metadata: authors: 0: author: Kakwani,Nanak Chand
count: Ukraine
docna: 0: docna: Income inequality, welfare, and poverty : an
            illustration using Ukranian data
docty: Policy Research Working Paper
subtopic: Disability,Educational Sciences,Services & Transfers to Poor,Poverty Reduction Strategies,Economic Assistance,Inflation,Access of Poor to Social Services,Inequality
teratopic: Poverty Reduction
abstracts: cdata!: The Ukraine is now faced with economic
            crisis on an unprecedented scale. The government has to
            follow rigorous demand management policies, which entail
            lowering the population's standard of living. To design
            policies that protect the poorest and most vulnerable groups
            in the society, it is important to understand the nature of
            poverty and income inequality. The author addresses the
            following questions: What is the extent of income inequality
            and is it increasing? How can observed changes in inequality
            be explained? Is the burden of income tax evenly distributed
            across the population? The Ukranian data base is far from
            satisfactory, so the author's findings are only
            tentative. Among them: 1) the standard of living increased
            significantly in the late 1980s, then fell in the 1990s.
            Real per capita family income grew by an average of 7
            percent in 1989-90, then fell about 24 percent in 1991-92.
            Per capita income for families dependent on government
            transfers fell by more than one-half. 2) Income inequality
            declined in the 1980s, to rise again in 1991-92. In
            particular, the family incomes of state and collective farm
            workers -- relative to industrial workers -- improved
            between 1980 and 1991. The increase in inequality that
            occurred in 1991-92 came about, among other reasons, because
            government benefits tended to be redistributed to richer
            families, not those in need. Poverty in Ukraine declined
            over the period 1980-91, from 38 percent of the population
            to 9 percent. But in 1992, 30 percent of the population was
            poor again, an alarming increase attributable both to a
            decline in real per capita income and an increase in income
            inequality. Still, income inequality was lower in Ukraine
            than in most other former republics of the Soviet Union.
geo_reg_key: 517208,82689,517190,517191
repnme: repnme: Income inequality, welfare, and poverty :
            an illustration using Ukranian data
display_title: Income inequality, welfare, and
            poverty : an illustration using Ukranian data
listing_relative_url: /research/1995/01/697768/income-inequality-welfare-poverty-illustration-using-ukranian-data
topicv3: Poverty m1326687 695,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Education m1327048 470,Social Assistance m1327201 1466,Income Inequality m1503891 2668
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: Transition Economics Division
no_of_pages: 62
author_keys: 0: author_key: 430061
model_extractions: 1<sup>ICi.Y(:Y</sup> **RI-SIFAIitI-I** WORKIN(G PA1'+R 1411

# Summary findings

Ukraine is now faced with economic crisis on an unprecedented scale. The government has to follow rigorous demand management policies, which entail lowering the population's standard of living. To design policies that protect the poorest and most vulnerable groups in the society, it is important to understand the nature of poverty and incomc inequality.

Kakwani addresses the following questions: What is the extent of income incquality and is it increasing? How can observed changes in inequality be cxplained? Is the burden of income tax evenly distributed across the population?

The Ukrainian data base is far from satisfactory, so Kakwani's findings are only tentative. Among them:

* The standard of living increased significantly in the late 1980s, then fell in the 1990s. Real per capita family income grew by an average 7 percent in 1989-90, then fell about 24 percent in 1991-92. Per capita income for

families dependent on government transfers fell by more than one-half.

e Income inequality declined in the 1980s, to rise again in 1991-92. In particular, the family incomes of state and collective farm workers - rclative to industrial workers - improved between 1980 and 1991. The increase in inequality that occurred in 1991-92 came about, among other reasons, because govemment benefits tended to be redistributed to richer families, not those in need.

Poverty in Ukraine declined over the period 1980-91, from 38 percent of the population to 9 percent. But in 1992, 30 percent of the population was poor again, an alarming increase attributable both to a decline in real per capita income and an increase in income inequality. Still, income inequality was lower in Ukraine than in most other former republics of the Soviet Union.

- - This paper a product of the Transition Economics Division, Policy Research Department is part of a research project on income distribution and poverty during transition. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Grace Evans, room NI 1-041, extension 85783 (54 pages). January 1995.

_The Poley Research Working Paper Series_ **_disse,niiates_** _the findngs of uwi m progress to cowurage the exchange of ideas about development issu. An objective of the scries is to get the findings out quicy. ven if tbe presentations ar kss than fully polishedS The papers carry tbe names of the auors and should be used and cited accordingly. The findigs, interpretations, and conclusions are the authors' own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its nmeber countrie_ Produced by the Policy Research Dissemination Center
TRANSmON ECONOMICS DIVISION POLICY REsEARCH DEPARTMENT WORLD BANK RESEARCH PRoEC INCOME DISnhEBUTION DURiNG THE TRANSITON

# INCOME NEQUALITY, WELFARE AND POVERTY: AN ILLUSTRATION USING UKRAIIAN DATA

Nnak Kakwani **The** University of New South Wales Kensington, New South Wales Austulia This paper is a product of a research project on social expenditus in Eastan Europe undertaken by the Socialist Economs Reform Unit under the direction of Bnkmo Milanovic. These papers carry the name of ffie autos mnd are prminay versions for discussion only. The findings, ineprtations, and conclusions are the author's own. They should not be attributed to the World Bank. its Boad of Directors, its managemt. or any of its member countries. Comments and suggsdons are welcome Phone (202) 4736968, Fax (202) 522-1151
# Contents

|1. Introduction .......................................|. 1|
|---|---|
|2. Welfare andnequalityMeasures Used<br>.........................|_2_|
|3. Weffare by Income Components ...............................|_4_|
|4. Methodological Problems ...................................|_7_|
|5. Trends in RealPrCapita Income in Ukraine ....................|_12_|
|6. Wages and Salaries in Ulkaine ..............................|_18_|
|7. Trends in inequality in Ukraine ..........<br>...................|<br>_21_|
|S. Trends in Welfare inUkraine<br>..........<br>....................|_30_|
|9. Poverty inUkrine<br>.....................................|_36_|
|10. Comparing Ukraine with other Soviet Republics ........|_41_|
|11. Concluding remarks .<br>....................................|_49_|
|_Referces_<br>_.................._<br>_..................._|_52_|

1 would like to express my gmatitude to Dr Ihor Gordijew wihoutwhose help I could not have completed tis pap. Khannm Sabahmyam provided expert compational as_stce. My gratitue to Banko Milanovic who mad m-y substantial dtailed comments which proved extremly useful in revising the paper. I also bemefitted grealy from many usefu discussions I had with Michelie Ribout, Paolo Roberti and Subbauo.

i
Tables

|Table<br>Price Indices in Uklaine<br>...............................<br>_10_<br>Table 2 Distribution of Average Income by Income and Expenditure Components .<br>_13_|
|---|
|Table 3 Real Average Per Capita Income and Components ...<br>.. .....<br>.. ...<br>_14_|
|Table 4 Annual Growth Rate, of Per Capita Real Income and Components ......<br>_15_|
|Table_5_Aggregate Income Per Family Member by Types of Workers:|
|At Current Prices - Ukmaine .............<br>....................<br>.......<br>17|
|Table 6 Per Capita Income of State and Collective Farm Workers|
|and Pensioner Families as a Percentage of Industrial Worker Families ...<br>....<br>17|
|Table 7 Average and Minimum Wages in Ukrine .....................<br>_19_|
|Table 8 Average Wage Eaming and It's Inequality by Age and Education|
|for Male and Female Workers and Employees: Ukamine 1989 .............<br>_20_|
|Table 9 Inequality of Per Capita Aggregate Family Income: Ulaine 1980 to 1992 .<br>_21_|
|Table 10 Income Inequality by it's Components ......................<br>_24_|
|Table 11 Income Inequality by Expenditure Components .................<br>_25_|
|Tablei2Explaining Changes in Inequality in Terms of Income Components ....<br>_28_|
|Table 13 Redistributive Effects of Direct Taxes<br>.<br>.<br>.<br>_30_|
|Table 14 Welfare in kllraine 1980-92 ....................<br>............<br>_30_|
|Table 15 Welfare by Income and Expenditure Components ............<br>...<br>_32_|
|Table 16 Explaining Changes in Welfare in Tenns of Income Components ....<br>_34_|
|Table 17 Explaining Changes in Welfare in Terms of Expenditure Components ...<br>_35_|
|Table 18 Povertyin Ukraine ..................................<br>_37_|
|Table 19 Explaining Changes in Poverty ...........................<br>_40_|
|Table20 InequalityinUSSR Republicsin 1990......................_42_|
|Table 21 Real Per Capita Aggregate Family Income and Welfare|
|inUSSRRepublicsinl98 UkainianPrims......................._43_|
|Table 22 Annual Growth Rates of Real Per Capita National Income|
|forUSSR Republics............<br>_45_|
|Table23 Poverty inUSSR Republicsin199 ......................._46_|
|Table 24 Ratio of Average Salis<br>of State Farmers**to**Blue and White Collor|
|WorklsbyUSSR'equblics<br>.................................<br>47|
|Table 25 Ratio of Average Salaries of Collctive Farmers to Blue and White Color<br>WorkersbyUSSRRepublics.................................<br>_48_<br>Table 26 Consumption of Foodstuffs by the Popatuim of Ukmine (Kilos Per Year)_51_|

ii
# 1. Introduction

Ukraine with a population of 52 million people is the second largest country of the Former Soviet Union. It is weil endowed with fertile land and rich mineral resources. Huge coal and iron deposits have led to considerable industrial development especially in heavy industry. Ukraine was once known as the bread baskeL of the Russian Empire and later of the Soviet Union.

With such wealth and a highly educated labour force, Ukraine has the potential to become a rich country. Unfortunatcly, it is now faced with economic crisis, the severity of which is on an unprecedented scale. Output has been filling continuously since 1990. According to a recent World Bank (1993) report, Ukraine's real net material product (NMP) registered declines of 3 percent and 11 percent, respectively in 1990 and 1991 and is esdmated to have contracted by another 15 percent in 1992. The country is faced with hyperinflation. The Lkrainian currency is depreciating at a phenomenal rate. The financial conditions of its enterprises have deteriorated badly.

Faced with such crisis, it is hard for any government to secure a smooth tansition from a centrally planned to a market-oriented economy. To provide a stable macroeconomic enviromenti the government of Ukaine will need to follow rigorous demand mement policies. This entails lowering the standard of living of the population. Under these circumstances, it is important that the governent design policies which protect the poorest and most vulnerable groups of society.

Ukraine has very extensrve socia protetion programs inheried from Soviet times. The current levels of government benefits seem unsustinable in the long run and the overaU system will undoubtedly have to undergo an overhaul. Spending on social programs, including subsidies and pensions was estimated to be 44 percent of GDP in 1992 (World Bank 1993). The shrining tax base due to resion and a much needed contracion in the fiscal deficit would necessitae a substantial reduction in welfare expenditures together with a change in their composition. It is, therefore, important to adopt the most efficient ways of directing expenditures towards various populadon subgroups. Obviously, the most efficient policy will be to target expenditures to the poorest secton of the population. To design such policies, it is important to understand the nature of poverty and income distribution. This study attempts to do exactly this for Ukaine for the first time.

The study is cocerned with such questions as: What is the extent of the inequalty of income and in which way direction is it moving? How can the observed changes in inequality be explained? Is the burden of tax evenly distributed across the population? How do the vanous income and expenditure components affect total welfare? What are the effects of currnt government programs on total welfare? This study also attempts to measume the aggregate level of poverty in Ukraine and the extent to which it is affected by econonic growth and income redistribution.

1
Quality of data. however, is a serious Umitation that must be kep in mind. Ukoaine is still using the sampling procedure inherited from the old Soviet system. It has a number of flaws, the most important of which, for our study are: the concentration on the "average" types of housegolds with a consequent underrepresentation of the poorer and richer segments of the population; bias toward the employed vs. pensioners, students and other non-active members; and underreporting of "unofficial" sources of income.

The paper is organized as follows: Section 2 discusses briefly the welfare and inequality measures used in the study. Section 3 develops techniques intended to analyze total welfare (and inequality) in terms of individual income and expenditure components. The welfare elasticities derived in this section provide a *link between total welfare and income or expenditure components. Section 4 offers a brief discussion of numerous methodological problems that arise in the measurement of economic welfare and inequality in Ukraine. Trends in real per capita income in Ukraine are discussed in Section _5_ while Section 6 deals with trends in wages and salaries in Ukraine. Trends in inequality and welfare are analyzed in Sections 7 and 8, respectively. Section 9 is focussed on poverty in Ukraine and Section 10 provides a comparison of welfare and poverty in Ukraine with other Soviet republics. Finally, Section Il is devoted to some concluding remarks.

# 2. Welfare and Inequality Measures Used

Among several measures of economic welfare available to economists, per capita national income is widely used. Although providing a comprehensive picture of the country's productive capacity the aggregate income measure has been subject to much criticism. National income as conventionally measured excludes many factors that contnbute to economic welfare while incorporating other factors which have an adverse effect on welfare.

