused outright or elected to return the land allocated to them during privatization. In the qualitative survey, none of the households reported selling their land. A land sales tax may be one impediment to liquidating land assets, but households also perceive land as a liability because ownership means foregone incomes from government transfers and employment. Local residents are disallowed from registering as unemployed, and in one case a respondent was turned away from a factory job by a manager who explained that he gives preference to urban residents who don't own land.
19. Depletion of assets. Traditionally, assets such as apartments, homes, cattle or jewelry, and personal belongings such as bed sheets, furniture, rugs or crystal, are amassed during good times or brought into the household by the young bride as dowry which allows the family to weather bad times by selling off these items. In the last seven years, assets become the main holdings since cash savings were lost to currency reforms and continue to be eroded by inflation. The absence of personal belongings and assets is a result of poverty because the poorest depend to an inordinate degree on the sale of assets to cover large, one-time costs such as bribes or health bills as well as daily consumption needs such as electricity, food and school supplies. Poverty also results from the depletion of assets which are provide the necessary start up capital to embark on productive activities such as trade, sending a husband or son abroad, or keeping the existing labor force healthy. ANNEX 5 Page 5 of 8
20. Increasing dependence. As may be expected, access to traditional networks is not governed by universal compassion. Informal support networks are regulated by a set of societal rules that identify the responsible helper as well as determining specific households' access to that help. The accessibility and scale of assistance varied greatly among different households. Traditional support networks are subject to the following societal values and rules. Informal networks are: - intended as a social gesture to maintain ties and don't necessarily offer assistance to alleviate poverty; - determined by kinship ties and prioritized along patriarchal kinship lines; - conditional based on reciprocity, repayment and gratitude; - moralistic in that they distinguish between "deserving," or work-incapable, and "undeserving," or work-capable, households; - judgmental in that some households, although work-incapable, hence presumably "deserving" are nonetheless considered "responsible" for their situation and thus less deserving than others; and - most often initiated by the outsider and not the poor, leaving many of the poor "invisible."
21. Indebtedness. Other informal systems exist which support families such as chronic indebtedness. Food and bread shops provide credit that the majority of poor households rely on because income is so irregular. The local electric company also delays payments that allow households to carry their debt into the next pay period. However, if creditors believe households will no longer be able to pay off their debt at some future date, they will refuse to continue extending credit. Many of the poorest households could no longer access this coping mechanism because sources of income had dried up causing creditors to withdraw credit.
22. Government assistance. Government cash transfers: - are insufficient to lift households out of poverty though they are an important source of income for the poorest; - are unreliable because they are often paid months after they are due; - are impeded by administrative hurdles prevent acquiring appropriate status -- especially with regard to invalidity; - don't reach all unemployed due to cultural and fiscal constraints understating real unemployment; - fail to include all the poor and exclude the non-poor because they are aimed at assisting vulnerable groups and not the work-capable poor, thus reflecting the same hierarchical and moralistic values as informal networks; and - exclude landowners, regardless of income.
23. Government social targeting systems. The main issues raised concerning the Paros registration and formula system were: - the Paros formula remains a black box, effectively limiting recourse for households who are unduly excluded; - some households have opted to not register although they may qualify for assistance, such as work-capable rural households; - lack of outreach limits access to the most needy households, such as invalids, young children and families with infants; - the registration process uses a cumbersome documentation system and time-consuming registration burdens households; ANNEX 5 Page 6 of 8
- data in Paros "passports" is often incorrect, increasing errors of inclusion and exclusion; and - an overlap in government agency responsibilities led to uneven implementation of documentation guidelines.
24. Local government assistance. In a less formal manner, local social protection offices and other local government offices have acted to prioritize among vulnerable households through the illicit, formal inclusion of households on humanitarian distributions and assistance lists. This practice demonstrates a perceived hierarchy of vulnerability on the part of the government.
25. Government institutions. Some parents use overnight schools, orphanages and schools for physically and mentally retarded to receive government assistance by claiming these institutions offered their child was better food, clothes and health care. But this alternative remained highly unappealing to most poor parents -- even those living in very poor conditions (see Appendix 2: Govermnent Iinstitutions).
26. Humanitarian assistance. While humanitarian assistance has played an important role in supporting households, it remains poorly targeted and mostly benefits well-off households.
Gathering and Begging
27. Many of the poorest households collect food left over and discarded by others. It is common for poor rural households (especially the landless and those unable to cultivate their land) to gather leftover wheat or potatoes from harvested fields. For urban households, the most common sources are large garbage containers and trash piles found in building courtyards. The poorest collect bottles from trashcans for 5-10 drams per bottle, and gather scrap aluminum and metal for 15 drams per kilogram. Households report this as a difficult, degrading activity that requires a great deal of searching, and feel belittled in the eyes of observers. The admit to bringing home any object that they might use or sell, such as old clothes, worn shoes, jars of animal fat, cigarettes, unfinished bottles of alcohol, etc. A half dozen people in Spitak and Yerevan were discovered living surviving on the food and alcohol discarded in cemeteries (see case below).
28. A few households, mainly older women and children, resorted to begging in both cities and villages. Begging for cash was mostly limited to Yerevan, which is considered the only propitious place to beg. In large villages and cities, a few respondents reported going door to door requesting bread but never begged in the streets.
Who are the Poorest Households?
29. Dynamics of poverty. The vast majority of Armenian households have experienceclat least a temporary spell of poverty in the last five years. In addition, considerable evidence suggests that many households move in and out of poverty as incomes and expenses fluctuate. The main difference between the transient and chronically very poor is that the former have retained crucial links to society and continue to have successful access to opportunities. Arnong the transient very poor, financial cycles result from income and expenditure fluctuations such as temporary: - decrease in income due to poor or insufficient harvest, unpaid salaries, seasonal variations in income-generatingactivities, recent loss of employment, or extended family ANNEX 5 Page 7 of 8
crisis; - depletion of stored goods such as food or fuel, assets, or savings while retaining an ability to replenish savings through work abroad, indebtedness, etc.; - unexpected increases in expenditures from illness, funeral, legal problems requiring large bribes, etc.; and - loss of labor force, which can become permanent, such as incarcerated family member, military son, pregnant or lactating mother, and mental or physical illness.
