Download Labor market transition follows pattern of whole CIS region

Development of the safety
nets in transition economies:
what can teach the recent experience of
Ukraine
Presentation at the “Economy of Belarus: current situation, main problems and
perspective of development ” in Minsk, Belarus, November 2005
by Alex Rohozynsky
CASE Ukraine
Outline:
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Ukraine follows the pattern common for FSU and
Eastern European countries (Belarus is lucky outlier)
Social protection becomes one of the strongest
arguments at the election campaign
Experts recommend reform the social sector …
… but government keeps promises and increases social
expenditures
As the result, pension fund and the state budget will
experience deficit …
… and the money that could be used for reform will be
eaten in two years.
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Labor market transition follows pattern
of whole CIS region …
1990-1994
1995-1998
1999-2002
Employment GDP Employment GDP Employment GDP
Armenia
-2.2
-16.2
-2.2
5.8
-0.94
7.9
Azerbaijan
-0.5
-17
0.5
1
0.12
9.7
Belarus
-2.3
-7.8
-1.5
2.7
-0.4
4.6
Georgia
-10.8
-27.5
-0.3
6.6
-0.65
3.8
Kazakhstan
-4.2
-9.6
-1.8
-2.1
2.3
8.8
Kyrgyzstan
-1.5
-14.4
0.9
3.3
2.06
3.6
Moldova
-5.1
-20.5
-0.6
-4.2
0
-1.1
Russia
-2.3
-10.3
-2
-2.9
0.69
0.8
Tajikistan
-1.1
-20.1
-0.7
-2.7
0
0.9
Turkmenistan
3.5
-9.2
2.5
-5.2
0
3.8
Ukraine
-2.4
-14.1
-0.7
-6.9
-0.18
-0.1
Uzbekistan
1.3
-4.9
1.9
1.9
0.35
1
Source: Economic Survey of Europe 2004; EBRD Transition reports; authors calculations
CASE Ukraine
http:// www.case-ukraine.kiev.ua
… and led to similar outcomes on the
labor market and poverty

Labor market transition follows pattern of whole CIS
region
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Low official unemployment during the huge recession
Resulted in large hidden unemployment (up to 30-35% at peak in 90th,
12% by ILO definition, 4% official rate)
And lead to the increase in poverty (27% of population leaving behind
official poverty line)
Labor market status before reforms
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High unemployment, currently about 9% by ILO and the government
Mismatch in human capital qualifications and market requirements.
Labor force emigration and the brain drain.
Strong legislative workers protection and strong labor unions that have
limited effect because of the enterprises market power.
Large shadow employment.
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Social protection system were inefficient
before the revolution …
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Social Protection system long time remained
unchanged
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Served redistribution purposes rather than protection
Shifted from the enterprises to the government, and created pressure
on the budget and tax pressure on enterprises
Legislation is slowly transformed and practices improve, but
inefficiencies remain huge
The efficiency of the system remained low
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Insufficient targeting of the benefits and leakage from the system.
Insufficient capabilities to monitor poverty
Insufficient capabilities to implement income-based targeted programs.
Social privileges that are provided in-kind and on categorical bases.
Overall complexity of the system and large number of benefits
CASE Ukraine
http:// www.case-ukraine.kiev.ua
… and social protection were lower than in
neighboring Eastern European countries
Average non-employment benefits at % of GDP
6.00%
5.00%
5.00%
4.00% 3.60%
3.00%
2.40%
2.70%
2.70%
1.90%
1.60%
2.00%
1.10%
1.00%
1.10%
0.50%
0.60% 0.60%
0.30%
0.00%
h
ec
z
C
ia
ry
ia
lic
nd
nia
a
n
b
a
ar
e
l
g
o
u
g
t
v
o
l
n
p
o
P
Es
Bu
Hu
Sl
Re
a
c
s
e
nia
nia
s ia
in
tvi
ru
bli
s
a
a
a
a
u
a
l
r
u
u
L
p
m
h
R
Be
Uk
Re
Ro
Lit
k
a
ov
Sl
Source: M. A. Orenstein and E.Wilkens, “Central and East European Labor Market Institutions
in Comparative Perspective”, Paper presented at the American Political Science Association
Annual Meeting, San Francisco, 2001
CASE Ukraine
http:// www.case-ukraine.kiev.ua
The social protection were one of the
arguments during the election campaign…

Old government (the Prime Minister was
Presidential candidate) started increasing social
payments:
Pensions and other payments increased two-three times in
November 2004
 Surprisingly, arrears for social payments decreased almost
two times in the second half of 2004
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Current president (the presidential candidate)
promised even larger increases in social
protection based on European experience
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Experts recommended New Government to use new
possibilities
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Recommendation of the Blue Ribbon Commission
For the social assistance
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For the pension system
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Make poverty the only target of the system
Reduce the number of benefits and monetize them
Introduce income test for the beneficiaries
Strengthen the responsibility for abuse of the system
Further rationalization of the solidarity system.