Since our concem is always with the welfare levels of individuals, it is reasonable to derive aggregate welfare from individual incomes. One such measure is the average per capita income of all individuals in a particular society. The main dmawback of this measure is that it does not take into account the inequality of income which always exists among individuals. This measure needs to be modified to make it sensitive to inequality in the distribution of income.

Several inequality measures have been proposed in the literature. Among them, the Lorenz curve is widely used. It is defined as the relationship between the cumulative proporton of individuals and cumulative pmportion of income received when individuals art armanged in ascending order of their income. The curve is represented by a function L(p) which is interpreted as the fraction of total income received by the lowest pth fraction of income units. If the Lorenz curve for one distribution X lies everywhere above that for another distibu ion Y, then the distribution X may be said to be more equal than the distribution Y. However, the ranking provided by the curve is only partial - when two Lonz curves interest, neither distribution can be said to be more equal than the other.

2
Despite the fact that the Lorenz curve provides only a partial ranking of the distributions, it is a powerful device for judging the distributions from the welfare point of view. Since the Lorenz curve ranking assumes that the distributions have the samnt mean income, it can only be used to compare inequality in the distiibutions. If the distributions have different means which is usually the case, the Lorenz curve may fail to provide a welfare ranking of the distributions.

Working independently on extensions of the Lorenz ordering Shorrocks (1983) and Kakwani (1984) arrived at a criterion which would rank any two distributions with different mean incomes. The new criterion given by L(,u,p) may be called the generalized Lorenz curve and is the product of the mean income A and the Lorenz curve L(p). This criterion of ranking has been justified from the welfare point of view in terms of seveml alternative classes of social welfare functions. Thus, it can be said that if the genemalized Lorenz curve for distribution X lies everywhere above the generalized Lorenz curve for another distribution Y, then distribution X is welfare superior to distribution Y. The Lorenz curve and the generalized Lorenz curve will be extensively used in the present study to analyze the distribution of income in Ukraine.

Like the Lorenz curve, the generalized Lorenz curve also provides a partial ranking of distributions. When the two generalized Lorenz curves interest, then neither distribution could be said to be welfare superior to the other.

To arrive at a complete welfare ranking of distributions, we must use a single meaure of welfe. Such a measure can be derived by giving different weights to individuals with different incomes. Suppose in a society there are n individuals who are aranged in ascending order of their incmes: xl s x2 S ... s **_x;,_** then a welfare measure may be defmed as a unique function of xl, x2, ..., xn. Sen (1974) considered the following welfare funcdon

**n** **_W_** = E x,v, i-1

where v; is the weight given to the person with income xi. It is obvious that if vi = for _n_ all i, then W is equal to average income of individuals. To make W sensitive to ineqal in the distribution, we must give higher (lower) weight to individuals with lower (higher) incomes. Sen (1974) proposed that v; (the weight given to the income of the ith person) should be proportional to the number of persons who are at least as well off as i.' From this poposition, Sen arrived at the welfare function: W _= A, -_ G) t() where I is the mean income of the society and G is the Gini index which is a well-known

**1** Kakwai (1980) **has** proposed an altemrtive weighting scheme in which **v,** is proportional to the total incom of persons who are at **Lst** as well off as individual i.

3
measure of income inequality. The Gini index is equal to one minus twice the area under the Lorenz curve.

Although there exist several altemative welfare measures-, this study is confined to using W as a basis for analyzing welfare in Ukaine. We give two reasons for this choice. First, we regard W to be a reasonable welfare measure which takes into account both the size and distribution of income. Second, since income distribution data are available only in grouped form, W is the only welfare function which can be estimated most accurately from such data.

# 3. Welfare by Income Components

Since the individual income is the sum of several income components, it will be useful to analyze total welfare (and inequality) in tenns of individual income components. The methodology for disaggregation of Gini index by income components was first developed by Rao (1969) and subsequently refined by Kakwani (1977, 1980), Field and Fei (1974), Fei, Ranis and Kao (1978), Fields (1979) and Pyatt, Chen and Fei (1980). In this section we extend this methodology to analyze the contribution of each income component to total welfare.

Suppose there are k income components and **_g4_** is the mean of the jth component. Then it is obvious that

**_k_** -1

and the disaggregation of Gini index in terms of income components is written as (Kakwani 1980): <!-- Start of picture text --> G -E 'Lici ~~~~~~~~~~~~~~~~~~(3)<br><!-- End of picture text --> where Cj is called the concention index of the jth income component. The concentration index C3is smar to the Gini index excep **t** th ranking of individuals is by the total income ande not the jth income component. As a result, the index can be negafive.

The concenton index of an income component measures how evenly or unevenly that income component is distributed over the total individual income. If C; is greater (smaller) than G, it implies that the jth income component is distributed over the total income in favc- of richer (poorer) individuals.

# Combining (l) with (2) and (3) gives

2 See for **instance** Atkinson (1970) who derived **a** clas of **welfare measurs** based **on** a homothetic utility **fi_n.** 4
A W E -F>(1- C,) Jul (4) which shows how the total welfare can be decomposed in terms of individual income components; #^(l - Cj) being the contribution of the jth income componen **t** o the total welfare. To see how the change in the jth income component affects the total welfare, we compute the elasticity of W with respect to Sj p _Ft-C,_ 1(l _AI1-G)_ (5) which implies that if 1j increases by 1 per cent; then the total welfare increases by rj per cent.

It is instructive to write (5) as __(G-C,)_ (6) Is _A,l-G)_ in which the first term may be called the income effect and the second term, the inquality effect. The inequality effect measures the gain or loss in welie as a result of inome isdistribution. If the increase in the jth income component favors the poor more than the rich, the inequality component will be positive, odterwise it will be negative. Ibis leads us to define a new progressivity index of the ith income component as the mtio of the inequality component to the income component:3 _pi=(G-C)_ 7 **_(_** _l -G)_ A positive value of Pj implies the jth income componen **t** o be progressive and the negative value implies the jth component to be regressive. Thus, the magniude of Pj indicaes whether the icrease in the jth income component favors the poor or the rich. If the jth income component is distibuted in proportion to total income, Cj will be equal to G which gives Pj to be equal to zero. In this case, the effect of an increase in the jth income component favors neither the poor nor the rich.

Pj can be used to devise an optimum tax - expenditure policy. It provides a quantitative basis for maxiiig the country's total welfare with minimum cost.

Next, we wish to evaluate the effect of price changes on the total welfare. So assume 3 Note that i% in (5) is the infinite elasticity; it is derived under the assumption that income source j i **inflitsimaily** across **al** income recipients, or in **other** words, it is asmed **that** cses in income sources do not chng the nng of recipients. This **elasticity** is **similar** to **the** elasticities of the Gini **index** with **espect** to income compoet derived by Lemmmn and and Yitzhaki (19BS).

_5_
that there are k expenditure items whose prices are pi, P.,---,Pk and if q 1, q2,...qk are the quantities consumed of the k expenditure items. then the total money income of an individual can be written as <!-- Start of picture text --> k k<br>X E Spq E v, Vy(8)<br>Jal Jp1<br><!-- End of picture text --> where vj = piqi is the consumption expenditure on the jth commodity.

Let x = e(p, u) is the cost or expenditure function which is the minimum expenditure required by an individual to reach the utility level u at the price vector _p.4_ Suppose the prices have changed to p'. If the individual remained on the same level of welfare as before, the new expenditure of the individual will have to be x = e(p, u) (9) Thus, the individual should be given an additional income of (x'- x) in order that he remained at the same level of welfare as before. Suppose in the initial period the individual enjoyed a standard of living equivalent to x but because of changed in prices, the new standard of living of the individual will be given by <!-- Start of picture text --> y = x - (x - x)= 2x - x (10)<br><!-- End of picture text --> Applying Taylor's theorem on (9) gives <!-- Start of picture text --> Akdpj<br>e(p ,u) = e(p, u) + -vj(x) (11)<br>i-I PJ<br><!-- End of picture text --> whem d7J is the percentage change in the price of the jth commodity and use has been made _Pi_ of the result: _Be(p,u)_ = q which the well-known Shephard's Lemma in demand theory _8p_ (Deaton and Muellbauer (1980)).5 Substituting (11) into (10) gives 4 Note that the expenditure function e(p,u) will be equal to the actual expenditure x if it is assumed that evety individual maximizes his or her utility in every period which is the usual assumption made in the consumer theory.

5Note that the tenns of higher order of smallness in (11) have been ignored.

6
(12)

# Applying Theorem 8.5 of Iakwani (1980) on (12) gives

- where W = lt(l G) is the social welfare before the price change and W' is the social welfare after the price change, nm is the mean expenditure on the jth item and Cj is the conen index of the jth item. Equation (13) immediately gives the price elasticity of the aggregate welfare as

which indicates that if the price of the jth commodity increases by 1 percent, then the aggmegt welfae changes by ej percent. e will always be negative. Thus, the magnitude of E3j can be used to evaluate the efects of price changes on the aggregate welfare.

# 4. Mathodological Problem

This section provides a brief discussion of many methodological problems which arise in the measurement of economic welfare and inequality in Uhmine.

Our study is based on the data obtained from fte Family Budget Surveys (CBS), which had been carried out regularly in the Soviet Union since the 1950s. These surveys are the only source that provides mcome distibution data over time. But they have been subjected to ever criticisms (McAuley 1979, Shenfield 1983 and Ainson and Micklewright 1992); the main among them is that the surveys are not representative of the population. The sample covered the teritory of the former Soviet Union incompletely and unevenly (Cazes and Cacheux 1992). It is not known what proporDi of families were sampled in Utkrine. The families in the sample were mainly selected on the basis of their industrial affiiation of wage earnms. Consequently, social groups (such as students) which did not live in households with wUOing members were excluded from the survey. The old age pensioners (orginaly excluded) have been incluied in the survey since 1977. The prObabi;Ly of a household being selected in the survey increased monotonical1y with the number of wage earners **in** the households. This wVIl clearly bias the results on economic welfare and inequality.

7
In this paper we have used per capita household income as a measure of household economic welfare.' The income concept used is the personal income which includes [McAuley (1979. pp.9-12)] thr, following:

# Money earnings from employment

- (a) in the state sector (excluding holiday pay)

- (b) in collective fanrs.

# Transfer payments

- (a) pensions

- (b) other social security payments

- (c) stipends.

# Receipts from the rmancial system

- (a) interest from saving deposits

- (b) lottery prizes

# Other receipts

- (a) the value of agricultural production for own consumption

- (b) receipts in kind from collective farms

- (c) other income from rnvate econonic activity.

The consumption of home-grown products is evaluated at state prices. In the case of many products, especially meat and frit, this may understate the true value of the product to the household. The imputed rent of owner-occupied housing is not included. Since rents charged by the state are very low, the distortionary effect of this omission should not be too great.

When the index of household welfare is constructed, the next step is to detrmine the welfare of the individuals in the households. In this paper individual welfare was derived by assing every individual in a household a value equal to the per capita income for that household (Kakwani 1986). If there are severe intrahousehold inequities in the distibuin of food and non-food items, poverty and inequality will both be undeimatd. Ihis problem could not be corrected because of non-availabilty of information concerning the intra-household distribution of resources. But intrahousehold inequality may not be bad in Ukraine. Ukrainians 6A better measure of household welfare will of course be the per equivalent adult income which corrects for the differing needs of adults and children. But this measure could not be employed because the FBS data were available only in grouped form (the groups formed on the basis of per capita household expenditure). We could have remedied this only by assuming that the rankdng of households by per capita income is the same as that by income per equivalent adult. This assumption which is unlikely to hold will result in more serious estimation errors.

8
are more family orientated than West-European **s** o they tend to look after tfieir children and aged parents better than in Anglo-Saxon societies. However, because of male dominated society, women tend to perform more domestic work than in Western societies which may contribute to inequality in welfare within households. This aspect of welfare is not the focus of the present paper.

Taxes, fees and fines paid by individuals are not subtracted from personal income. This may lead to an over-estimation of economic welfare. Since data on the amount of taxes, fees and fines paid by individuals are avaiable, an attempt is made to quantify their effect on the total individual welfare in Section 6.

To compare welfare and poverty across different time periods, one needs to adjust the distributions given in current pnces for pnce changes over time. We used the official price indices for Ukraine as presented in Table 1. The only official price index available until 1990 is the retail price index. This index has severe limitations, the main among them being that it is constrcted on the basis of official list prices in the stae retail outlets. It ignores the prices charged in colectve farm markets and other secondary markets. A new price indexcalled consumer price index (CPI) was introduced in January 1991. This is a superior index based on a wide range of prices actually charged.

As can be seen from Table 1, prices in Ukaine have been increasing at a phenomenal rate since January 1992. It seems the country is on the brink of hyperinflation. The government has lost control over the budget. The currency has been depreciating at an accelerating rate. This clearly has severe implications for the standard of living. If wages lag behind price inflation, the standard of living for a large majority of people will certainly decline.

Measurement of economic welfare is problematic under the unstable situation of hypernflation. Relative prices will be changing constantly rsulting in severe disotions.