30. Household characteristics. The poorest households are afflicted by problems that are psychological, physical, geographic, social and economic in nature. Thus, to improve the situation of the poorest of the poor, poverty alleviation involves not only increased income levels, but includes access to other essential needs as well. This has important implications for policymakers whose programs must take into account not only economic poverty but other impoverishment, too.
Thmaineaat sts fthpoeshueodsare:
ionclusionand Recommendations
31. Within Armenian society, specific, clearly delineated groups are excluded from the very strategies targeted to meet their basic needs because of isolation (geographic or social), lack of mobility, dearth of assets (for sale or productive purposes, such as quality land), poor health and psychological barriers. Currently, such strategies are supported by growth policies meant to focus on increasing consumption, however these policies haven't translated into sufficient local investments and economic restructuring to promote development of local employment opportunities. A parallel movement is afoot to reduce government subsidies to households for basic amenities such as water and electricity, and services such as education and health. Kinship and other traditional support networks are unable to support large factions of the poorest households, and consequently a growing segment of the poorest ones have lost all hope for improvement in their situation. Having exhausted their resources, they live day to day, hungry, cold, anxious and hopeless.
32. While poverty has already spread to a large percentage of the urban population, it has simply been postponed for the rural population. Rural poverty can be expected to worsen, albeit at a slower pace since productive assets can be more easily depleted and replenished in a rural setting. But cycles of poverty in rural areas will be deeper than in urban areas, and key informants at some rural sites identified a trend, by which the middle classes had vacated villages and outlying areas, leaving behind only the wealthy and the poorest. The isolation of villages will take a long-term toll on the rural poor as they lose human capital to diminished education and health care quality. ANNEX 5 Page 8 of 8
33. The brunt of these circumstancesis borne by the childrenwho are comingof age followingthe transition.This generationwas born into povertyand is growingup malnourished, poorlyeducated, and withoutaccess to qualityeducation or medicalcare -- a strikinglydifferent situationfrom their parents' generationwho may also have been poor but had guaranteedaccess to basic foodproducts and health and educationalservices. The long-termeffects of grappling with this new type of povertywill be felt for manyyears to come.
Recommendations
The top prioritiesfor the country'spoorest households are to: - Promotedevelopment of well-remuneratedlocal laboropportunities such as micro-enterprises throughmicro-credits for trade and services. - Supportrestructuring of localindustry, services and other sectorsto promotelocal employment. Privatizationof existingstructures has provedinsufficient to generatingsustainable growth.. The local investmentclimate must be improvedto attract local and foreigninvestments for production. - Reviewobstacles to sellingand renting land-- such as highcadaster valuations, land sale taxes! lack of land ownershipcertificates -- which maybe impedingland redistribution.Review iissues relatedto the poorestreturning their land to the municipalitywithout compensation. Land redistributionor compensationpackages may be consideredat the local level. - Do not overestimatethe importanceof informalsupport networks for the poorestwhich cannot replacelocal labor opportunitiesand targetedgovernment transfers. Comparedto the poor and non-poor,the poorestare moreisolated, even in crisis situations,so improvedtargeting of govenmentbenefits is essential. - Developand implementa basic packageof free healthservices for the poorestto include currentlyunavailable services: family planning, child vaccinations,and treatmentof respiratory infectionsas well as infant and child under-nutrition.Consider health coveragecredit schemes for the poor and non-poorand voucherschemes for the poorest. Developtobacco awareness campaign. -Defmeand enforcelaws regardingemployer's responsibility regarding work-related injunies. -Ihitiate an informeddebate within the Ministryof SocialProtection regarding poverty. - Consideroutreach and othermethods to betterreach the poor. Consideralternatives to the Parosformula to reduce institutionalcosts and reduce risks of inclusionand exclusion. - Reviewthe process of obtaininginvalidity status. Prioritizethese households for cashtransfers basedon the resultsof the SDS surveyand outreach. - Implementand enforce law that separatesreceiving child allowancesfrom paying taxes. - Identifymeans (such as cashtransfers) to offer supportto familiesnow relyingon government institutions to meet child needs.
'These findings were confirmedby other sources such as the representative of CARE International who manages a program providing technical assistance to farmers in Armenia, November 1997. ANNEX 6 Page 1 of 5
METHODOLOGY FOR THE QUANTITATIVE ANALYSIS OF THE PAROS PROGRAM1
1. Throughout Chapter Three, references were made to results taken from Grosh and Glinskaya (1998). These are complex calculationsbased on Household Budget Survey data; for full details, the reader is referred to the background paper. However, below is a short summary of some of the key calculations for reader convenience.
EstimatingParos Scores
2. Although the HBS questionnaireasked householdsto report their actual Paros score, not enough actually did to allow for meaningfulanalysis of actual scores.2 It is, however, possible to estimate what the score would be, using the known Paros formula and information from the HBS questionnairesince most of the necessary componentsto compute the Paros score are available from the questionnaire. Where information is missing plausible approximationsare possible, as follows: e Disability. From the questionnaire,we know whether a disability was declared for each individual,but not whether it was grade I, II or m. Thus we gave each disabled person 36.5 points, the averageof the points in the formula -- 43, 39 and 28, respectively -- weighted by the prevalence of each grade of disability -- 0.2, 0.5 and 0.3, respectively. The Ministry of Social Affairs provided details on weights. - Orphans. From the questionnaire,we did not know whether the orphans were one- or two- sided, and so we assigned to all orphans the number of points given for one-sided orphans. a Twins. We could not tell whether childrenwere twins. Any household with two children the same age was assigned the number of points for twins. * Income. We could not, of course, replicate exactly what a household mnighthave reported to the Paros registry about its income, but we can assume that households reported receiving humanitarian assistance as well as the salaries of those in the formal sector and any official pensions. These were plausible assumptionsbecause the receipt of these items could be verified by Paros' internal records or by asking the applicant to provide pay stubs. For landholders,the Paros system imputes a value for agriculturalincome based on information in the land cadastres regardinghow much income to expect from a holding given its size, quality and location. We could not replicate this exactly, but instead used the value of agriculturalincome the householdreported in the HIBSquestionnaire. We did not make any attempt to include income from the informal sector, even though the Paros system asked registrants to report such income, because we assumed a high degree of underreporting. It is obviouslyin the interest of the applicantnot to report such income and there is no method for the Paros system to verify the existence of informal income. * Business licenses. We could not determine from the survey data whether or not the household had registered as a small business, although we did know if the household had any workers in the informal sector. We made no provision for setting scores to zero based on this information because
This is drawnfrom Groshand Glinskaya,1998.