Strengthening the accumulation system.
Strengthening the supervisory structures.
The most important are reforms of healthcare and
education systems
CASE Ukraine
http:// www.case-ukraine.kiev.ua
… and New Government kept the
promise
Changes in social payments according to
the Law on the State Budget for
2005 (UAH)
old law
Subsistenc
e level
(minimum
pension)
Minimum
wage from
April 1st
Aid for
baby care
382
new law
Change
10.70%

423
26.70%
262
332
1025%
764
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Increased subsistence
level and minimal wage,
which led to increase in
social payments and
wages for public workers
Increased pensions
As the result, the percent
of social transfers in
total household income
increased to 46.9%
8600
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Old age pensions rise significantly over the
last couple of years
350
323.8
300
250
194.2
UAH
200
141.8
150
127.1
100
85.2
69.3
60.1
50
50.8
50.9
1997
1998
38.8
0
1996
1999
2000
2001
2002
2003
2004
2005
Old age pensions
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Consider some facts about Ukrainian
economy …
14
60%
35
14%
12
30
12%
50%
10
10%
25
40%
8
4
% GDP
8%
% GDP
20
6
30%
6%
15
20%
2
4%
10
0
1998
1999
2000
2001
2002
2003
2004
10%
2%
5
-2
-4
0
% living in poverty
GDP growth
Unemployment
0%
1992
1993
1994
1995
Total revenue
1996
1997
1998
Total expenditure
1999
2000
2001
Social protection expenditures (RHS)
Source: Ukrainian Economic Outlook, Committee for Statistics, presentations by World Bank
CASE Ukraine
http:// www.case-ukraine.kiev.ua
2002
0%
2003
… and Ukrainian demographics
Total population - 47100.5 thousand
Population over 65 - 7507.2 thousand
Pensioners total (inc. disable and other.) 14.1mln
Old-age pensioners – 13.5 mln
Life expectancy at birth (male) – 62.60 years
Life expectancy at birth (female) – 74.05
years
Proportion of people over 60 in total male
population– 16.1%
Proportion of people over 60 in total female
population2 – 24.9%
Urban population – 67%
Rural population – 33%
Source: Committee for Statistics of Ukraine
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Pension fund deficit increased to the size of own
revenues of the fund
Revenues and expenditures of the Pension Fund of Ukraine
20000
18000
16000
14000
mln. UAH
12000
10000
7883.7
8000
6000
3889.5
3284.4
4000
1634.1
2000
369.9
441.1
497.7
649.2
2003:Q1
2003:Q2
2003:Q3
2003:Q4
487.9
588.5
2004:Q1
2004:Q2
0
Pension fund own revenues
Pension fund expenditures
2004:Q3
2004:Q4
2005:Q1
Pension fund defict
Source: Pension Fund of Ukraine
CASE Ukraine
http:// www.case-ukraine.kiev.ua
2005:Q2
Main question is how to pay for the
social protection
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Together with increasing social protection, Government
eliminated most of VAT, export and profit tax
privileges
Main source of financing for budget deficit suppose to
be privatization revenues (about 6 bln. UAH this year)
But it may be not enough and damaging for the
economy
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GDP growth declined to 2.8% already, and inflation grew to 11% yto-y
Privatization revenues in eight months were less than 750 mln., and
only recent privatization of KrivorozStal (24bln. UAH) saved the
situation
The increased tax pressure on the economy may lower tax base
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Past reforms was decreased payroll tax from 52% to 37%.
Will it raise again?