Since in the Family Budget Surveys, households are not interviewed at the same time, so if there is a high rate of inflation, the distribution of nominal household income which these surveys provide will differ from that of real household income. Needless to say, it is the real income of households that is relevant for the purpose of analyzing the inequality of income. Kakwani (1987) has demonstrated that the inequality of nominal income from these surveys tends to overestimate the inequality of real household income (income adjusted for inflation occurrng dung the survey period).

The FBS data are available in grouped form giving only the percentage of people in each group. This may be supplemented by information on overal mean income. The mean income of each income range were not available. Esdmates of inequality from such data will clearly be biased because of loss of infonnation due to grouping. Clearly, if the number of groups is small, the bias in estimates can be quite large. To estimate inequality from such data, one needs to employ some interpolation device. A commonly used procedure is to fit a density function to the entire income range and then compute inequality mcasures from the parameters of the fitted function. The difficulty with this approach is that there exists no single function which fits the entre income range.

9
# Table I Price Indices In Ukraine

|**_Year_**or Month|Overall<br>|<br>Index|**Fo od**|Clothing and<br>**Foowar**|Rent, Water,<br>**Fuel and**<br>|HouIehld<br>|<br>**Good**|Medical Caf<br>|**Tranedt**<br>**and**Camm<br>|**RRooeation** <br>Education||**Personal Cue**<br>andEffoct|
|---|---|---|---|---|---|---|---|---|---|
|||||Power||I|t:u|_||
||||**Ratin**Pie* Ind|ex frfm 19W0 to|19Oand Cun|eumer Mae Index|1991**and 1992**|||
|1980|100||||-|-|-||r<br>|
|1985|104|-|-|.|-||-||r|
|1986|106|-|||||-|-||
|1987|107<br>||-||-||||||
|1988|107|||||||||
|Ig89|109|.|.|.||||||
|1990|114|.|.|.||||||
|1991|213.6|-||.||||||
|1992|3232.5|'|.|||-||||
|||||Coneumer Ma<br>|e Indices Oct<br>|oberI 1990=100<br>||||
|Doe1990|100|100||<br>100|100|100|100|100|100|100|
|Jan 91|103.7|101.9|105.7|100.|104.5|100.2|100.9|109.1|106.1|
|Feb|109.6|103.3|115.2|101.6|119.4|100|101.7|119.9|113.4|
|March|117.7|109|121.3|123.7|157.8|99.8|103.4|133|131.8|
|April|195.9|199|225.4|150.9|229.8|100.3|173.4|155.9|186.8|
|May|198.3|194.2|236.2|153.5|249.3|99.1|176.5|162|203.6|
|Juno|199.9|191.9|241.4|161.6|259.8|100.3|177.2|167.2|206.2|
|July|200.9|190|243.8|162.4|267.6|101.3|180.2|171.5|207.6|
|Aug|201.5|186.2|250.9|166.3|275.4|102.3|180.4|174.1|198.9|
# Table 1 _(continued)_

|Sep|206.5|188.4|259.2|167.3|284.5|108|184|178.1|213.4|
|---|---|---|---|---|---|---|---|---|---|
|Oat|219.5|197.1|283|170.6|305.8|115.7|186.4|192.9|239.9|
|Nov|235.7|209.1|310.5|175.2|341|132.2|188.3|209.3|244.7|
|Doc 91|280.9|228.1|354|188.3|373.4|132.3|192.1|243|262.8|
|Jan 92|919.4|927.5|966.4|773.7|1411.1|369.5|594|895.7|646.8|
|Fab|1129|994.3|1256.3|1755.5|1920.5|401.2|696.2|1223.5|730.9|
|Mafoh|1246.4|1086.8|1398.3|1896.9|2225.9|483|914.1|1290.8|896.1|
|April|1417.2|1211.9|1542.3|2057.1|2337.2|487.8|1038.4|1774.9|1187.3|
|May|1740.3|1379|1648.7|2275.2|2887.8|533.7|1694.7|3187.7|1269.2|
|';ane|2001.3|1795.S|1813.6|2341.2|2870.8|868.1|2060.8|3583|1387.2|
|July|2551.7|2449.1|2111|3834.9|3269.6|780.7|2388.5|4249.4|1789.5|
|Aug|2947.2|2838.5|2377|4291.3|3890.8|773.7|2744.4|6056.8|1970.2|
|Sep|3386.3|3233.1|2728.8|4980.7|4264.3|864.2|3356.4|5936.7|2179|
|Oct|4246.4|4041.4|3574.7|5119.4|5262.1|1292|5843.5|6756|2834.9|
|Nov|5206.1|4954.8|4557.7|5308.8|6525|1357.9|8397.1|7681.8|2922.8|
|Deoc 92|7246.9|6428.4|6193.9|6503.3|9924.5|1447.5|14812.5|10001.4|3866.9|
|Jan 1993|14298.1|15693.3|10009.3|18540.9|16851.8|3219.2|24b29.5|11781.8|8511|
|Feb|18344.5|18706.4|14093.1|24066.1|23457.7|4548.7|32894.1|16553.1|12630.3|
|_Maroh_|22105.1|20951.2|18039.2|27363.2|32254.3|6172.6|41808.4|21370.1|17076.2|
|Aprl93<br>~~.|26238.8|24324.3<br>_|21611<br>_.|31495<br>m|36898.9|7505.9|53389.3|26114.3|18903.4|
In the present paper we have used a general interpolation device proposed by Kakwani (1980). This method utilizes, within each income range, a separate continuously differentiable function which exactly fits to the data points. The inequality and poverty measures are then computed by liniing this function. Kakwani's approach requires information on the mean incomes in each income range which is not available in the present case. A modification of the approach is used in this paper.

# S. Trends in Real Per Capita Income in Ukraine

Tables 2, 3 and 4 present information on the real per capita income in Ukraine based on data from the family budget surveys. The nominal incomes were converted to the real incomes by means of the price indices given in Table 1. The real per capita incomes given in the tables are at 1980 prices.

Table 4 giving the growth rates of per capita real inoome shows that the average standard of living in Ukraine increased quite significantly in the late 80s. The 1989-90 period registered a growth rate of 7.4 per cent, but this was eroded in the subsequent periods from 1990 to 1992. In 1990-91, the real value of salary income declined by 7.54 percent and that of collective farm income went down by a massive 30.67 percent. It is intersting to note that government cash benefits to families increased by 45.79 percent. Since government cash benefits are generally concentrated among poorer families, it is to be expected that the distribution of per capita family income would have become more equal dunng the 1990-91 period.

Per capita family income declined by 23.56 percent during the 1991-92 period. This represents a drastic reduction in the average standard of living of the Ukrainian people. Salary income declined by a massive 31.44 percent. Families dependent largely on government transfers suffered the greatest decline in their incomes.<sup>7</sup> Their per capita income fell by 58.33 percent. The substantial income gain made by transfer recipients in the 1990-91 period was completely eroded in the subsequent period. The collective farm income increased, however, by 49.56 percent.

'Note that many families receive wages, smalholding income etc. in addition to government transfers and, therefore, their economic situation may have changed somewhat differently than what is shown by changes in govemment transfers.

12
Table 2 Distribution of Average Income by Income and Expenditure Components

|Components<br>1|1980||1985|19891|19901|1991<br>|1992|
|---|---|---|---|---|---|---|
||||Income Co|mponents|||
|Salary Income|59.6|55|56.9|57.3|51.8|46.4|
|Collective Farm Income|9.9|10.7|10.4|10.2|6.9|13.5|
|Govt Cash Benefits|13.6|14.9|12.8|13.4|19.1|10.4|
|Smaliholding Income|9.8|11.1|9.9|10.2|11.5|19.6|
|Other sources|7.1|8.3|10|8.9|10.6|10.2|
|Total Income|100|100|100|100|100|100|
||||Expenditure|Component|s|l|
|Food|39.9|36.6|32.7|32.8|38|38.3|
|Non food|29.9|29.6|29.6|31.4|32.3|31.9|
|Alcohol|2.8|2.6|2.5|2.7|2.1|2.1|
|Social Expenditure|8.8|8.3|8.8|8|6.2|3.7|
|Taxes|6.9|6.8|7.3|7.2|5.1|5.2|
|Other Expendtures|6.5|7.8|8.5|6.5|7.1|7.5|
|Savings|5.2|8.3|10.7|11.4|9.3|11.2|
|Total Expenditure|100|100|100|100|100.1|100|

13
Table 3 Real Average Per Capita Income and Components

|Components|1980|1985|| 1989|I1990|1991|1992|
|---|---|---|---|---|---|---|
||||Income C|omponen|ts||
|Salary Income|73.3|74.6|84.6|91.5|84.6|58|
|Collective Farm Income|12.2|14.5|15.5|16.3|11.3|16.9|
|Govt Cash Benefits|16.7|20.2|19|21.4|31.2|13|
|Smaliholding Income|12.1|15.1|14.7|16.3|18.8|24.5|
|Other Sources|8.7|11.3|14.9|14.2|17.3|12.7|
|Total Income|123|135.6|148.6|159.6|163.4|124.9|
|||E|xpenditur|eCompone|nts||
|Food|49.1|49.6|48.6|52.3|62.1|47.8|
|Non Food|36.8|40.1|44|50.1|52.8|39.8|
|Alcohol|3.4|3.5|3.7|4.3|3.4|2.6|
|Social Expenditure|10.8|11.3|13.1|12.8|10.1|4.6|
|Taxes|8.5|9.2|10.8|11.5|8.3|6.5|
|Other Expenditures|8|10.6|12.6|10.4|11.6|9.4|
|Savings|6.4|11.3|15.9|18.2|15.2|14|
|Total Expenditure|123|135.6|148.6|159.6|163.4|124.9|

14
# Table 4 Annual Growth Rate of Per Capita Real Income and Components

|Components|1980to <br>1985|11985to<br>1989|1989to <br>1990|11990to<br>1991|1991tol<br>1992|
|---|---|---|---|---|---|
|||Incom|e Component|s|l|
|Salary Income|0.35|3.19|8.16|-7.54|-31.44|
|Collective Farm Income|3.51|1.68|5.16|-30.67|49.56|
|Govt Cash Benefits|3.88|-1.52|12.63|45.79|-58.33|
|Srrnllholding Income|4.53|-0.67|10.88|15.34|30.32|
|Other sources|5.37|7.16|-4.7|21.83|-26.59|
|Total Income|1.97|2.32|7.4|2.38|-23.56|
|______________________|___________|Expendi|ture Compon|ents||
|Food|0.2|-0.51|7.61|18.74|-23.03|
|Non food|1.73|2.35|13.86|5.39|-24.62|
|Alcohol|0.58|1.4|16.22|-20.93|-23.53|
|Social Expenditure|0.91|3.76|-2.29|-21.09|-54.46|
|Taxes|1.6|4.09|6.48|-27.83|-21.69|
|Other Expenditures|5.79|4.42|-17.46|11.54|-18.97|
|Savings|12.04|8.91|14.47|-16.48|-7.89|
|Total Expenditure|1.97|2.32|7.4|2.38|-23.56|

It is **clear** from the evidence that the income structure by source has changed quite substantially in the late 80s and the early 90s. The **share** of salary income has declined quite substantially from a level of 59.6 percent in 1980 to 46.4 percent in 1992 and that of farmers increased from 9.9 percent in 1980 **to** 13.5 percent in 1992. It is interesting to note that income from personal garden plots (small holding income) increased more or less monotonically between 1980 and 1992. The real value of this income doubled during this period. The share of this income stands at 19.4 percent in 1992 - which is the second highest after the share of wage and salary income.

Most of the smallholding income comes from the output of small household plots. Until 1989, this output was valued at state prices which were lower than private market prices. Since the government introduced the new consumer price index in 1990, prices in collective farm markets or secondary markets have been used to evaluate the output of small household plots. This change in the valuation of output could be the main reason for a large increase in the share of smalUholding income.

15
Next, we look at the structure of expenditure components. Although the share of expenditure on food increased slightly between 1991 and 1992, real per capita expenditure on food declined quite substantially between these years. During a recessionary period, people generally try to maintain their consumption of food by cutting expenditure on other items of consumption. This does not seem to be happening in Ukraine. Food expenditure in real term declined almost as much as real non-food expenditure. This can probably be explained in terms of price changes for food and non-food items. The overall CPI increased at a faster rate than the food CPI during the 1991-92 period. This implies that the decline in the quantity of food might not be as high as indicated by the figures in Table 3.

It is interesting to note that the real outlays on wsocial expenditure' has declined by a massive 54.46 percent. This is understandable. Expenditure on social activities is a luxury which people would not be able to maintain. Further, it can be seen from Table 1 that the collective price index for recreation and cultural activities was higher than that of the overall CPI for the entire period of 1992 which means that the decline in the real expenditure on cultural activities would have been even larger than indicated by the figures in Table 4.

Table 2 shows that in 1992 Ukrainian families paid 5.2 percent of their income in direct taxes (including fees and fines) and at the same time received 10.4 percent of their incomes in the form of governmen **t** ransfers. This means that the Ukmainian government relies heavily on indirect taxes. The value-added tax (VAI) accounted for about 45 percent of general government revenues in 1992 whereas for the personal income tax this figure was only 10 percent. Excise and trade taxes and non-tax revenues accounted for 16 percent of the total tax revenues. Since indirect taxes are generally regressive, it seems that the overall tax system in Ukraine favors the rich rather than the poor.

