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Recent Evolution of Poverty 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
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