JUDGING WHO IS POOR IN UKRAINE

Judging Who is Poor in Ukraine
By Tom Coupe, Bohdan Povoroznyk
Foreign visitors, prior to visiting Ukraine for the first time, often expect they will see a lot of poverty. Many are then surprised when they arrive in Kyiv and see all the construction going on, the expensive cars on the streets and the flashy bars and restaurants along Khreshchatyk, Kyiv's main street. And even those who do not restrict themselves to the rich center of the capital and tour through the country often leave with the impression that people in Ukraine aren't that bad off. For many foreign visitors, Ukrainians definitely do better than expected.
If you ask Ukrainians, however, many will consider themselves poor. Indeed, according to the Ukrainian national statistical agency, about a third of all Ukrainians consider themselves poor.
It is possible that neither foreign visitors impressions nor Ukrainians' self-evaluation are the best indicators of the real situation in Ukraine. Indeed, the rich foreigner might have a rosy picture of the life of a farmer in a rural area that has a quiet existence in the middle of nature. And the Ukrainian Mercedes owner might feel poor since he cannot buy a Bentley. Economists have tried to develop objective indicators of poverty to overcome the obvious tendency toward subjectivity.
Economists typically use income or consumption expenditures as preferred indicators of living standards. Generally, income is used for measuring poverty in developed countries and consumption or expenditures for developing countries. Researchers argue that consumption expenditures are a more preferable proxy for measuring poverty in countries like Ukraine because of the problems related to measuring income - due to high taxation and the existence of a huge underground economy, income indeed is often underreported. How much a person consumes may thus be a better indicator of poverty. However, the expenditures approach has a lot of drawbacks: first, a researcher needs to know the precise values of all consumed goods, which is often difficult to ascertain, e.g. when determining the rental price of a house owned by a person. And a person who owns a lot of assets but consumes little will be considered poor based on the expenditures method. An alternative method that has been proposed is the asset-index method. Using this method, a person may be considered poor if he does not own or does not have access to specific assets. The 'assets' included may be basic assets like heating, access to warm water or electricity or, on top of the basic assets, more luxurious assets such as computers and mobile phones.
According to a 2003 World Bank survey, around 19 percent of the Ukrainian population lived in poverty at that time. Based on the criteria employed, one needed UAH 151.1 per person per month in 2003 to be able to buy a specific basket of food and non-food products. For the United States, the percentage living in poverty was 13 percent, for the UK 17 percent and for China 22 percent. The World Bank also computed that 42 percent of world population lives below the poverty line.It was also found that there are not only substantial differences in poverty rates between countries, but that also within Ukraine, there were substantial regional differences. Rural regions have a poverty rate twice that of urban regions. Geographically, the more industrialized and urbanized Eastern regions are less poor, and the agricultural and rural south Western regions have higher poverty rates than the average.
More recently researchers have argued that when one wants to classify people as poor or non-poor, one should take into account not only physical needs (such as food, housing, education, health care) but also nonphysical needs (like participation in social life, social status, etc.). For example, Amartya Sen, the winner of the 1998 Nobel Prize in Economic Science argues that there is a strong case for judging an individual's situation in terms of the 'opportunities' a person has, i.e., the freedoms he or she enjoys to lead the kind of life he or she has reason to value. It means that we should look at poverty as a dispossession of basic opportunities, rather than as a lack of income, assets or expenditures, which are the more traditional criteria for judging poverty.
One problem with all these approaches is that they typically rely on surveys - people are asked about their income, their expenditures, their wealth and whether or not they consider themselves poor. But of course, not everybody will answer such questions - the interviewer who approaches the local oligarch with such questions is unlikely to get past the guards. What's more important, the very poor people - those living on the street or hidden in some rundown apartment - are unlikely to be interviewed, so poverty statistics definitely do not capture the extreme poverty that people typically remember or think of when they imagine poor people.
Being able to accurately determine who is poor and who is not, while extremely difficult and controversial as explained above, is very important since income redistribution often relies on the poverty concept. Indeed, people typically are willing to support taxing their income to support the poor. While many people will accept that the governments spends money to help homeless people or gives money to people who are on the verge of starving, it is less clear that people are willing to spend money to make the life of, say, a farmer more easy by providing him support to improve his housing conditions.
Being able to say who is poor and who is not is also important because it allows one to measure how successful actions are that are directed towards combating poverty. Many economists will argue that stimulating economic growth is the best way to fight poverty. A very nice example of this is the success of the micro-credit system. In the 1960's, Muhammed Yunus left his native Bangladesh on a Fulbright scholarship to study for a doctorate in economics in the United States. After finishing his studies and a short stint as professor in the States, he went back to Bangladesh where he started giving small loans to poor people because the traditional banks were not interested in providing such small loans. These small loans allowed the poor people to start or improve and expand their small businesses. By stimulating economic activity and helping them to escape poverty, Yunus' ideas and their successful implementation resulted in his being awarded this year's Nobel Prize for Peace.
The abovementioned report of the World Bank indicated that economic growth is also crucial for Ukraine. It showed that the incidence of poverty was reduced by about 50 percent between 2000 and 2003. Researchers found that this 50 percent drop in poverty was one of the fastest reductions in the region and was associated with fast economic growth of more than 7 percent per year. Visitors who come to explore investment opportunities thus have an additional argument in favor of doing business in Ukraine.
Tom Coupe' is Program Director, Economics Education and Research Consortium (MA program in economics of NaUKMA) and Academic Director, Kyiv Economics Institute. Bohdan Povoroznyk is a researcher at EERC-EROC. The views expressed in this article are the authors' views, not the views of the institutions to which they are affiliated.