As noted earlier the share of collective farm income increased during the period between 1980 and 1992. This suggests that the relationship between the average eaniings of blue-whitecollar workers and collective farmers may have changed over this period. Table 6 shows that this has indeed been the case. The ratio of average incomes of families of collective farm workers to that of industrial workers increased more or less monotonically over the period from 1980 to 1991. Since collective farm families have had much lower per capita income than the blue-white - collar families, the overall income distribution in Ukraine should have gradually become more equal between 1980 and 1991. Further, it is intesting to note that pensioner families of collective farmers also improved their reladve position quite substntally dunng the 1980-91 period. This will have a further equalizing effect on the overall income distribution. We shall return to this issue in the next section.

16
Table 5 Aggregate Income Per Family Member by Types of Workers: At Current Prices - Ukraine

|Family typos|1980<br>|1985<br>|1986|1987|1988|1989<br>|1990<br>|1991<br>|
|---|---|---|---|---|---|---|---|---|
|All families|~<br>123|~l~-<br>141|-<br>145|148|149 ||I<br>162|NNNNN<br>182|N<br>349|
|||||Worker F|<br>amilies||||
|Industry|132|151|152|154|152|174|196|377|
|State farm|103|120|125|127|134|143|163|318|
|Collective farm|96|125|129|131|136|151|171|323|
|||||Pensione|r Families||||
|Blue & White Collor|74 ||_97<br>||891|92] |||_|__<br>106I|116|<br>227|
|Collective farm|78 ||101|106 ||105|11S|132J|<br>155|<br>33|

Table 6 Per Capita Income of State and Collective Farm Workers and Pensioner Families as a Percentage of Industrial Worker Families

|||||Warker F|amilies||||
|---|---|---|---|---|---|---|---|---|
|| Industry|100|100||100|100|100|100|100|
|State farm|78|79.5|82.2|82.5|82.7|82.2|83.2|84.4|
|Collective farm|72.7|82.8|84.9|85.1|84|86.8|87.2|85.7|
|||||Pensione|r Families||||
|Blue & White Collor|56.1|64.2<br>|58.6<br>|59.7 |||60.9|59.2|60.2|
|Collectivefarm|59.1|66.9[|<br>69.7|6.2|71|75.9|79.1|88.3|
# 6. Wages and Salaries in Ukraine

As noted in the previous section, real per capita family income fell substantially in 1992. There is evidence that the Ukrainian economy deteriorated further in 1993. Family Budget Survey results are not available to assess the standard of living since 1992. However, data on average and minimum wages for the beginning of 1993 were provided to us by the Ukrainian statistical department. This information is summarized in Table 7. It can be observed that the total average wage and the average wage of industrial workers fell by about 10 percent between 1991 and 1992. The deterioration in wages is quite striidng since 1992. In early 1993, real wages for all workers were about sixty percent of what they were in early 1992. The decline in wages among the industrial workers has been even greater.

The drastic fall in real wages is due to the deliberate wage and income policy pursued by the Ukrainian govemnment. In an effort to control inflation, the government has suspended wage indexation and introduced tax-based wage controls on January 1, 1993. This led to a substantial reduction in real wages. Average nominal monthly wages increased by 16 percent in January and by only 9 percent in February 1993, whereas inflation rates during these months were 97.3 and 26.3 percent, respectively. These results tend to suggest that the standard of living in Ukraine is falling at a phenomenal rate. Will the govemment continue squeezing real wages? How much more do real wages have to fall before there is a slowing down of rie inflation? While it is not possible to answer these questions, it is useful to consider what is ikely to happen to the distribution of income and poverty in ULkraine. This is attempted in Sections 7, 8 and 9.

In the mean time we consider the issue of male-female differentials in earnings. The distributions of earnings among men and women are summarized in Table 8. It is evident that women on average earn considerably less than men. This conclusion holds for all levels of education and age groups. The ratio of female-male earnings varies quite substantially with respect to education and age. The ratio is highest among workers with higher education.

The disparity of earnings between male and female workers exists in Ukaine despite the fact that the Soviet Union had in its constitution a provision for sexual equality. Several reasons may be given for this disparity, but the most important ones are the levels of educafion, age, occupational segregation and hours of labor supply. Since the results presented in Table 8 tabe account of education and age, the remaining two reasons, viz, occupational segregation and hours of labor supply are most likely. These two factors are likely to be less important among workers with higher education. It is, therefore, to be expected that the ratio of female-male average earnings will be highest among these workers.

'Our finding that women are least discriminated against at high education level is an interesting one because the finding in other countries is often the opposite. In the West, difference between women and men is greater at higher levels of education than that for low-sldlled jobs.

18
# Table 7 Average and Minimum Wages in Ukraine

|Date||At Current Pri|ces||At Constant P|rices|
|---|---|---|---|---|---|---|
||Minimum<br>Wage|Average<br>Wage Total|Average Wage<br>Industry|Minimum<br>Wage|Average<br>Wage Total|Average Wage<br>Industry|
|1990||247|-|0|216.7|-|
|1991||474|548.4|-|221.9|256.7|
|1992|-|6423.2|7885|-|198.7|243.9|
|Jan 91|80|-|-|67.7|-||
|April 91|145||-|64.9|-||
|Oct91|185|-|-|74|-||
|Dec91|400|-|-|134.5|-||
|Jan 92|400|1655.9|2280.8|38.2|158|217.7|
|Feb|400|1847.4|2622.9|31.1|143.6|203.9|
|March|400|2068.6|3031.7|28.2|145.6|213.4|
|April|400|3068.1|4529.1|24.8|190|280.4|
|May|900|3572.4|4508.4|45.4|180.1|227.3|
|June|900|5464.4|5696.7|39.5|239.6|249.8|
|July|900|5379.7|6715.6|30.9|185|230.9|
|Aug|900|5705.9|7096.5|26.8|169.9|211.3|
|Sep|900|7689.8|8789.1|23.3|199.3|227.7|
|Oct|900|8715.9|10414|18.6|180.1|215.2|
|Nov|2300|11314.3|14436.3|38.8|190.7|243.3|
|Dec 92|2300|20072.5|25385.3|27.8|243|307.4|
|Jan 93|4600|15802|19180|28.2|97|117.7|
|Feb|4600|20192|23060|22|96.6|110.3|
|March|4600|24857|28491|18.3|98.7|113.1|
|June|6900|38169|-||||

19
# Table 8 Average Wage Earning and It's Inequality by Age and Education for Male and Female Workers and Employees: Ukraine 1989

||Male Em|ployes|Femdae<br>Em|ployees|Ratio of Fa|lde-Male|
|---|---|---|---|---|---|---|
|Employees|||||||
|Chwractedstics|Aveage<br>Wage|Gini<br>Index|Avae<br>Wage|Ginl<br>Index|Averag<br>Wge|income<br>tnequdity|
||||Levels of Ed|ucation|||
|Higher Education|236.124542|19.0183462|184.3897645|18.17798|78.1|95.6|
|Secondary Special|216.259565|20.9938104|144.6056877|19.41531|66.9|92.5|
|Secondary General|215.895647|22.5010022|143.6918695|22.29261|66 6|99.1|
|Incomplete Secondary|204.12568|23.9308589|140.6166197|24.30334|68.9|101.6|
|Primary Education|177.860896|23.4948659|129.3665318|24.12899|72.7|102.7|
||||Age of Em|ployees|||
|16-24|176.715836|21.9304696|125.755102|20.0741|71.2|91.5|
|25-29|210.367413|21.08665|139.0529129|19.33895|66.1|91.7|
|30-39|229.616129|21.4136811|154.2772768|20.57662|67.2|96.1|
|40-49|230.484869|20.5815562|161.2882208|21.58169|70|104.9|
|>50|205.076292|22.45246|149.5554106|23.52911|72.9|104.8|
From the evidence given in Table 8, it is not possible to conclude that earnings disparity is less for women relative to that for men. This conclusion holds for workers up to the age of 39. The opposite conclusion emerges for the workers aged 40 or more. Similarly, the lower disparity for women is observed only among the workers with education levels equal to or higher than the secondary school.

An interesting question that arises is whether earning differences between men and women are widening or narrowing during the recession. This aspect will not be pursued here due to lack of data.

# 7. Trends in inequality in Ukraine

Table 9 presents the inequality measures for Ulraine calculated from the family budget surveys covering the period from 1980 to 1992. The table gives the quintile shares, Gini index and decile distribution ratio (DDR). The DDR is defined as the share of the bottom 40 percent in relation to the share of the top 20 percent. An increase in this measure will imply a reduction in income inequality. All these measures have been computed by assigning eadh individual in a household an income level equal to the per capita income of that household. Thus, these measures indicate inequality in individual income distribution.

Table 9 Inequality of Per Capita Aggregate Family Income: Ukraine 1980 to 1992

|Ouintles|||Yea|_|||
|---|---|---|---|---|---|---|
||1980|1985|**1989**|**1890**|1991|1992|
|**I1St**|**8.13**|**7.09**|**9.41**|**10.35**|**11.01**|**10.56**|
|2nd|13.04|14.83|13.99|14.31|14.72|15.53|
|**3rd**|**16.04**|16.37|17.37|17.51|17.82|16.07|
|4th|19.83|20.51|21.33|22.83|23.99|23.69|
|5th|42.96|41.2|37.9|35|32.46|34.15|
|Gini Index|34.64|32.16|26.5|25.13|21.8|23.4|
|Decile Destribudion<br>Ratio|49.28|53.2|61.74|70.46|79.27|76.4|

21
The results are quite strikdng. Inequality declined monotonically between 1980 to 1991, but rose between 1991 to 1992. This is indicated by the Gini index as well as the DDR. The share of the first quintile increased monotonically between 1985 to 1991, then fell in 1992. The share of the top quintile declined monotonically between 1980 to 1991 and then rose in 1992. The Lorenz curves for the years 1985, 1989, 1990 and 1991 shift gradually upwards at all points. This implies that income distribution in Ukraine became gradually more equal between 1985 to 1991. Since the Lorenz curves for the years 1991 and 1992 intersect, we cannot unambiguously state that income inequality rose between 1991 and 1992 although this conclusion holds on the basis of the Gini index and the DDR.

The question that arises is: why has inequality declined consistently during the 1980-1991 period? The evidence given in Table 6 provides a parta answer. The families of state and collective farm workers were generally poorer than those of industrial workers. The results in Table 6 suggest that the income gap between these families narrowed quite substandally between 1980 and 1990 which would have made the income distribution more equal. Further, it is interesting to note that the pensioner families of both blue and white collar workers and collective farmers also improved their relative incomes (compard to industrial workers) between 1980 and 1991. For instance, in 1980, the average per capita income of pensioner families of collective farm worlers was about 59 percent of that of industrial wrkers, but this percentage ineased to 88.3 percent by 1991. This would clearly have an eq-Jimzing effect on the distribution of income.

We may also attempt to explaun changes in income inequality by means n observed changes in income components. The shares and distribution of income components air reinted in Table 10. The information in Table 10 could be compiled only for the years 1989, 1991 and 1992 because of non-availability of the appropriate data for other years.

Results in the table show that the income structure has changed quite substandally in the years between 1989 to 1991 and 1991 to 1992. The percentage share of salay income deeased monotonically during the three year period. This may be due to the effect of the recession which occurzed during this period. It is interesting to note that the share of income from small holdings such as family plots incased quite substntially during this pedod. This is understandable. When people lose theirjobs due to a recession, they divert their efforts to small holdings to maintain their standard of living.

The concentration index of an income component measures how evenly or unevenly that mcome component is distributed over the per capita total family income. It can be seen that the concentration index of wage and salary income is 32.8 in 1989, which is considerably higher thn the Gini index of total per capita fanmly income. This implies that income from wages and salary is unevenly distributed over the total income in favor of richer families. From quintile shares, it can be seen that the first quintle gets only 6.1 percent of total wage income whereas the top quintile gets more than 40 percent of total wage and salary income. The coective farm income is also unevenly distibuted in favor of richer households but its regmssivity is less than that of wage and salary income in the non-farm sector.

22
The concentration index of income from governmen **t** ransfas is -0.7 which implies that this income component is more or less distributed on a per capita basis with no focus o the poor.9 Although the overall effect of govemment transfers is to reduce the inequality of total income, the magnitude of the effect is small. The progressivity of government rnsfers can easily be increased by focusing them on the poor rather than distributing them on a per capita basis. It is unfortunate that the progressivity of government benefits in fact fell considerably in 1992. The value of the conentration index for governmen **t** ransfers changed from _-0.5_ in 1991 to 14.2 in 1992. From the quintile shares we note that the share of the goverment transfers going to the bottom 20% of individuals reduced dramatically in 1992 while the share of the top 20 percent of people increased from 20.87 percent in 1991 to 29.16 percent in 1992. During recession the government should target its scarce resources but in Ukraine exacty the opposite happened. The greater proportion of governmen **t** ransfers went to the richer fa_m in 1992. Since we do not have the breakdown of governmen **t** ransfers, it is not possible to explain why the govemmen **t** ransfers became less progressive in 1992.

