Pro-Poor Economic Policies and Poverty in Eastern Europe and the CIS

Marek Belka Executive Secretary of the

UN Economic Commission for Europe Under-Secretary-General of the United Nations

July 2007ECOSOC, Geneva

United Nations Economic Commission for Europe

Economic Overview of the ECE Region: 56 countries of Europe, Central Asia and North America

Rapid Economic Growth and Favourable Prospects

Tremendous Diversity: Region Has the some of the Richest and Poorest Economies

Future Growth Will Need to Be in Knowledge Intensive Industries-UNECE Has a New Program

A Major Challenge from Globalization Is How to Preserve the Social Welfare State

Solid Real Growth in the ECEAfter a Difficult Decade (1990s) There Is Now Solid Growth in the Transition Economies especially since 2002

-20

-15

-10

-5

0

5

10

15

Rea

l GD

P G

row

th

CIS

SEE

NMS-12

North America

EU-15

Per Capita Income in the UNECE Region:Significant Diversity

Per Capita Income 2004 PPP Basis

05,000

10,00015,00020,00025,00030,00035,00040,000

U.S

. $

20

00

Pri

ce

s

Poverty in the Transition Economies of the ECE

The collapse of central planning and dissolution of the USSR and Yugoslavia resulted in a decade long transitional recession GDP fell by:

• 20% in central Europe• 30% in southeast Europe• 50% in much of the FSU

In addition to the fall in income, much of the institutional structure supporting social services fell apart as well, resulting in rising unemployment, poverty, and inequality.

Inequality in the Transition ECEAbove Western Europe, Below Latin America

00.05

0.10.15

0.20.25

0.30.35

0.40.45

0.5

Gin

i

1989 LatestLatin America 50+

U.S.

France

Nordics

Inequality Increased during the Transition Two Different Patterns of Increasing Inequality:Poland Typical of NMS, Russia of CIS

0.200.250.300.350.400.450.500.55

Gin

i

Poland Russia

Poverty in the ECE RegionHighest in Central Asia, Caucasus

Share of population below poverty lines, 2003

74

23

47

17

3126

13

52

13 12

26 7 7

4 3 2 2

96 96

86

66

93

85

41

22 21

58

71

24

33

26 24

17

8

27

12

0

10

20

30

40

50

60

70

80

90

100

$ 2.15PPP a day $4.3PPP a day

40 Million ($2.15PPP) and 150 million ($4.30PPP)

Central Asian and CaucasusAs Poor as Many African Countries

GDP per capita (PPP, 2003)

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Tajikistan

Rwanda

Moldova

Uzbekistan

Kyrgyzstan

Sudan

Zimbabwe

Georgia

Azerbaijan

Armenia

Morocco

Poverty: The Vulnerable Groups

Rural Areas Unemployed Ethnic Minorities Retired, Elderly Unskilled Single Parent Households Health Problems

Poverty Varies Significantly Within Countries --GeographicallyKyrgyzstan

Naryn

Osh

Ysyk-Kol

Chuy

Jalal-Abad

Batken

Talas

Bishkek

Poverty rate ( $2.15 PPP)40% - 49%50% - 59%60% - 69%70% - 79%80% - 89%90% - 100%

Poverty rates in Kyrgyzstan according to $2.15 PPP ( 2003)

Note: Poverty is generally lowest in capital citiesSource:UNDP

Poverty is Significantly Related to Unemployment in the Transition Economies

Although unemployment has been declining; still very high in southeast Europe

A significant percent of unemployed are long-term due to large structural changes in sectoral output (2 to 3 times western levels)

Unemployment likely to result in poverty since weak safety nets, tight eligibility, limited funds for active labor market policies Large informal sectors with no benefits Women and youth have especially high unemployment

Economic growth in the resource rich-CIS has not (until recently) produced much employment growth

Gender Pay Gap: Worsened During the TransitionPercentage Women’s Pay Is Less than Men’sRed=Transition Economy

05

1015202530354045505560

Gen

der P

ay G

ap

There Is an Ethnic Dimension to Poverty: The Roma of Southeast Europe

Source: UNDP

By Some Measures the Transition Economies Appear to be Pro-Poor

It is difficult to assess the overall policy environment of a country in addressing basic needs

The UNDP human development index (HDI) may provide a reasonable overall measure (includes literacy, life expectancy, etc)

Generally most of the transition economies rank significantly higher by the HDI than by per capita income

Thus for their income level, they seem to be addressing basic needs reasonably well

Pro-Poor versus Pro-Growth

Not all growth policies are pro-poor, and not all pro-poor policies are pro-growth

The pro-poor growth agenda attempts to promote those that are both (such as broad-based education programs)

But there are large policy areas where there is some trade-off; how do we assess policies where the benefits “trickle-down” only in the long-run

Generally, donors favor poverty reduction while national governments favor growth

Just How Pro-Poor Are Some Current Economic Policies?Tax Competition Amongst the Middle-Income Countries

In order to encourage investment (especially FDI) and improve competitiveness, taxes (especially on corporations) have been cut, made less progressive; and social benefits, and government’s role has been cut back Flat taxes in Baltics, Russia, Slovakia, Ukraine, Georgia, Romania,

fYR of Macedonia, others considering There is tax competition throughout Europe, especially the lowering

of corporate taxes Generally, the government sector is significantly lower in these low

tax economies with less spent on social services, less investment in human capital & infrastructure

Although some of these economies have grown quite rapidly, it is less clear if tax policy is the key

Just How Pro-Poor Are Some Current Economic Policies?PRSP/PRGF in Low-Income Economies

Macroeconomic policy in the poorest ECE members is formulated under the IMF/WB Poverty Reduction Strategy Papers and Poverty Reduction Growth Facility (1999) Covers Albania, Caucasus, Kyrgyzstan, Moldova, Tajikistan,

Uzbekistan Provides concessionary lending Definitely a positive development, but is this framework working

effectively? There has been progress in terms of the MDGs, but not that rapid

Are the country programs pro-poor enough or just the old Washington Consensus policies repackaged?

Research, Assessment Is Needed

Policies for Promoting Pro-Poor Development

Social Policies Improve the design of social safety nets Improve access to education and health resources

Structural Policies Encourage creation of SMEs, self-employment Improve access to finance for the poor

Macroeconomic Policies Reduce cyclical fluctuations by making fiscal policy more counter-cyclical Diversify out of resource-intensive sectors in order to stimulate

employment growth Keep borders open; benefits of trade and migration; stick with economic

reforms, don’t backtrack Political Policies

Resolve political conflicts; ensure the disenfranchised have a voice; civil society has a role to play

Address ethnic and gender discrimination

Summary: Pro-poor Development in the ECE Region

The ECE region has solid economic growth This is having a major impact on poverty Policy reforms have also contributed but

more is needed Economic policies should better target the

vulnerable groups There are some broad macroeconomic

policy trends in the region, however, that may not be pro-poor