2 Aboutten percentof householdsreported their Paros score. Of these, a fair numberof the observations werenot in the plausiblerange, indicating that the householdshad not read or recalledthe score properlyfrom their socialpassport. ANNEX 6 Page 2 of 5 to date the number of firms registered and licensed in the bureau has been very small. Clearly,non- compliance is the norm. * Ownershipof Cars. The HBS survey did not contain a direct question on whether households own automobiles,so we constructed a proxy variable based on whether the household reported expenditureson gasoline or automobile repairs during the reference period (prior month) of the survey. This method likely underestimatedcar ownership, especially among those who essentially garaged an automobile to save operating expenses.
Simulatingthe Impact of Transfers through Paros
3. The HBS data did not allow us to directly see who received transfers through Paros and who did not, so to draw conclusions about how the system operates, we simulated how transfers might work using the Paros score. We hypothesizeda very simple program that approximateshow actual aid distributionsworked, as follows: * Budget. We postulate a budget of 6.4 million drams, which represents about 2.5 percent of the total consumption of the sample, e.g. an approximate scaling down of the budget for social assistance in 1997. 3 Benefit. Everyone who gets a transfer receives the same amotint. EEligibility. We use two eligibility criteria. First, we use a cutoff point of 35 with the scores of those who own cars, according to our proxy, set to zero. Second,we use a cutoff of 32 without taking into account information on car ownership. The first variation may be more similar to how the program works today in that it currently takes into accountthe data on cars, and as aid has diminished, the thresholds have gotten higher. The second variationrepresents more closely how the program operated when the bulk of humanitarianaid was flowing through it. Car ownership was not factored in, and since aid was more abundant,cutoffs were lower. (Remember that a high score represents more need, so that "lower cutoff' actually means one in which more of the population benefited). * Registration. We only give a benefit to those who are both registered and meet the eligibility criterion. * Poverty measures. As in Chapter 2 (The Poverty Profile), we use household per capita consumptionas our measure of welfare. We calculate the same measures of poverty, the headcount, depth and severity (i.e. the Foster-Greer-Thorbeckemeasures for alpha equals 0, 1 and 2) using the same poverty lines. * Calculatingerrors of inclusion and exclusion. We assumethat the target population is the bottom 25 percent of the populationand use this as the guideline for a plausible simulationsince the actual cutoff points used over the years were in this range. In monetary terms, the 25ipercentile of the population has a log per capita consumptionper person per month of 8.83 drams. This corresponds approximatelyto a score of 35 Paros points, with the scores of car owners set to zero. * Benchmarks. To provide benclhmarksfor comparison,we also show the baseline situation before a transfer and simulatewhat would happen if the same budget were distributedequally t-oall people, which is called the uniform transfer.
Regression Results from Models of Proxy Formula
4. Before we embarked on any of the work in the simulations, we divided the sample in half by sorting households by region, urban/rural and per capita consumption. We then took the even numbered observations for one sub-sample and the odd numbered observations for the other. We used one sub-sample to run the regressions to determine which indicators-and weights to use and then used the other half of the sample to predict welfare and conduct the transfer analysis. ANNEX 6 Page 3 of 5
5. The idea behind this technique is that it applies a harder test to our procedures. If instead, the work had all been done on the same sample with the same households used in the regressions to determine what the formula should be -- and in the simulation of the transfers -- the results would have been biased in favor of accurate prediction. (Sensitivity analysis not presented here nonetheless shows the bias to be negligible).
6. Ordinary, least squares regressions are used.3 Standard errors are adjusted for stratification and in the (mostly rural) areas where two-stage sampling was used, for clustering. The particularly significant variables shift somewhat between models. This is largely a result of having reduced the sample size in order to conduct the methodologymore correctly out of sample predictions.
7. Model 1: Location. We have four types of location variables available: Yerevan, other urban, low altitude rural areas, medium altitude rural areas and high altitude rural areas. They are in the earthquakezone, conflict-effectedborder zone, and the marz, or region, where the household lives. Surprisingly,the strata variable was not generally significant. The conflict-effected border zone was not strongly associatedwith lower consumption,and residences in the earthquake-effected area were more closely tied to with lower consumption. Armavir and Lori marzes were also associated with higher per capita consumption than Yerevan, whereas the others had insignificant coefficients.
8. Model 2: Social categories. For each of the fifteen social categories we could handle (described above), we include a variable consisting of the number of household members with those characteristics. Households where all members were classified as "category-less" were excluded. These households were presumed to have no disadvantages;the Paros program hypothesizes that all other categories constitute a social disadvantagethat will result in poverty. When household size is added to the regression, interpretation of the social category dummies has the same effect on welfare that would occur if a "category-less"person were replaced by someone who was identical but possessed one of the disadvantagesin the social categories.4
3 Strictlyspeaking, OLS is inappropriatefor predictingconsumption for two reasons. First, the technique minimizesthe squared errors between the "true" and the predicted levels of welfare. The minilmizationof squarederrors is a differenttheoretical problem than that of the minimizationof poverty.Ravallion and Chao's(1989) algorithm directly minimizes poverty, thereby producing better povertyresults which could make it a bettertool for designinga transferscheme. However, we do not use it throughout this paper because it is: cumbersome when a large number of predictive variables are available, doesn't use continuous variablesefficiently, and policymakers and their technicalteamns are unfaniliar with it. OLS may not be the best algorithm to use for a small number of discrete variables, but it's convenient and useful when large numbers of variables and continuous ones are available. (see Grosh and Baker, 1995, Annex I for a fuller discussionof this issue.) The second problem with using an OLS model is that many of the variableswe use on the right-hand side of the regressionare, strictly speaking,endogenous. In other words, the householdmakes decisions about them that are not independent of decisionsthat determine householdwelfare, which is the variable on the left-handside of the regression. OLS is neverthelesssufficient in this targeting simulationbecause we are only concerned with identifyingthe poor and not with explainingwhy they are poor. 4 Note that household size and the sum of the social category variables are not so strongly collinear as to cause the regression package computational difficulties. Indeed, they are hardly more collinear than many regressors. To the extent that they are collinear, they may inflate standard errors somewhat,but ANNEX 6 Page 4 of 5
9. Three of the social categories were, in fact, stronglyand negatively related to consumption: the registered unemployed, pensioners, and pensioners living alone. These variables presumably effect eaming power, and thus consumption, in ways that can be easily interpreted. The iamily structure variables that indicated the presence of children were generally negatively correlated with consumption, in some cases stronglyenough to be significant (children aged 2-18, orphans, twins). Any interpretation of the coefficients on these variables should, however, be done with caution. Since the consumption measure being predicted is consumption per capita rather than per adult equivalent, and since food is quite a large share of consumption (50 percent overall and 73 percent for the poorest decile), the link between children and poverty may be somewhat exaggerated inthis formulation. Most of the social categories are not significantlyrelated to consumption.