The last column in Table 10 gives the % contribution of each income componen **t** o the total inequality. In 1989, the contribution of salary income of blue and white collar worker was 70.7 percent which fel substantally to only 62.1 percent in 1992. This shows that the changes in wage and salary income strucure led to a consderable reduction in total income inequality. In 1992, the share of smallholding income was 19.8 percent but it contributes only 16.6 percent to total inequality. It would seem then that any policy that increases the smaiholding income has an equalizing effect on the size distribution of total income.

Table 11 presents inequality of total income by its expenditure components. The personal income tax paid by the families is shown as an item of expenditure. It can be seen that the share of xs to total family income declined from 7.3 percent in 1989 to only 5.1 perent in 1991. Smce the concentration index of taxes is considerably larger han the Gini index for towal income, taes can be said to be highly progressive. So the decline in the share of aes woud have the effect of incrsing the inequality of total income in the 1989 and 1991 period. In the subsequent period (from 1991 to 1992) the share of taxes remained more or less the same whereas their concentration increased from 32.1 percent in 1991 to 38.7 percent in 1992. This would have an effect of decreasing the inequality of total income in the 1991-92 period.

'The absence of targetting of govemment trnsfers is a common finding for sociaist counties, see for instance Mlanovic (1993).

23
# Table 10 Income Inequality by It's Components

|Income||l|Quintile<br>_Shwars_<br>-_ I|||<br>%9_Shere_|JConcen-<br>tratlinIndex|%coantib. to<br>total|
|---|---|---|---|---|---|---|---|---|
|Components|**lit**|2nd|<br>3rd|4th|5th|||Inequality|
|||||Year|1989||||
|SalaryIncome|6.1|12.31|17.77|23.05|40.77|56.9|32.8|70.7|
|Collective Farm Income|10.07|13.16|15.53|20.02|41.22|10.4|28.5|11.2|
|Govt Cash Benefits|21.8|20.92|17.94|16.37|22.97|12.8|-0.7|-0.3|
|SmaliholdingIncome|10.64|14.91|17.54|20.04|36.87|9.9|23.8|8.9|
|Other sources|10.48|14.54|16.17|20.47|38.34|10|25.4|9.6|
|Total Income|9.41|13.99|17.37|21.33|37.9|100|26.4|100.1|
|||||Year|1991||||
|Salary Income|7.51|13.43|18.11|25.39|35.56|51.8|28.5|67.7|
|Collective Farm Income|12.7|15.79|16.98|22.77|31.76|6.9|18.8|6|
|Govt CashBenefits|21.65|19.13|18.62|19.73|20.87|19.1|.0.5|.0.4|
|Smaliholding Income|8.99|13.31|16.28|25.47|35.95|11.5|27.5|14.5|
|Other sources|10.05|13.83|17.19|24.03|34.9|10.6|25|12.2|
|TotalIncome|11.01|14.72|17.82|23.99|32.46|99.9|21.8|100|
||<br>|____**__**__ ____ _<br>_____<br>Year|___<br>___ ____||1992||||
|SalaryIncome|7.97|13.83|14.46|23.86|39.88|46.4|31.3|62.1|
|Collective Farm Income|13.69|18.31|18.65|23.15|26.2|13.5|12.4|7.2|
|GovtCashBenefits|14.4|17.37|17.6|21.47|29.16|10.4|14.2|6.3|
|Smallholding Income|11.41|16.36|16.93|24.35|30.95|19.6|19.8|16.6|
|Other sources|12.62|16.16<br>|18.8<br>|24.65<br>|29.77<br>|10.2|18|7.8|
|Total Income|10.56<br>||15.53r|<br>16.07<br>||23.69r|34.15<br>1|<br>100.1<br>||<br>23.4|100|
# Table 11 Income Inequality by Expenditure Components

|Expenditure|1<br>||2nd<br>||C<br>3ft<br>||lubitle shoe<br>4*<br>||s<br>C<br>|_S_<br>%_8hare_|~~~~~Canc <br>tiation|an-I%<br>contrib.<br>to total|
|---|---|---|---|---|---|---|---|---|
||<br> <br>can4wente<br>lst|<br> <br>2nd|<br> <br>3rd|<br> <br>4th|<br> <br>5th|<br>|<br>k<br>**_index_**|<br>Inequality|
|.|<br>|||<br>~~~~~~~<br>1|<br>~~~~~~~~Y<br>989|ear|________<br>||
|Food<br>_|1333_|16.44|18.05|20.45|31.73|32.7|16.8|20.7|
|_Non_food|8.66|13.8|17.7|22.23|37.61|29.6|27.3|30.5|
|Alcohol|8.58|13.93|1 6.88|21.4|39.21|2.5|28.2|2.7|
|Social Expenditure|9.83|16.57|18.79|22.31|33.5|8.8|22.2|7.4|
|Taxes|5.48|11.41|17.13|22.92|43.06|7.3|35.5|9.8|
|Other Expenditures|7.09|11.61|15.24|19.6|46.46|8.5|35.7|11.5|
|Savings|3.89|9.3|15.24|20.95|50.62|10.7|43.3|17.5|
|Total Expenditure|9.41|13.99|17.37|21.33|37.9|100.1|26.5|100.1|
|||||Year 1|991||||
|Food|14.85|16.75|18.5|22.33|27.57|38|12.9|22.5|
|Non food|10.11|14.44|17.89|24.44|33.12|32.3|23.4|34.7|
|Alcohol|10.76|14.32|17.34|24.41|33.17|2.1|22.9|2.2|
|Social Expenditure|11.4|15.29|19.44|23.33|30.54|6.2|19.4|5.5|
|Taxes|6.5|12.37|17.15|25.73|38.25|5.1|32.1|7.5|
|Other Expenditures|9.57|12.23|15.08|24.67|38.45|7.1|29.2|9.5|
|Savings|1.83|10.24|16.29|28.04|43.6|9.3|42.4|18.1|
|Total Expenditure|11.01|14.72|17.82|23.99|32.46|100.1|21.8|100|
# Table 11 _(contlnued)_

|||||Year 1|992||||
|---|---|---|---|---|---|---|---|---|
|Food|14.85|16.75|18.5|22.33|27.57|38.3|14.1|23.2|
|Non food|10.11|14.44|17.89|24.44|33.12|31.9|24.2|33.1|
|Alcohol|10.76|14.32|17.34|24.41|33.17|2.1|22.5|2|
|Social Expenditure|11.4|15.29|19.44|23.33|30.54|3.7|20.7|3.3|
|Taxes|6.5|12.37|17.15|25.73|38.25|5.2|38.7|8.6|
|Other Expenditures|9.57|12.23|15.08|24.67|38.45|7.5|34.1|1 1|
|Savings|1.83|10.24|16.29|28.04|43.6|11.2|39.2|18.8|
|Total Expenditure|11.01|14.72|17.82|23.99|32.46|99.9|23.3|1 00|
It may be enlightening to explain the change in the inequality of total income in terms of its income or expenditure components. This may easily be done by means of equation (3) which can also be written as where G is the Gini index of the total income, C; is the concentration index of the jth income or expenditure component and wj = gfIt is the share of the jth income or expenditure component.

Suppose that over a period, income or expenditure shares change from wj to w; which may be accompanied by changes in their concentration indices from C3 to C;. These changes would change the inequality of total income fiom G to G, which from (15) can be written as **_A_** _-_ G-~~~~ **_J-y_** _wiC) (16)_ 1 which shows that (wjCj - wj will be the contribution of the jth income or expenditure component to the change in the inequality of total income. This contribution may be further decomposed into two components; one, due to a change in the share of the jth income compone and second, due to a change in the distiuton of the jth income component These individual components may be wntten as in which tie first term on the right side measures the effect of a change in the share of the jth income component and te seoond term measures the effect of a change in the distrbution of the jth incoe amponent.

Subsfituting (17) into (16) gives

**The** calcdlai using **(18)** are presented in Tables 12 and 13. The conclusions emerging fom them ae ummarized below.

Th Gini index of total income declined by 4.7 points between 1989 and 1991. The major cause of this reduction was the salary income of blue and white collar workers which contributed a reducdon of 3.9 points. The reduction in the **sbare** of **salary** income caused a **reduction** in total inequality by 1.6 points and the remainig **reduction** of 2.3 points in total income inequality was caused by the redistribufion of **salary** income **in** favor of the poorer families.

27
Changes in collective farm income led to a reduction of 1.7 points in total inequality. Of this reduction, 0.8 points was due to a change in the share of coilective farm income and the remaining reduction of .9 points was caused by the redistnbution of this income component in favor of poorer families.

Table 12 Expaining Changes in Inequality in Terms of Income Components

|hncome Componet|_ Due to Changes h<br>Shares|Due to Changes hI<br>Distribution|Total Change<br>Components|
|---|---|---|---|
|C|hange in Inequality bet|ween 1989 to 1991||
|S_lryIncom<br>|1<br>-1.61|<br>-2-3|-39|
|Collstive Farm Income|-0.8|-0.9|-1.7|
|Govt Cash Benefits|0|0|0|
|Smaliholding Income|0.4|0.4|0.8|
|Other sourcs|0.2|-0.1|0.1|
|Total Income|-1.8|-2.9|4.7|
|C|hange in Inequality bet|ween 1991 to 1992||
|Salary Income||<br>-1.61|<br>1.4|-0.2|
|Colctive Farm Income|I|-0.6|0.4|
|Govt Cash Benefits|-0.6|2.2|1.6|
|Smaliholding Income|1.9|-1.2|0.7|
|Other sources|-0.1|-0.7|0.8|
|aTotlIncome|0.6|1.1|1.|

The share of salary income of blue and white collar workers continued to decine dunng the 1991-92 period resulting in reduction of inequality by 1.6 points. In this period the wage and salay income was iutd in favor of the richer households resulting in increase in income inequality by 1.4 points. Tbus the net effect of the salary income of blue and white collar workes was to decrease inequality by only 0.2 points.

Govenment transfers had no effect on the inequality in the 1989-91 period. But in the subsewquent period, govarnmen **t** ansfers caused an increase in total inequaIy by 1.6 points. This increase came about mainly from the redistribution of government benefits in fivor of richer families. These results strongly suggest that the exsting social sector poicies must be changed. Govenment benefits must be targeted on the poor.

28
In the 1989-91 period, the small-holding income had the effect of increasing inequality by 0.8 points. Of this increase, .4 was due to an increase in its share and the remaining increase of 0.4 points was due to redistribution of this income in favor of richer households. In the subsequent period, the share of smallholding income increased substandally from 11.5 percent in 1991 to 19.6 percent in 1992. This would have resulted in an increase in inequality by 1.9 points but the redistribution of this income in favor of poorer households resulted in a reduction in inequality by 1.2 percent. So the net contribution of the smallholding income was to increase inequality by only .7 points.

The redistribution of smallholding income in favor of poorer households is an interesting observation particularly when the country is faced with severe economic crisis. In this connecton, Milanovic (1993) has made an observation that in the early stages of reform, an increase in smallholding income decreases income inequality but after a while this income component may become unequalizing. His observation made in connection with eastean European countries suggests that Ukraine is at an early stage of reform.

So far we have measured the inequality of before tax income. The after tax income (or disposable income) is, obviously, a better measure of welfare than the before tax income. To compute the Gin index of after tax income, we used the followng formula due to Kakwani _(1980): G.=G- = <C -G (19) (1 -e)_ (9 where G' is the Gini index of per capita after tax income and G the Gini index of per capita before tax income: C is the concentration index of per capita tax paid by an individual and e is the average tax rate of the society. This formula is valid if we assume that the _taxes_ do not significanty change the ranldng of individuals. Since the average tax in Ukraine is small, it will have negligible effect on the individual ranlkings.

Table 13 presents the Gini indices before and after tax incomes. The last column in the table gives the redistibutive effect of taxes which is the difference between the Gini index of after and before tax income. It can be seen that taxes do reduce the inequality but the magnitude of reduction is not very large. This is due to the fact that the share of taxes in the total ncome is very small. As observed earlier, Ukaaine depends heavily on indirect taxes which can be quite regessive. It may seem appropriate to change the tax system so that the share of income tax is increased and that of indirect taxes decreased.

29
Table 13 Redlstributive Effects of Direct Taxes

||**Cmi**|**kindx**||
|---|---|---|---|
|**Yew**|**Pe**capit<br>beforetax<br>**Income**|Pw captafter<br>taxIncorne|Redistribution<br>Effect of Taxes|
|1989|26.5|25.8|-0.7|
|1991|21.8|21.2|-0.6|
|1992|23.4|22.6|-0.8|

# 8. Trends in Welfare in Ukraine

To compare welfar levels over time, we have plotted the generalized Lrenz curve for each year. It was observed that the generalized Lorenz curve shifted upward gradually duiung the period from 1980 to 1991. But in 1992 it shifted down. This demonstrates that welae in Ukraine increased gradually untl 1991 and then it fell to a level below that for 1985. These conclusions are valid for any welfare function which is symmetric and quasi-concave in incomes.