Social tax rates as % of gross wage
60.0%
55.0%
47.5%
50.0%
40.0%
30.0%
20.0%
39.0%
37.0%
36.0%
35.6%
34.5%
28.0%
24.5%
40.0%
37.0%
37.0%
46.8%
44.5%
35.1%
34.5%
34.0%
42.7%
38.2%
26.0%
17.4%
10.0%
Ar
m
Az en
er i a,
b
2
Be aij a 00
0
n,
la
ru
19
s,
9
G m id 7
Ka eor
9
z a gia 0 th
,
k
Ky hst 19 9
a
7
rg
n
yz , 2
00
st
1
M an,
ol
2
do 00
1
v
R a, 1
us
si 997
Tu T
rk aji k a, 2
m
en i sta 002
ist n ,
an 20
, m 01
U
id
zb Uk
90
ek rai
n
i
t
C
ze sta e, 2 h
ch n,
00
R mid 4
ep
u b . 90
Es li c, th
to 20
ni
02
a
La , 2
0
t
Li v ia 02
th
,2
ua
00
H ni a 2
un
,
ga 200
ry
2
Sl
,
ov
P
a k ol a 200
n
2
R
ep d, 2
ub
0
Bu lic , 02
20
lg
a
R ria 02
om ,
an 200
2
ia
,2
00
2
0.0%
Source: European commission "Social protection in the 13 candidate countries; World Bank
CASE Ukraine
http:// www.case-ukraine.kiev.ua
So far it is just direct effect of increase in
payments ...
Percent of population receiving income from specific source
30.0%
28
.6
%
30
.3
%
35.0%
34
.1
%
36
.3
%
40.0%
25.0%
20.0%
15.0%
0.
1%
0.
6%
0.
0%
0.
1%
1.
5%
1.
5%
1.
7%
1.
8%
3.
9%
1.
9%
0.
4%
0.
4%
0.
3%
0.
3%
5.0%
2.
0%
3.
9%
10.0%
0.0%
Wage at the main Compensations at
job
the main job
Income from
business
Income from selfemployment
Temporary jobs
2004:Q1
Pensions
Stipends
Unemployment
benefits
End of w ork
compensations
2005:Q1
Source: Ukrainian Household Expenditure Survey, authors calculations
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Other income
… but the full expected effects of
reforms are not observed yet
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Increase in number of recipients due to the increase in
the size of the benefits
The increase in birth rate expected in 9 months,
interviews with low-income population suggest that increased payment was sufficient stimulus to
.
Increased child birth benefits are already paid
However the effect of increase in actual size of the
benefits may be compensated by negative expectations
get another child, which may be abandoned after first year
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Population expects high social payments lead to increased inflation
Budget may be not executed, leading to arrears in payments, and
actual decrease in the size of the benefits
CASE Ukraine
http:// www.case-ukraine.kiev.ua
The budget for the next year already
creates problems …
Planned revenues and expenditures of the Pension Fund
2005
Budget project 2006
(first reading)
Budget project 2006
(second reading)
49.2
58.3
58.0
6.7
9.1
9.1
Expenditures
63.9
69.3
68.8
Total transfers from the budget
21.4
20.1
19.9
14.7
11.0
10.8
Revenues
including transfers from central budget
including deficit financing
Planned state budget expenditures
State budget 2005
Budget
project
2006
(second
reading)
Total
spending,
billion UAH
116.5
138.7
Social
spending,
billion UAH
92.5
105.1
Investment
spending,
billion UAH
23.5
33.1
Social
spending, %
Investment
spending, %
79.4
20.2
75.8
23.9
Source: Draft Budget 2006 law
CASE Ukraine
http:// www.case-ukraine.kiev.ua
… and the huge revenues from
privatization will be eaten in two years
Distribution of the KrivorozStal privatization revenues
billion, UAH
Receipts
24.2
Payment to the former owners of “Kryvorizhstal”
4.3
Financing of budget deficit 2005
7.9
Financing of budget deficit 2006
9.0
Stabilization fund formation in 2006
3.0
Source: Draft Budget 2006 law, Ministry of Finance of Ukraine
CASE Ukraine
http:// www.case-ukraine.kiev.ua
Our coordinates
Alex Rohozynsky, Development Director
Economic Development Consulting
and Research Director
Center for Social and Economic Research
CASE Ukraine
e-mail: [email protected]
[email protected]
Phone: +380 (39) 491-2712
Web: http://www.edc.com.ua/
http://www.case-ukraine.kiev.ua/
CASE Ukraine
http:// www.case-ukraine.kiev.ua