10. Model 3: Social categones and location. Next, we used social categories and location together. The pattem of which variables were important remained fairly stable and the coefficients for conflict-effected border areas and persons over age 80 are more strongly significant and negative. The adjusted R-squaredL,which shows the overall fit of the model was slightly better, but still low at xxxx. (TK)
11. Model 4: Adding household demographics. We add several variables about household demographicsto those in Model 3. As is common, the household size and its square are signif.icant, however once these are in the equation, the dependency ratio5 is not significant. The head of the household's6 gender doesn't matter either. However, the maximum education level attained by the most highly educatedmember of the household has a stronglypositive effect on consumption. The age of the head of the household (entered as age and age squared) is not individually or jointly significant.
5. Model 5: Adding assets. We included assets that were mentioned on the questionnaire and whose existence it might be reasonably easy for a program administrator to verify. First, we use a proxy measure for car ownership7 that was strongly and positively related to consumption with households we believe own a czLrhaving per capita consumption 38 percent higher than those without cars. Interactions show that car ownership is especially crucial in rural areas. Owning land has strong, positive effects on consumption. Holdings of cows exhibit a threshold effect; ownership of a single cow does not significantlyraise consumption, but ownership of more than one does. Because relatively few households own pigs or sheep (5 and 8 percent, respectively) we enter those variables as dummniesfor ownerslhipor not although neither is significant. Owning fowl shows no significant effect on consumption, though because they are more common and have more variable numbers we allow for a threshold effect.
do not bias the coefficients.We preferto leavehousehold size in, as it is importantin its own right, and aids greatlyin the simplestinterpretation of the socialcategory variables. 5The dependencyration is definedas (numberof members-numberof earners)/numberof members. 6 Head of householdin this data setis definedin a somewhatunusual manner. The householdwas not askedto namea head duringthe interview.Instead, the surveyinstitute inferred such a position. It is assignedto the memberwith the greatestreported income in householdswith an identifiable eamer. In otherhouseholds, the oldestmale is labeledas head.
7The questionnairedid not ask directlyif a householdowned a car. However,it didrequest data on expendituresfor gasolineand auto repairs. If a householdreported either of these,it wasassumed that the householdowned a car. ANNEX 6 Page 5 of 5
6. Model 6: Adding housing quality. We add various measures of housing quality. First, we examine the type of residence. The base case is apartment dwellers. Unexpectedly, the types of residence variables are not significant,which is a surprise when we take into account those living in railcar/containersor hostels. With respect to ownership of the dwelling, the welfare of those who rented from private persons was about a quarter higher than other renters. The size of the dwelling is statistically significant, but not significantly so. An extra 10 square meters of living space is associated with a 1- percent increase in per capita household consumption. Virtually no one has operational centrally supplied gas or heat, although most had functioning electricity so these variables turn out to be insignificant. Households without bottled gas or their own sources of heat are worse off than those with them just as people with telephones are better off than those without them.
7. Model 6U/R: Separate rural/urban formulas. We included all the same variables but split the sample into rural and urban components. On the whole, the variables that are significant and their parameter estimates are fairly stable. The bigger exceptions are unsurprising: more of the marz variables are significantbecause they are now more closely associated with land quality or, in urban areas, with the local labor market, and some of the livestock variables lose significance in urban areas. Surprisingly,some of the dwelling quality variables matter more in rural areas than urban ones.
8. Model 7: Shortened variable list. By now the model involves a fairly large set of variables. Since the administrative burden increases with each extra variable, keeping the model as small as possible is desirable. In order to move closer to this goal, we excluded the variables that had not had significant statistics in the preceding regressions and a few that were harder to measure, like livestock. This effectively reduces the number of pieces of information we must gathered from 39 to 20. The adjusted R squared drops a little -- from .251 to .263 -- but not markedly.
9. Model 8: Adding employment and income variables. The labor force status of the head of household, the sum of earnings, and the imputations for the value of agricultural goods were all significant and the coefficients of the expected sign. However, the sum of wage arrears was not significant, nor was whether the household received remittances (dummy indicator, not amount) during the month of the reference period. A variable constructed from the difference in the number of persons the household considers to constitute their family and the number of individuals who reside together at the time of the survey can be taken as a proxy of the potential number of remitters. This variable is significantly related to consumption, as is the actual level of remittances during the recall period.
10. Model 9: Paros indicators. Many of the indicators are significantly associated with welfare. The social categories and locations that are not strong predictors of welfare are, of course, the same as in Models 1 and 2. ANNEX 7 Page lof8 PAROS BENEFICIARY ASSESSMENT
Executive Summary
I. Introduction
This Beneficiary Assessment of the Paros targeting system was funded by the World Bank in an effort to inform the reform of the social welfare system prior to the introduction of a new family benefit system. (See Appendix 2: Methodology)
II. Background
The Paros system was initiated in 1994 in an effort to improve the targeting of humanitarian assistance from international donors to the Armenian population. In 1997, a re-registration of households was conducted in order to update information, and improve the quality of data available on households by requiring official documentation. In the fall of 1998, it is expected that the Ministry of Social Security will use the Paros system to distribute cash transfers to 200,000-250,000 households.