The generalized Lorenz curve can only rank the income distributions for diffeet years without weiling the magnitudes of increase or decrease. To enable us to make statements about the magnitudes, it will be necessary to compute single measures of welfare. A single measure of weae given by equadon (1) takes into account both the size and distribution of income. The estimtes of this measme along with its growth rates are presented in Table 14.

Table 14 Welfare In Ukraine 1980-92

|**Yew**|**Avera**<br>PW**Capit**<br>Rel hoone|_Avrage_<br>PW**CUpita**<br>Wellf|**Annud**Gro<br>Per**Capita**<br>Rea_Moor_|wth**Ra**<br>**Pr Copta**<br>Wow|
|---|---|---|---|---|
|1980|123|80.4|||
|1985|135.6|92|1.97|2.73|
|1989|148.6|109.2|2.32|4.38|
|1990|159.6|119.5|7.4|9.43|
|1991|163.4|127.8|2.38|6.95|
|1992|124.9|95.7|-23.56|-25.12|

30
It is evident that during the period between 1980 and 1991, welfare in Ukaine grew at a faster rate than per capita real income. The reason is that growth in real income was accompanied by a substntial reduction in income inequality during these eleven years. But during the period from 1991 to 1992, real per capita income declined by 23.56 percent. Per capita welfare declined at an even faster rate by 25.12 percent. This means that the decline in real income was accompanied by an increase in income inequality dunng the 1991-92 period.

We may now attempt to explain the changes in welre in terms income and expenditure components. Table 15 presents the contribution of each componen **t** o the total wfre. As can be seen from the table the wage and alary income of the blue and white oflar workers contributed 52 percent to total welfare in 1989. This contribution fell gradually to only 41.6 percent in 1992. This means that the wage and salary income of the blue and white collar workers became considerably less important in explaining welfare in the recessonary perod.

Government cash benefits contributed 17.5 percent to total welfare in 1989. This contribution increased to 24.5 percent in 1991 and then fell to ondy 11.7 percent in 1992. The welfare contribution of collective farm income and income from sallhdigs increased quite substanfially in 1992. The contribution of incomes from other sources remained more or less constant during the 1989-92 period.

Table 15 also presents results on wfare elasticity and the progresity index for each income and expenditure component. The welfare elasticity for s income was 0.42 in 1992; it mneans that if salary income on average increases by 1 perent total wfre increases by ondy 0.42 percent. The elasticity for government cash tansfers in 1992 was found to be only 0.12 which means that an average increase of 1 prcent governmen **t** ansfers increases total average welfare by 0.12 percent. Can we conclude from these obserations that salary income is welf superior to government transfers? The answer is obviously no. A welfare comparison of the two income components cannot be made without taking into account the cost involved in increasing the welfare. The progressivity index derived in (7) makes this cost adjustmen. A positive (negative) value of tis index implies that the income component is pro (egressive) favoring the poor (richer) families. This index suggests that salary income is regresive ndicatng **Xt** any policy to increase wage and salary income will favor richer families more than poorer families.

It is importan **t** o not that government cash transfers became gradually less progessive during the 1989 to 1992 period. Collective farm income was regressive in 1989 with a value of the index equal to -0.03, but in 1992 its value incrased to 0.14, thus maldng this icome component progressive. Similarly, the income from smalholdings was regressive in 1991 but became progressive in 1992.

Turning to expenditure components, it is observed that food is t most he expenditure item. This is undstandable because the poor spend a greater ption of thir income on food. If the govenment decides to impose a tax on food, the poor will be disadvanuged more severely than the rich. It is interesting to note that peronal income tax is progressive throughout. As a matter of fact the progressivity of taxes increased over the 1991-1992 period.

31
# Table 15 Welfare by Income and Expenditure Components

|I Edi||1989|||1991|||1992||
|---|---|---|---|---|---|---|---|---|---|
|ncome ar xpenture||||||-||||
|<br>Components|<br>% Contrlb.<br>of comp<br>to total<br>waifare|Wolfare<br>EBasticity<br>of each<br>cOmp|Progress<br>Index of<br>each<br>COMD|96 Contrlb.<br>of camp to<br>total<br>welfare|Welfare<br>Elasticity<br>of each<br>c|Progress<br>Index of<br>each<br>omc|96 Contrlb.<br>of comp to<br>totd<br>welfare|Whfare<br>Elasddtty<br>of each|Pragress<br>Index of<br>each<br>car|
|Salary Income|52|0.52|-0.09|47.3|0.47|-0.09|41.6|0.42|-0.1|
|Collective Farm Income|10.1|0.1|-0.03|7.2|0.07|0.04|15.5|0.16|0.14|
|Govt Cash Benefits|17.5|0.18|0.37|24.5|0.25|0.29|11.7|0.12|0.12|
|Smallholding Income|10.2|0.1|0.04|10.7|0.11|-0.07|20.5|0.21|0.05|
|Other sources|10.2|0.1|0.01|10.2|0.1|-0.04|10.9|0.11|0.07|
|Total Income|100|1|0|100|1|0|100|1|0|
|||||<br>Expe|<br>nditue Compo|<br>nents||||
|Food|37|0.37|-0.13|42.3|0.42|-0.11|42.9|0.43|-0.12|
|Non food|29.3|0.29|0.01|31.6|0.32|0.02|31.5|0.32|0.01|
|Alcohol|2.4|0.02|0.02|2.1|0.02|0.01|2.1|0.02|-0.01|
|Social Expenditure|9.3|0.09|-0.06|6.4|0.06|-0.03|3.8|0.04|-0.03|
|Taxes|-8.4|-0.06|0.12|-4.4|-0.04|0.13|-4.2|-0.04|0.2|
|Other Expenditures|7.4|0.07|0.13|6.4|0.06|0.09|6.4|0.06|0.14|
|Savings|8.3|0.08|0.23|6.9|0.07|0.26|8.9|0.09|0.21|
|Total Expenditure|87.3|0.86|0|100|_<br>1|0|100|1|0|
Next, we attempt to explain changes in welfare in terms of income and expenditure components. Suppose the average jth income component changes from 8 to g; and its concentraton index from _CJ_ to C;, then the total change in welfare may be written as where use has been made of (4), which shows that i&;(1-Cj-)-t&,1-cj) is the contribution of the jth income component to the total change in welfare. This contribution is further decomposed into two components; one due to a change in the mean of the jth income component and second due to a change in the distribution of the jth income component across total family income. Thus, Substituting (20) into (19) gives The calculations based on (21) are presented in Tables 16 and 17.

It can be see that real per capita welfare increased by 18.6 rubles (at 1980 prices) between 1989 arnd 1991. The major share of this increase came from government cash transfers which improved the per capita welfare by 12.2 rubles. Most of this increase came from the increase in the real value of govemmen **t** ransfers (12.3 rubles). This means that the distribution of governmen **t** ansfrs did not change significantly during this period.

It is intresting to note that wage and salary income (of the blue and white collar workers) added only 3.6 rubles to total welfare. And all of this increase came from the redistribution of wage and salary income in favor of the poorer families. The collective farm income led to a fall in total per capita welfare by 1.9 rubles between 1989 and 1991. Of this 1.9 rubles reduction, a fall of 3.2 rubles was due to a sharp decline in average income- from farm income, but the redistribution of this income component in favor of the poorer families led to an inrase in wdfare of 1.3 rubles. Small holding income contributed to an increase in welfare of 2.4 rubles in the 1989-91 peiod.

Trends changed damaticaUly between 1991 and 1992. Per capita welfire declined by 32.1 rubles. A lare proporton of this reduction is explained in terms of movements in salary income and government cash transfers. The average levels of both these components declined sharply and at the same time, both these components redistributed income away from the poorer families.

33
# Table 16 Explaining Changes In Welfare In Terms of Income Components

|Income Components|IDue to Changes<br>InIncome Comp<br>Averages|Due to Changes<br> <br>hIIncome Comp<br>Distribution|Total Change |<br>due to Income I<br>Components|
|---|---|---|---|
||Change In|Welfare between 198|9 to 1991|
|Salary Income|0||<br>3.6 ||<br>3.6|
|Collective Farm Income|-3.2|1.3|-1.9|
|Govt Cash Benefts|12.3|-0.1|12.2|
|Smaliholding Income|3|-0.6|2.4|
|Other sources|1.8|0.5|2.3|
|Total Income|139|47|18.6|
||.<br>Change in|.<br>Welfare between 199|1 to 1992|
|Salary Income|-18.6|-2|-20.6|
|Collective Farm Income|4.7|0.9|5.6|
|Govt Cash Benefits|-17|-3.2|-20.2|
|Smaliholding Income|4.4|1.6|6|
|Other sources|-3.6|0.7|-2.9|
|Total Income|-30.1|-2|-32.1|

34
# Table 17 Explaining Changes In Welfare In Terms of Expenditure Components

|Income Components|Due to Chanos In<br> <br>Exp Comp<br>Aver_se_|Due to Chanose<br>In<br>Exp Comp<br>Distribution|Total Chanoe<br>due to Exp<br> <br>Wm|
|---|---|---|---|
||Change In I|nequality between 1989|to 1991|
|Food|11.5|2.2|13.7|
|Non food|6.6|1.9|8.5|
|Alcohol|-0.2|0.2|0|
|Social Expenditure|-2.4|0.3|-2.1|
|Taxes|1.7|-0.4|1.3|
|Other Expenditures|-0.7|0.8|0.1|
|Savings|-0.4|0.1|-0.3|
|Total Expenditure|12.7|5.9|18-6|
||Change in I|nequality between 1991|to 1992|
|Food|-12.4|-0.6|-13|
|Non food|-9.9|-0.4|-10.3|
|Alcohol|-0.6|0|-0.6|
|Social Expenditure|-4.4|-0.1|-4.5|
|Taxes|1.2|0.5|1.7|
|Other Expenditures|-1.5|-0.3|-1.8|
|Savings|-0.7|0.5|-0.2|
|Total Expenditure|-30.7|-1.4|-32.1|

35
It is interesting to note from Table 17 that changes in taxes led to an improvement in welfare in both the periods, viz, during 1989-91 and 1991-92. The average level of taxes declined which had the effect of improving per capita welfare. In the 1991-92 period, taxes also became progressive which improved welfare by 0.5 rubles.

# 9. Poverty in Ukraine

To measure poverty, we need to know the poverty line - a threshold level of income below which an individual is poor. The most common approach to defining a poverty line is to estimate the cost of a bundle of goods and services which would ensure that the so caUled "minimum basic needs' of individuals are just met. To estimate such costs, the first step involves estimating the minimum money cost for food which would safisfy the average nutritional needs of families of different sizes. To these costs, one must add the rent paid and certain minimnum amounts for clothing, fuel and sundries to arrive at a poverty line for a family of a given size. This approach to specifying the poverty line pioneered by Rowntree (1901) may be called the physical subsistence approach.'<sup>0</sup> The physical subsistence approach has been used in the USSR at least since 1918. Khrushchev used the subsistence minimum baslet as part of the framework for the 1959-65 Seven Year Plan ((see McAuley (1979), Matthews (1986) and more recently Atkins and Michlewright (1992)). In 1988, Goskomstat estimated the minimum basket to be 78 rubles per month.

The Government of Ukraine has developed its own minimum consuton basket to target households with low incomes. The cost of this basket at January 1993 prices was 14345 coupons per month. The food and non-food costs of this basket are as folows.

1. Food products 9490 2. Non-food products 3,083 including 3083 (a) Clothes, underwear and footware 1488 (b) hygiene and sanitary items, medicine 391 (c) household and everyday use items 1113

3. Services 1103 4. Taxes and payments 669 Total 14345 A brief but illuminating discussion of this approach is given in Sen (1979).

36
It can be seen that the cost of the total basket (14345 coupons) is about 1.51 times the cost of food products (9490 coupons) in the basket. The multiplier of 1.51 may be considered to be too high. Kendall, Mills, Munoz and Sahn (1993) suggested a multiplier of 1.25 which they regarded to be adequate and realistic, given the extensive subsidies to housing, health care, education, public tansport, and so forth. If we applied this multiplier, the total cost of the basket would be reduced to 11862 coupons per month which is about 82 percent of the cost of the official basket.

It is interesting to note that the poverty line of 78 rubles in 1988 if adjusted for price changes amounted to a value of 11878 coupons per month in January 1993. Thus, our derived basket of 11862 coupons (based on a multiplier of 1.25) is almost identical to the Goskomstat baslet.

In the present paper we have used two poverty lines. The cost of the official basket of the Ukrainian government is our first poverty line. Our second poverty line is equal to 11862 coupons per month (which is derived from the food cost of the official basket multiplied by 1.25). We define the families whose per capita income is below the second poverty line as 'ultra poor"; those whose physical personal maintenance is unstable ((Lipton (1988)). The fixed poverty lines in January 1993 prices were converted to those in current prices by means of the price indices given in Table 1. The results are presented in Table 18.