III. Main Characteristics of the System
The main characteristics of the Paros system are the following. It relies on a self-targeted, voluntary registration. Household information is collected from potential clients in the office - not in the household. The proxy means test algorithm is complex. The algorithm is not a secret formula. The data is processed both locally and centrally. The supervision role is ill-defined supervision and there is no effective audit function. Technical and human resources are available in the system, but not used to their full potential --- because of lack of training and clear definition of roles, tasks and goals.
IV. Findings of the Beneficiary Assessment
1. Choice of a Proxy Means Test
Compared to other targeting alternatives, the choice of a proxy means test is a rational one from the point of view of the government and the population. There are three main reasons: the lack of accessible and reliable data regarding actual household incomes; the lack of professional training to identify the poor among social workers, and the perceived and real) corruption of bureaucrats as gatekeepers of government resources.
However, the objectivity of these lists should not be overstated. Social workers can edit (5 percent of) the lists they receive from the Mergelian Institute and can use their own criteria for distributing up to 15 percent of the assistance through additional lists. ANNEX 7 Page 2 of 8
2. Voluntary Registration Process
The number of registered households with Paros has decreased considerably since th[e 1994 registration. This is in large part to emigration and the regrouping of certain households who had claimed previously to be living separately.
The process of re-registration of households under Paros has been in many sites quite efficient because of de-centralization. At the peak of registration - in late summer and fall of 1997 - many of the territorial offices set up temporary offices in neighborhood shops in towns and in the village councils in villages. In some sites, de-centralization did not take place (Vartenis town and villages) or took place late in the Spring of 1998 (Talin villages).
3. Access
There are two opportunities for inclusion: the first is access to the system through registration and the second is inclusion once data is in the system and the household is selected by the formula. (Also see Formula). Access to the Paros system is determined by above all, by information availability (See point 4), perception of household eligibility and other social values and social alienation of the household (passivity, mental health, gender), then cost of processing registration (informal processing fees, documentation costs), mobility/ distance/ transportation.
Costs (See Appendix 1: Table 1) varied greatly in terms of type and size of expense through out the sites. The unofficial costs were common in villages where documentation was provided at a cost 2-4 times higher than official urban prices. Unofficial costs in town were not reported (except on respondent in Vartenis) while they were common in rural areas.
Documentation requirements entailed some formal and informal costs. Documentaticinof handicap ($10-$50 infornal cost plus costs related to the health services), divorce (30,000 dr. in Yerevan) and change of passports from old Soviet passports to the new Armenian passports (1200 dr.) require official and unofficial payments related to legal procedures (Also see DocumenLtation).
In urban and rural areas, costs related to pre-conditions set by organizations issuing documentation were the highest expense related to registration. There were cases of households who did not go through re-registration because they heard first or second- hand of pre-conditions requiring paying off outstanding debts. Many of these paymernts were said to be negotiable, according to the officials themselves, in order to make them accessible to the poorest. The costs related to transportation were high especially for rural households who did not take advantage of the decentralized re-registration process when social workers spent a day or two in their village.
There are social (gender, age, family status, ethnic) barriers to obtaining documentation affecting mostly secondary cities and villages. This affected women (Armenian and ANNEX 7 Page 3 of 8
Yezidi villagers near Talin and Aparan) without a male head of household present and daughters in law (Talin). Participants explained that "without a master, without a husband," a woman has no right to go to the village council for business reasons.
As a result, the greatest divides in registration levels among respondents were a function of rural versus urban residence, and work capable versus work incapable adults. Rural residents registering at a lower rate because of lack of information about Paros and historically low levels of humanitarian assistance going to rural areas (except in the conflict zone, earthquake zone and among some refugee populations). Urban households were more systematically targeted by de-centralized re-registration efforts. Work capable versus vulnerable groups, with work capable households having historically been ineligible for assistance.
The main reasons why eligible participants were unable to register were: lack of information (re-registration process and Paros benefits); inability to document poverty; cost (low mobility because of old age, illness or distance, pre-requisite payments of debts; informal and formal costs of registration)
The main reasons why the poor are not actively included by social workers are that there exist no directives as to how this identification should take place; the large number of cases for which each caseworker is responsible (some 2000 cases per worker). But at the time of field work, the social workers were sitting mostly idle - with no plans for home visits; and cultural inhibitions about visiting strangers' homes.
4. Information about Paros
The primary source of information for most households was word of mouth. The second most important source was the mass media -- namely television and radio not newspapers. However, it is important to remember that the poorest of the poor often do not have electricity or consumer goods in working order. In some villages, the main source of information was the village council head.
Knowledge of Paros is limited. The purpose of Paros is generally perceived to be to assist the poor, and to distribute humanitarian assistance from abroad. Paros is sometimes not believed to be a government program or associated with the Ministry of Social Security. There was little knowledge of the use of a formula to select recipients of assistance.
5. Data Collection and Processing
Information about the situation of households is collected in the office, not in the household. The main assumption of the system is therefore that the household's welfare status can be communicated through documentation.
There are a number of obstacles to documenting poverty. First, Paros assumes that poverty is linked directly to a household's status or characteristic of a member of the household which has been refuted by the recent poverty studies. Second, it assumes that ANNEX 7 Page 4 of 8 the poor have the information and financial resources to access appropriate documentation. In many cases, the poor are likely to lack documentation and live in unofficial situations - unformalized divorce, handicap or illness, changing household composition, etc. Cost (formal and informal) associated with documentation and lack of ability to navigate bureaucracy are the two main impediments to documentation.
The system therefore encourages strategizing on the part of households (and sometimes social workers) struggling to show low welfare in order match up poor households vvith eligibility requirements. Thus there is an incentive to produce false documentation. The issue is not always that the household is not poor but that poverty is not coherent with the Paros criteria.
The quality of information within the system becomes less reliable as it progresses through the system (Also see Monitoring below). Human error in data entry of household data is widespread. There are no processes for fact checking or data cleaning. The bureaucrats issuing documentation may have little information upon which to assess veracity of the information they are documenting and even an incentive to provide documentationthat is not true. Delays in input of data into the central computer may temporarily exclude eligible families. The information recorded in the Paros booklets of the beneficiaries does not necessarily correspond with the data on file at the social services, or that in the central computer. The information in the computer can be changed by the social worker or the Mergelian Institute once it enters the system. Tlhe lists received by social workers for distribution of assistance can also be changed by the social workers. According to regulations, up to 5% of recipients can be eliminated because they are not deemed needy by the social workers.