Table **18** Poverty in Ukraine

|||Poor|||Ultra Poor||
|---|---|---|---|---|---|---|
|Year|Poverty line<br>in current<br>Drices|Head<br>Count<br>Rio|Poverty<br>Gap<br>Ratio|Poverty line<br>in current|Head<br>Count<br>Rato|Poverty<br>Gap<br>Rtio|
|1980|88|38.04|11.37|72.9|23.23|7.3|
|1985|91.6|28.37|7.55|75.8|14.41|4.67|
|1989|96|17.93|4.18|79.5|8.56|2.3|
|1990|100.4|11.53|2.29|83.1|5.49|1.01|
|1991|188|8.76|1.33|155.7|3.2|0.43|
|1992|2845.8|29.75|6.86|2356.4|16.88|3.45|

Having decided upon the poverty line, we next compute poverty indices which would measure the intensity of poverty. The head-count measure, while widely used, is a crude poverty index because it does not take account of the income-gap among the poor. If the degree of misery suffered by an individual is proportional to the income shortfall of that individual from 37
the poverty line, then the sum total of these shortfalls may be considered an adequate measure of poverty. Such a measure is called the poverty gap ratio and can be written as where g(x) = (Zx) , z being the poverty line, f(x) is the density function of income x, H is z the head-count ratio and pp is the mean income of the poor.

The measure g will provide adequate information about the intensity of poverty if all the poor are assumed to have exactly the same income, which is less than the poverty line. In practce, the income among the poor is unequally distributed and, therefore, g will not be sensitive to income inequality among the poor. Several poverty measures have been proposed in the literate wich are sensitive to income inequality among the poor ((Sen (1976); Kakwn (1980); Foste, Greer and Thorbecke (1984) and Takayama (1979). Since we have at our disposal only the grouped data, it winl not be possible to estimate these measures accurately partularly when the number of groups are very small. The present paper uses only the two measures of poverty, viz, head-owunt ratio and poverty gap ratio. The results are presented in Table 18.

It is evident that poverty in Ukraine declined monotonically over the 1980-91 period. In 1980, 38 percent of individuals were below the poverty line but this figure reduced to only 8.76 percent in 1991. But in 1992 poverty increased to a massive figure of 29.75 percet. The same conclusion emerges if poverty is measured by the poverty gap ratio.

In 1990, 23.23 percent of the population were in the ultra poor category. This is a very high figure but it is interesting that the percentage of the ultra poor dropped to only 3.2 percent in 1991. This shows that _Ukraine_ made tremendous progress in alleviadng poverty until 1991 but this ahie nt tuned into a disaster in subsequent periods. In 1992, the pcentage of the ultra poor was 16.88. As we noted earlier, the Ukaainian standard of living (measured by wages) has been falling at a phenomeal rate since January 1993. We expect that poverty would by now have increased to an unacceptably catstrophic level.

To explain changes in poverty, we use a poverty decomposition procedure given in Kakwani and Subbano (1992)."1 This decomposition enables one to separate the impact on poverty of changes in mean income and in its inequality.

"Datt and Ravallion (1992) have also dealt with this issue but their decomposition is different from the one used here.

38
Let us consider two years, viz, the base year and the terminal year. 9 is the poverty measure which is a function of the mean income and the Lorenz curve. Therefore, the poverty index in the base year is given by

> °co = _O,_ WL))

where pe is the mean income in the base year and L(p) the Lorenz curve in the base year, where p varies from O and 1.

Similarly, the poverty index in the terminal year is given by Oil = _0((1 ,_ 0L(p)) where y1 and L1(p) are the mean income and the Lorenz curve in the terminal year.

Then the change in poverty is given by T = 01, - _°0-_ which we call as the total poverty effect.

there is also the pure growth effect which is defined as the change in poverty lvel if the mean income were to change but the relative income distribution measured by the Lorenz curve remained unchanged. This effect can be measured by (lKkwani and Subbarao (1992)).

- G- 1 _[lo_ ° + _o 1 -e01J_ 2

where _1 0_<sup>=O(UW.</sup> 1(p)) im = 9Qzo, L1(p)) Similarly, the pure inequality effect is defined as the change in povrty if the Lrenz curve were to change but the mean income remained the same. This effdct can be measured by I = 1 [Ooi - °oo + oil G °Gol he it is easy to show that T = G + I (23) which implies that the total change in poverty T is equal to the sum of the gmwth and inequaity effects.

(23) The calculations of T, G and I are presented in Table 19.

39
# Table 19 Explaining Changes in Poverty

||Hea|d Count Rad|o|Pov|ery Gap Rato||
|---|---|---|---|---|---|---|
|Yews|Tota Change<br>In Povety|Dueto<br>_Growth<br>I|Dus to<br> Inequalty|Total Change<br>In Povety|Due to<br>Growth|DO to<br>IInequality|
||||Po|or|||
|1980 to 1985|-9.67|-8.69|-0.98|-3.82|-2.3|-1.52|
|1985 to 1989|-10.44|-6.99|-3.45|-3.37|-1.57|-1.8|
|1989 to 1990|-6.4|-4.04|-2.36|-1.89|-0.84|-1.05|
|1990 to 1991|-2.77|-0.94|-1.83|-0.96|-0.2|-0.76|
|1991 to 1992|20.99|17.13|3.86|5.53|4.01|1.52|
|1980 to 1992|-8.29|-3.53|-4.76|.4.51|-0.9|-3.61|
||||Ultra|Poor|||
|1980 to 1985|-8.82|.4.51|-4.31|-2.63|-1.69|-0.94|
|1985 to 1989|-5.85|-3.06|-2.79|-2.37|-0.96|-1.41|
|1989 to 1990|-3.07|-2.38|-0.69|-1.29|-0.38|-0.91|
|1990 to 1991|-2.29|-0.59|-1.7|-0.58|-0.08|-0.5|
|1991 to 1992|13.68|9.94|3.74|3.02|1.97|1.05|
|1980 to 1992|-6.35|-0.6|-5.75|-3.85|-1.14|-2.71|

As we noted earlier, poverty in Ukraine increased sharply in the 1991-92 period. On the basis of the head-count rado, the total increase in poverty was 20.99 percent. The quesfion we ask is: how much of the total increase in poverty can be explained in tms of changes in the mean income and income inequality. It can be seen that 17.13 percent of the increase in poverty was due to a decrease in the per capita income and the remaining 3.86 pacent due to e increase in income inequality. During the same period ultra poverty increased by 13.68 pement of which 9.94 percent was due to decrease in per capita income and 3.74 percent due to an increase in income inequality. This shows that the increase in inequality has a greater effect on ultra poverty than that on poverty.

Looking at the enfire period 1980 to 1992, it can be seen that the poverty in Ukraine decreased quite substantially. A larger proportion of this decline came about as a result of redistribution of income in favor of poorer families. For instance, the poverty gap ratio shows that the poverty decreased by 4.51 points; the growth in per capita income contributed only 0.9 40
to this decline and the remaining decline in poverty was due to the redistribution of income in favor of the poorer households. Thus, we may conclude that it was the lack of economic growth which led to a lower reduction in poverty in Ukraine between 1980 to 1992.'u

# 10. Comparing Ukraine with other Soviet Republics

It is alwavs very difficult to make intemational comparisons of inequality. The major difficulty is the availability of comparable data from different countries. Since the data from different republics of the USSR are quite similar, it will be possible to make a cross-republic comparisons of income inequality and welfare. The year book of the USSR provides data on income distribution for 1990 with seven income groups. We used a general interpolafion device to compute quintile shares and the Gini index. The results are presented in Table 20.

It is evident that income inequality varies quite widely among the republics. Inequality as measured by the Gini index is lowest in Ukraine. The highest inequality is found in Azerbaijan with the Gini index of 30.05. The other republics with very high inequality levels are Georgia, Kazakhstan and Turkmenistan. Ukraine and Belarus have quite smilar inequality patterns.

Table 21 presents real per capita family income in 1980 Ukmainian pric. Welfare in 1990 was computed using the formula given in (1). According to this table, it is found tbat the richest republics are Estonia and Latvia. The ranling of Russia was 13 in 1980 and 1985 which became 12 in subsequent periods. The poorest republic is Tlildstan followed by Azerbaijan. On the basis of per capita income, Ukraine's ranldng remained 9th throughout the period between 1980 and 1990. If we take into account income inequality in measuring welfare, Ukmraine's ranking rises to 11th in 1990.

The major conclusion that emerges from Table 21 is that there existed substantial regional disparities in the Soviet Union. Although the reduction of regional disparites was one of the major goals of the Soviet government, disparities between republics continued to exist. This observation has been made earlier by McAuley who states: wAlthough all republics in the USSR enjoyed increases in per capita incomes, there was little if any reduction in interrepublican variation. If the Soviet government did become more concemed about the extent of regional disparities in the standard of living in the late fifties, and if it actively sought to reduce them, its policies must be judged to have failed during the 1960s', (1979, pp.99).

"<sup>2</sup> Note that poverty in Ukraine reduced by 29.28 percent in the 1980 to 1991 period and about 70 percent of the reduction is explained by the growth in per capita income and the remaining 30% was due to income redistribution in favour of poor households. But during the subsequent period (1991 to 1992) a large deterioration in economic growth changed this situation.

41
Table 20 Inequality in USSR Republics in 1990

||||Quintiles|||Gind<br>|Ranking<br>|
|---|---|---|---|---|---|---|---|
|Republics||||||Index|by<br>|
||I_t|2nd|3rd|4th|5th||GIni Index|
|Russia|10.1|13.1|17.9|21.9|37|26.6941|9|
|Ukraine|11|13|19.3|21.9|34.8|24.18871|1|
|Belarus|11|14|17.7|21.9|35.4|24.37788|2|
|Uzbekistan|10.5|12.2|17.4|23.3|36.6|26.9212|10|
|Kazakhstan|8.8|14.3|16.8|22.4|37.7|28.39032|13|
|Georgia|8.9|13.7|17.3|22|38.1|28.7073|14|
|Azerbaijan|9.3|11.9|17.7|22.1|39|30.05381|15|
|Lithuania|9.9|14.1|17.1|21.5|37.4|26.55661|8|
|Moldova|9.6|14.9|17.4|22.1|36|25.87432|4|
|Latvia|9.9|14.3|17.2|21.3|37.3|26.1603|5|
|Kyrghyzstan|9.3|13.3|18.8|21.8|36.8|27.13963|11|
|Tjikistan|11.9|11.9|16.9|23.3|36|25.67341|3|
|Armenia|9.7|14.3|17.6|22|36.4|26.44916|7|
|Turkmenistan|9.6|13|18.3|21.8|37.3|27.50055|12|
|Estonia|9.6|13.7|17.3|20.9|38.5|26.35545|6|
|USSR|8.8|13.9|17.7|22.2|37.4|28.22334||

42
Table 21 Real Per Capita Aggregate Family Income and Welfare<sup>In USSR Republics In 1980 Ukrainian Prices</sup>

|Reublics|-__|PerCa|haReal lnc|ome|-|Welfare<br>1390|R|anking. b|Per Capita**R**|**eal**Ineom|e<br>-|**Wefare**<br>RLnking|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|p|1960|198S|1907|1968|1990||1980|1965|1937|1186|1990|1990|
|Russia|148.7|154|157|159.6|172.2|126.2|13|13|12|12|12|12|
|Ukraine|123|135.6|138.3|139.3|_159.6_|121|9|_9_|9|9|9|11|
|Bularue|132.5|144.1|149.8|148|176.4|132.6|11|11|11|10|13|13|
|Uzbekistan|90.6|90.4|87.9|90|101.1|73.9|3|2|2|2|3|3|
|Kazakhstan|125.7|128.5|132.5|124.9|14S.4|104.1|10|8|a|a|8|_|
|Georgia|118.9|139.8|149.8|156.7|161.2|114.9|8|10|10|11|10|9|
|Azefballan|86.5|96.1|100.8|103|so|691.5|2|3|3|3|2|2|
|Lthuania|148.7|152.1|159.9|165.4|161.2|118.4|12|12|13|13|11|10|
|Maiddve|109.5|11568|121|121.9|137.5|101.9|7|7|6|6|7|7|
|Latvia|166.3|170.9|178.8|178.5|207|152.8|14|14|14|14|14|14|
|Kyighvzstan|94.6|9819|10098|104.5|116.9|85.2|4|4|4|5|5|5|
|Tjkisktan|78.4|77.7|77.8|78.4|**69.5**|51.7|||1<br>1|1||1|
|Annenia|109.1|11538|123,9|124.8|134.3|98.8|6<br>I||7|7|6|6|
|Turkmmnistan|98.7|100.3|103 7|103|102.7|74.5|5|5|5|4|4|4|
|Estonia|177.1|160.8|188.7|193|230.7|169.9|15|1S|15|15|15|15|
|USSR|135.2|1413|144.1|145.1|158|113.4|_<br>,|||_ __|||
Table 22 presents the average growth rates of real per capita national income. The results suggest that a large number of republics suffered decreases in real per capita income between 1989 and 1990. As a matter of fact, the growth rate was negative in 14 out of 15 republics. Ukraine's per capita income grew quite strongly until 1989 but then the growth rate becane negative in the subsequent year. Despite the fact that Ukaine's growth rate was negative, its ranldng on the basis of its growth rate in 1990 was as high as 13. There was a large number of republics which suffered larger deterioration in their growth rates.