6. The Paros Formula
The Paros formula remains based on the concept of vulnerable groups. As a result, the formula retains a moralistic character. It also continued to privilege the work incapable versus the work capable. Thus, a poor family with two children and a working adult is unlikely to receive aid no matter how poor it is.
The criteria used in the formula may not always be appropriate to support what it is meant to document - i.e. relative welfare levels. This is in particular the case for characteristics such as household composition, employment status, household income, and agricultural incomes.
An emphasis is being made on excluding the well-off but not on including the poor. Particular efforts are being made to exclude well-off households by using a single criteria such as car ownership, having a registered trade or private enterprise, sale of real estate, and others are being considered. There are no equivalent efforts to identify proxies for including the poor. The fact that a single criteria can exclude households entirely is an unfortunate oversimplification., ANNEX 7 Page 5 of 8
The lack of effectively enforced standards used for documentation weakens the reliability of the centralized selection system. Supporting information requirements varied by territorial office for asset holdings, household composition, car ownership and receipt of assistance.
7. Technical and Human Resources
The social workers are often perceived by beneficiaries as uneducated, rude and corrupt. The social workers are bureaucrats trained to process documentation, do not have a professional background and few have lengthy experience in the system. The level of professionalism of directors of local territorial center offices who had gone through a three-month training program was notably higher than that of social workers.
The social workers are seen as corrupt because of their position as gatekeepers to government resources. While beneficiaries clearly based this perception on a misunderstanding of the international assistance system, it was also a result of excesses experienced in the context of assistance distributions. Yet precedents are widespread with regard to officials and government workers benefiting from their position as gatekeepers of government resources. One example is the Health Commission reporting to the Ministry of Social Security that approves handicap status and is known to take bribes. Another "tradition" involves the postman who delivers pensions and takes 100 drams in cities as a mandatory tip and 200-400 drams in villages "for newspapers," that is, the obligatory purchase from the postman of out-of-date newspapers. The family benefits will not only be managed by people who are widely seen as corrupt but also inexperienced with cash management and monitoring of cash transfers.
The formula is not secret but it is misunderstood. Lack of understanding of the Paros scoring system feeds expectations that officials and social workers are taking advantage of the poor. Left in the dark, people assume that the social workers and the system are corrupt.
8. Accountability, Supervision and Monitoring
There is little sense of accountability of the system to its clients/ beneficiaries. The social workers seem to use the fact that a computer selects beneficiaries to divert accountability away from themselves. The majority of complaints about exclusion were met by a similar reply through out the country: "It's not our choice. The computer decided."
The monitoring system focuses on monitoring the beneficiaries through the control of papers. There is no monitoring of the quality of the information being inputted into the system. Other controls within the system are mostly rubber stamps. There are no means to check data inputted based on the files compiled by the social services since the only documents kept on file are photocopies of birth certificates of minors. The Marz level authorities have unclear authority and role in the management of the system and benefit from no additional information. ANNEX 7 Page 6 of 8
The appeal system is weak. It continues to rely on official documentation rather than introducing new types of information. The official appeal system consists of a sittilig commission at the local level whose purpose is to review complaints. This commission is charged with reviewing the complaints based on documentation gathered by the beneficiary to counter information that is in the computer. There is also a conmmissionat the Marz level.
The only means of correcting erroneous information in the file (because of poor data entry or out of date information about car ownership, etc.) is for the beneficiaries to complain. Beneficiaries complained only when they expected to receive assistance, then did not and were self-assured enough to complain. Thus complaints are few compared to the total caseload. One reason why there are few complaints may be that beneficiaries did not know to whom to complain or were told to go to Yerevan to complain.
9. Parallel Targeting Methods
"Additional lists," which represent up to 15 percent of the total list of recipients, could, in theory, introduce flexibility in a system that is particularly rigid and excludes some types of poor households. In practice, however, the criteria for the additional lists did not necessarily introduce flexibility in identifying the poorest since its purpose is often seen as correcting errors in applying the system rather than introducing targeting alternatives.
Officially, the lists consisted of those persons who were erroneously excluded because of errors in data entry; late data entry; priority households based on Paros scores near the cut-off point; and cases positively reviewed by the Ministry. In fact, the social workers claimed that they use these lists mostly to appease scandal-prone households. Thus risk of hysteria is the criteria not relative need.
These additional lists are not posted so there is little accountability to the community or to super-visorswith regard to these lists.
There is a perceived disincentive for the social workers to disseminate information regarding recipients of assistance because the more beneficiaries do not come to clai:m their assistance, the larger the additional list drafted at the initiative of the social workers. The social workers were also seen as making it difficult for certain households to claim assistance.
There is no institutionalized cooperation to identify the poor among local agencies. IThe belief at each level of the system that "I know best" who deserves assistance impedes efforts to build on local knowledge, share resources and to allow different levels to identify different kinds of households for assistance depending on a varied assortment of criteria. ANNEX 7 Page 7 of 8
10. Role of Government
According to the focus groups, the role of government is to support the work incapable and provide work to the work-capable. The definition of social policy is broader in Armenia as a former Soviet state where employment creation is seen as a duty of the state. Examples of local government efforts to target the poor were mostly ad hoc, targeted to entire population, or self-targeted.
The concept of targeting the poorest is controversial among beneficiaries and social workers. One reason why targeting the poorest may be politically difficult is that most of the population has suffered a great drop in living standards so that most are struggling in comparison to Soviet times. Second, the concept of allowances is tied to a history of Soviet entitlements provided on the basis of good citizenship to all families in return for working hard, for fighting a war, for having many children who will be able to produce for the state and be called to serve in the army. Allowances are thus not necessarily seen as support to the poor but as manifestation of a reciprocal, beneficial relationship between the state and the citizen. Third, there may be a cultural/ societal condescension toward the poor. Armenian sayings and stereotypes point to the poor as being responsible for their own situation.
11. Beneficiary Satisfaction with Paros
The assessment of the Paros system was mostly negative. It was linked to a large part to' beneficiaries' experience of humanitarian assistance. The positive aspect of Paros was that it is meant to assist the poor. The beneficiary's assessment of the Paros formula was closely linked to whether they had qualified for assistance and how much assistance they had received.
V. Recommendations
The Paros formula and system need to be retained for the time being because there is no better alternative in the absence of a trained and reliable corps of social workers to distribute the assistance without creating a web of patron-client relationships; and the formula is an improvement on the Soviet-style vulnerable group targeting system. However, some important changes need to be made to the existing system in order to strengthen its ability to meet its goals effectively.
The summary of recommendations listed below is drawn from focus group discussions and the analysis of the findings discussed in this report.
- Increase focus on the serving beneficiaries. Provide professional training to inspectors. Clarify the goals, and activities of the social services to include active targeting sand support of the poorest households through the system.
- Rethink the targeting system to rely less exclusively on documentation and more on trained and dedicated social workers. ANNEX 7 Page 8 of 8
- Improve openness, information dissemination and sharing, transparency to enhance trust in the system and to increase beneficiaries' ability to enforce accountability at the local level. Information dissemination can take place through radio shows, TV, distribution of leaflets in plain language; open house, meetings in villages.
- Increase accountability by improving the information flow back down to the beneficiary.
- Monitor of costs of registration and receiving assistance to the beneficiary is essential.
- Introduce more flexibility in the appeals system by allowing decisions based on additional information sources that can be documented for the file and monitored by a supervisory body.
- Introduce a methodology for determining inclusion in and monitoring of the additional lists.
- Introduce partnerships with organizations that have experience in targeting the poorest to mentor social workers.'
- Introduce other services than family benefits to ensure impact on poverty. These are essential for the mentally ill, alcoholics, bed-ridden handicapped and other groups. Essential services for the general population are: assistance with registration, legaLl assistance for documentation.A contact persons who can act to as links to other sources of information or services (work, credit, training, health care, etc.) for those households not eligible for the cash transfers would also be useful.
- Create a multi-disciplinary/ mixed commission that would assess the relative need of households by observing living conditions in the home.
- Introduce effective supervision roles. Re-define and strengthen the supervisory role of managers, and monitoring activities to improve both quality of work and accountability to the beneficiaries.
- Improve data used in the processing of the Paros score. Improve standardization of requirements for documentation used in calculating the Paros score. Identify better information sources for the data used in the formula.
- Make a symbolic and real distinction between the government's cash transfer program to families and the system of distribution of humanitarian assistance. Change the name of Paros as it applies to the government program. This will allow monitoring of public perceptions independent from ongoing humanitarian assistance programs. ANNEX 8 Page 1 of 5
SOCIAL SERVICES CENTERS IN ARMENIA - A SUMMARY OF INSTITUTIONAL CAPACITY EVALUATION
1. Findings and recommendations presented in this summary regarding institutional capacity of Armenia's social services centers, are based on extensive field work conducted by a team of researchers in July and August 1998. The team visited 13 social services centers (one forth of the total number): one in each region (marz) and three in the capital of Armenia, Yerevan.
2. The social services centers were chosen so as to reflect the most important geographic, social and economic characteristics of the country and its population. Each center was extensively surveyed concerns: (i) its functioning, (ii) work organization, (iii) monitoring procedures, (iv) working conditions, (v) services provided to the population, (vi) registration of the population within the PAROS data base, including issues related to data entry procedures and practice, data entry errors detection and correction, data base management, possibilities for clients to check directly their files, etc., (vii) outreach work, (viii) financing, and (ix) the most pressing problems. More than 110 social workers, including directors of the surveyed social services centers were interviewed (about 20% of the total number of employees working for the social services centers in Armenia), in order to find out what work tasks they performed, in what manner, the way their work was organized, qualifications, training issues, motivation, etc.
3. The method used in the field work was basically a qualitative assessment. An enormous arnount of information was collected. Basic findings and recommendations are summarized in the following paragraphs.
1. Introduction
4. History: Social services centers (SSC) in Armenia were established in 1993/1994 to register population eligible for humanitarian assistance and to distribute or participate in distribution of humanitarian assistance. These have been the only tasks performed by the SSC so far.
5. Current status: SSC still perform the same function of registering the population for humanitarian assistance, within the PAROS data base and using the proxy means test as a targeting mechanism, and distributing humanitarian assistance from time to time. The volume of humanitarian assistance has declined sharply. SSC and their staff have been prepared and trained lately to administer the new Family Benefit which the Ministry of Social affairs introduced at the end of 1998. As of August 1997, the SSCs have been reregistering population for the new family benefit. The re-registration has been mostly completed. The number of reregistered families (with all the required documents submitted) is approximately 30% lower than it was before. ANNEX 8 Page 2 of 5 6. Currently, there are 54 social services centers with 545 employees covering the entire Armenian territory. In urban areas they are within walking distance. In rural areas, in most of the cases, the distance between the SSC and the most far away villages served by the SSC is 35-40 km. SSCs are financed from the republican budget through the regional (marz) budgets. They account both to a social policy department at the marz level (for organizational, management, budgeting, financial, staffing and other operational issues) and to the Ministry of Social Affairs (for policy and methodological issues).
7. Potential: SSC constitute a solid base for building a network of efficient and effective, client oriented social policy implementation units.
2. The Situation
8. Role, functions and tasks. Not clearly and precisely defined. This opens roomnfor discretionary decisions by the SSC directors as regards eligibility and other rules.
9. Work procedures (business plan). Nonexistent. Tasks are performed in a campaign-like manner which puts an uneven workload on social workers: waves of re- registration and hundreds of clients crowding in narrow corridors are followed by months of idleness for most of the SSC employees.
10. Organization of work. Under the circumstances, not bad. SSC directors and employees are trying to accomplish assigned tasks as best and as efficiently as they can. However, organization of work varies. It mainly depends on the SSC director's capacities and initiative.
11. Client orientation. Poor. Clients are mainly seen as objects to be registered and processed, not as individuals in need served by the SSC staff. This is probably conditioned by the major function performed: registration of the population for humanitarian assistance. However, it seems that SSC employees are trying to facilitate registering process as much as possible. In all of the surveyed SSCs it was firmly stated that clients are allowed to check directly their personal computer file and request correction, if information in the file is found to be inaccurate.
12. Monitoring: Weak and random at all levels. There is not clear understanding of the term "monitoring" (nablyudenie) which is feared and rejected, because it is understood as the old Soviet control system.
13. Appeal commissions and procedures: Appeal commissions officially do not exist, neither are there written appeal procedures. Appeals are mainly solved at the level of the SSC director. However, some of the SSC have established an appeal commission. In some of them, representatives of the local community actively participate in solving complaints and disputes. ANNEX 8 Page 3 of 5 14. Information of clients: Sporadic, mainly through electronic media (radio and TV). There are not even any posters hanging on the SSC walls with basic information as regards registering with the PAROS data base for humanitarian assistance.
15. Registration of outreach clients. Although all screened SSC employees claimed that they had done all the necessary work to include population from far way villages in the PAROS data base, outreach work is not organized in a systematic manner. The impression is that it mainly depends on the SSC initiative and the good will of the sociai workers, because in most of the cases they have to bear transportation costs to villages themselves. Having in mind the very low amount of their monthly wages $15-20, it is understandable that they are not particularly willing to spend money on travel to villages. Therefore, major impediments for better results in assisting the outreach clients are: (a) lack of resources (budgeted operational expenditures, such as transportation costs for outreach, are executed by less than 30% on average), and (b) poor transportation (in most cases transport is available only once a week; in some cases it is non-existent). However, some of the surveyed SSC have achieved good results in registering outreach clients through cooperation with local councils and NGOs.
16. Cooperation with local communities and NGOs. Sporadic and limited. Local communities and local NGOs sometimes provide information to SSC on the needy population which should be registered for humanitarian assistance. It seems that local community administration offices in far away villages have played an active role in registering population for humanitarian assistance.
17. Staff. Mainly with higher education. However, only a few of them are social sciences graduates. Few like the work they perforn and are satisfied with it, although they are happy for the fact that they at least have a job. Most of the SSC employees would change their job if they could find a better (that is, higher paid) one. The problem of burn-out is significant. Social workers feel helpless because of their limited mandate - registration of the population within the PAROS data base. People in need come to the social services centers asking for assistance. The only assistance social workers can give them is to register them for humanitarian assistance and talk to them. This creates lots of very unpleasant situations in which the clients' anger is directed to the social workers who are unable to help them.
18. Training. Not sufficient, although almost all of the SSC employees have at least a few days of social work training, while some of them, particularly managers (SSC directors) have several months of training in social work. The Ministry of Social Protection has obviously put significant efforts into training the SSC employees. At the time of the SSC institutional assessment field work, quite extensive training of social workers and directors of the SSC was being undertaken regarding the issues related to the new Family Benefit.
19. Financing. Not sufficient. SSC employees (very low) wages are paid more or less regularly. However, operating expenditures are severely underfunded. SSC get approximately 30% of the resources budgeted for material expenses, transportation costs related to serving clients, and the like. Disconnected telephone lines and electricity ANNEX 8 Page 4 of 5 supply due to unpaid bills are quite common. As already pointed out, lack of funds is one of the major impediments for better registration of outreach clients.
20. Preniises: Generally poor, in some cases very poor. However, all of the visited facilities can serve their purpose.
21. Furniture and equipment. In many cases furniture is barely sufficient for work. Computer equipment is mostly sufficient. Faxes, Xerox machines and similar equipment are completely lacking.
General evaluation. With its experience in registering population for humanitarian assistance, and relatively good knowledge of the economic and social situation of most of their clients, SSC make a good basis for being transferred into a social policy implementation units, provided that:
v socialpolicy measures to be implemented by the SSC are clearly defined, and V SSC capacity to implement them efficiently and effectively is strengthened.
3. Strengthening the institutional capacity of the social services centers in Armenia - what should be done
22. Role, functions and tasks to be performnedby the social services centers should be clearly and precisely defined. Each social assistance measure to be implemented by the SSC should be accompanied by written implementing rules, procedures and instructions, in order to provide fair and equal treatment of the clients.
23. Work procedures (business plan) should be developed, including simple operational manuals, so that work is organized smoothly and efficiently. Room for discretionary decisions made by the SSC directors should be minimized.
24. Monitoring procedures and mechanisms should be developed and implemented. Responsibilities should be clearly defined. SSC employees should know who and in what way accounts and reports to whom. Regular evaluation of performance should be introduced together with incentives and awards for good working results.
25. Appeal commissions and procedures: Appeal commissions should be established officially and written instructions for their functioning should be developed. It is highly recommended that local community representatives actively participate in their work, as well as distinguished and respected members of the community. ANNEX 8 Page 5 of 5 26. Information of clients should be systematic. While electronic media campaigns are welcome, posters with information on social assistance benefits, including lists of necessary documents should be placed where potentially indigenous people frequently gather or can be found (hospitals, local administration offices, post offices, etc.) to reach more of the potential clients.
27. Registration of outreach clients should be a regular SSC activity, organized and monitored in a systematic manner. In assisting clients social services centers and social workers should go to the clients, they should not wait passively for the clients to come to them asking for assistance. Simple instructions based on the best practice acquired during registering population for humanitarian assistance should be developed. Appropriate funding should be secured, including incentives for social workers engaged in registration and providing services to outreach clients.
28. Cooperation with local communities and NGOs should be regular practice. Exchange of information and jointly organized actions can result in many new initiatives and better services provided to the needy. SSC cooperation with local communities and NGOs is particularly important for better outreach work.
29. Staff. Although social services centers employees have not been educated for social work, most of them hold university degrees and have significant experience in working with the needy - the vast majority of the interviewed SSC employees had been working there since the SSCs were established. The Ministry of Social Insurance has invested significant efforts to provide at least basic training in social work for the social services centers employees. It should continue to provide workshops, seminars, knowledge updates, as well as more ambitious training in social work, particularly to younger employees.
30. Financing should be sufficient to provide normal functioning of the SSC. In comparison to the current situation this means regular payment of wages and more funds for operational costs, e.g. what is planned by all means should be executed.
31. Premises, furniture and equipment: As already seen in the field, premises and work environment can be greatly improved through the initiative of a SSC director and employees and joint action with the local community. Recently acquired computers should be sufficient for the time being. Other equipment, such as faxes, Xeroxes, etc., is needed, but is not an immediate impediment for work to be performed.