The poverty estimates of republics for the year 1990 are presented in Table 23. These estimates were obtained using the Ukaainian poverty lines discussed earlier. Again a general intepolation was used to compute these estimates. According to these results, _11.55_ and 5.49 percent of people were poor and ultra poor in Ukraine, respectively. Ukraine's poverty raning is 5th which means that there are only four other republics which had lower poverty than Ukaine. Among these four republics, three are Baltic republics viz, Estonia, Latvia and Lithuania. Belarus has the 4th ranking.

ITe republics which have the most severe poverty are Tajikistn, Uzbekistan, Azerbaijan and Turkmenistan. The percentage of the poor in these countries is more an 49. In Tajikistan, this percentage is as high as 67.97. Even the percentage of ultra poor is more than _52._ This may be regarded as an extremely high level of poverty in a country which until recently was a part of the USSR, a leading power after World War H.

The conclusions about poverty in the republics must, however, be qualified. In our computations we have made the assumption that the price levels in diffemnt republics are the same. It is reasonable to assume that some differences in the price levels do exist but we still believe that our overall conclusion of extreme disparities in standard of living in different republics does hold.

Tables 24 and 25 indicate that the wage gap between rural workers (which include state and collective farmers) and blue and white collar workers has been continuously narrowing in the 1980s. This trend is evident in all the Soviet republics. Since the rural workers generally had the low average wages in the early 1980s, it means that income inequality in the republics must have significandy declined during the 1980s.

44
# Table 22 Annual Growth Rates of Real Per Capita National Income for USSR Republics

|Republic-||Annu|al Growth R|ates||Growth<br>Rat-||Rankings b|y Yeedy4|rowth<br>Rates||Avg<br>Growth|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
||Igoe<br>-<br>---|1gs7|1998|1989<br>-|199o<br>-|1985to<br>-~~~|1986<br>~~~~~~|1987<br>~~~~~|1988<br>~~~~an<br>---W|1989<br>--<br>I|1990|lsst<br>_14_|
|Russia|1.02|-0.1|3.65|1.43|-5.44|0.112|11|6|6|a|6|7|
|Ukraine|1.01|4.94|2.07|3.69|.1.6|<br>2.002|7|15|5|10|13|11|
|Selafus|1.04|2.99|1.78|7.27|-1.89|2.238|13|13|4|13|12|13|
|Uabekiatan|0.97|-2.47|6.86|0.4|-0.69|1.014|1|3|11|6|14|10|
|_Kazakhatan_|1|-1.2|4.55|.1.55|-2.45|0.07|5|5|8|5|9|8|
|Georgia|0.98|-2.65|6.08|-3.95|-4.53|-0.814|2|2|10|4|7|4|
|Azerbaijan|1|2.4|-0.88|-7.38|-8.93|-2.758|4|12|2|3|4|2|
|Uthuania|1.05|3.61|9.53|0.59|-13.56|0.244|14|14|14|7|1|8|
|Moldova|1.06|0.94|1.31|7.93|-7|0.828|15|10|3|15|5|9|
|Latvia|1.04|0.48|5.18|6.75|.3.33|2.024|12|8|9|12|8|12|
|Kyrghystan|0.99|0.71|10.84|2.45|-2.39|2.48|3|9|1S|9|10|15|
|TpkIstan|1|-4.5|8.89|.10.47|-11.16|-3.248|6|1|13|1|2|1|
|Arnenla|1.01|-1.59|-2.53|7.77|-10.77|-1.222|8|4|1|14|3|3|
|Tufkmenistan|1.02|1.18|7.49|-9.05|-2.09|-0.29|10|11|12|2|11|5|
|Estonla|1.02|0.2|4.31|5.82|0.8|2.43|9|7|7|11|15|14|
|USSR|1.01<br>i<br>n|0.59<br>~<br>**_-5-_**|3.43|1.71<br>_-_|-4.57|0.434||_||_|_<br>**_-_**||
Table 23 Poverty In USSR Republics In 1990

|||Po|or|||Ultra|Poor||
|---|---|---|---|---|---|---|---|---|
|Republics|Head-Co|unt Ratio|Poverty G|ap Ratio|Head-Ca|unt Ratio|Poverty G|ap Ratio|
||Value|Rank|Value|Rank|Value|Rank|Value|Rank|
|Rusasia|11.62|6|2.46|6|5.86|6|1.16|6|
|Ukraine|11.55|5|2.29|5|5.49|5|1.01|5|
|Belarus|7.62|4|1.42|4|3.41|4|0.58|4|
|Uzbekistan|57.31|14|17.95|14|41.55|14|11.38|14|
|Kazakhstan|24.65|10|6.25|10|14.67|10|3.46|10|
|Georgia|17.93|8|4.3|9|10.13|9|2.28|9|
|Azerbaijan|49.61|13|15.59|13|36.08|13|9.91|13|
|Lithuania|5.87|3|1.11|3|2.66|3|0.46|3|
|Moldova|18.86|9|4.29|8|10.15|8|2.17|8|
|Latvia|4.86|2|0.88|2|2.13|2|0.35|2|
|KVrghyzstan|46.75|11|13.69|11|31.83|11|8.36|11|
|Tjikistan|67.97|15|22.75|15|52.45|15|14.93|15|
|Armenia|16.95|7|3.83|7|9.06|7|1.92|7|
|Turkmenistan|49.44|1 2|14.69|1 2|34.13|12|9.04|12|
|Estonia|3.42|1|0.61|1|1.47|1|0.24|1|
|USSR|18.52||4.75||11.13||2.66||
Table 24 Ratio of Average Salaries of State Farmers to Blue and White Collor Workers by USSR Republics

|Republics|1980|1985|1986|1987|1988|1989|1990|
|---|---|---|---|---|---|---|---|
|Russia|88.4|100.1|103.8|103.7|100|101.5|105.4|
|Ukraine|87|93.2|97.2|98.1|96.9|99.3|107|
|Belarus|79.2|94.5|98.8|100.2|97|98.6|96.8|
|Uzbekistan|98.3|95.1|96.3|94.3|98.6|104.1|110.4|
|Kazakhstan|101.3|107.9|111.9|111.1|106.6|105.6|112.3|
|Georgia|73.4|79.1|81.9|78|79.4|79.8|91.7|
|Azerbaijan|93.8|98.7|87.3|79.6|76.2|76.5|84.4|
|Lithuania|82.5|99.8|101.6|100.8|96.1|99.4|98|
|Moldova|86.9|92.7|96.7|94.3|94.6|97.8|104.8|
|Latvia|90.8|113|65.3|111|103.9|104.4|96.5|
|Kyrghyzstan|83.7|93.1|91.2|89.4|88.5|91.4|90.6|
|Tiikistan|83.4|84.5|87|84.5|84.9|84.3|85.2|
|Armenia|75.3|79.7|81.1|/7.7|79.9|75.6|76|
|Turkmenistan|94.8|95.1|96.7|99.8|103|116|118.5|
|Estonia|104.6|119.6|82|116.4|111.9|111.4|97.5|
|USSR|88.6|97|99.8|99.2|96.6|98.1|102.4|

47
Table 25 Ratio of Average Salaries of Collective Farmers to Blue and White Collor Workers by USSR Republics

|Republics|1980|1995|1986|1987|1988|1989|1990|
|---|---|---|---|---|---|---|---|
|Russia|69.9|82.4|86.4|87.5|85.2|85.6|89.3|
|Ukraine|66.8|78|82.8|84.4|83.8|84.7|88.7|
|Belarus|67.9|89.2|94.5|96.4|93|92.9|93.3|
|Uzbekistan|83.6|79.2|78.2|77.8|82.2|85.1|94.1|
|Kazakhstan|83.4|89.3|89.8|93.7|92.9|90|92.8|
|Georgia|76.2|86.9|82.2|78.5|77.6|85.9|109.1|
|Azerbaijan|111.3|127.7|115.5|103.1|99.4|101.9|123|
||Uthuania|80.7|96.5|101.1|101.4|100.6|105.4|106.8|
|Moldova|73.5|90.3|97.3|93.9|91.6|98|108.1|
|Latvia|88.6|108.6|110.6|110.5|107.1|105.7|103.3|
|Kyrghyzstan|79.5|98.5|90.5|93.6|90.1|100.3|100.5|
|Tjikistan|89.2|89.1|90.4|83.4|89.4|88.3|89.3|
|Armenia|84.6|98.2|97.4|93.6|94|93.2|113|
|Turkmenistan|86.4|84.7|75.9|81.4|86|92.1|100.9|
|Estonia|109.5|126.8|128.3|127.1|122.4|117.6|103.2|
|USSR|70.2|80.7|83.3|83.9|82.7|83.5|87.8|

48
# 11. Concluding remarks

The average standard of living in Ukamine increased quite significantly in the late 1980s. The 1989-90 period registered an impressive growth rate of 7.4 percent in per capita family income but this was eroded in the subsequent periods from 1990 to 1992. Per capita family income declined by 23.56 percent during the 1991-92 period. Families largely dependent on governmen **t** ransfers suffered the greatest decline in their incomes. Their per capita income fell by 58.33 percent.

The significant increase in real per capita income in the 1980s was accompanied by a substantial decline in income inequality. Inequality dedined monotonically from 1980 to 1991, but rose between 1991 to 1992. The results suggest that the families of state and collective farm workers improved their relative incomes (compared to industrial workers) between 1980 and 1991 which would have an equalizing effect on the distribution of income.

The inequality of total per capita income declined by 4.7 points between 1989 and 1991. The major cause of this reduction was the salary income of blue and white collar workers which contributed to a reduction of 3.9 points. Changes in collective farm income led to a reduction of 1.7 points in total inequality. Government transfers had no effect on inequality in the 1989-91 period. But in the subsequent period (1991-92), government transfers caused an increase in total inequality by 1.6 points. This incrase came about mainly from the redistribution of government benefits in favor of richer families. The proposed progressivity index shows that government cash transfers became gradually less progressive during the 1989 to 1992 period. During a recession the government should target its scarce resources on the poor but in Ukraine exactly the opposite happened. The greater proposition of government transfers went to the richer families in 1992.

Poverty in Ukraine declined monotonically over the 1980-91 period. In 1980, 38 percent of the population were poor but this figure reduced to 8.76 percent in 1991. But in 1992 poverty increased to a massive figure of 29.75 percent. Of 20.99 percent increase in poverty, 17.13 percent was due to a decrease in per capita real income and the remaining 3.86 percent increase was due to the increase in income inequality.

Income inequality varied widely among the republics of the USSR. Inequality in Ukraine was found to be the lowest in 1990. Among the 15 republics, Ukraine's rank on the basis of per capita welfare was 11th. Ukaine's poverty ranking was 5th in 1990 which means that there were only four republics which had lower poverty than Ukraine. Some of the republics had poverty levels varying from 49 percent to 67.97 percent whereas the similar figure for Ukraine was only 11.55 percent.

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Most of the analysis presented in the paper is confined to the period between 1980 and 1992. Ukraine performed reasonably well until 1991 and then the decline in the living standard began. Since January 1993, the real wages have been falling at a phenomenal rate. Table 26 supplied to us by the Statistical Department of Ulcraine is a clear demonstration of rapidly falling standard of living in Ukraine between 1992 and 1993. The average per capita consumption of meat, fish and dairy products have fallen. Per capita consumption of these items among low income families is much lower than the norms of consumption worked out by the Institute of Hygiene.<sup>13</sup> How long will the standard of living in Ukraine continue to fall? Nobody knows the answers. On the one hand, to control the hyperinflation, the government has to follow rigorous demand management policies and on the other hand it has to protect the poorest and most vulnerable groups in society. The task is gigantic, particularly when there exists no reliable information on which to formulate policies. The present paper provides a basis for determining the magnitude, causes and characteristics of inequality and poverty. This should help in designing appropriate policies but a lot more work needs to be done. And it needs to be done quickly.

3It might seem puzzihng from Table 26 that consumption of vegetables and frits increased by about 30% in the 1992-93 period while the real income collapsed substantially during the same period. This may be explained by the fact that many households grow vegetables and frits in their plots which they can afford to eat even if they do not have large money incomes. In the paper, we nodced that the snallholding did increase in the 1991-92 perod and this trend might have continued in 1993.

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# Table 26 Consumption of Foodstuffs by the Population of Ukraine (Kilos Per Year)

||1<br>|992<br>|1<br>|993<br>||
|---|---|---|---|---|---|
||Average<br>per capita|Average<br>per family<br>member in<br>low-income<br>families|Average<br>per capita<br>|Per capia in<br>lownincome<br>familes|Norms of<br>consumption worked<br>out by the Insttute<br>of Hygiene and<br>Nutrition<br>(average per capita)|
|Meat and meat<br>products|53.0|27.0|45.8|23.8|46.0|
|Milk and dairy<br>products|286.0|203.0|246.0|172.0|350.7|
|Fish and fish<br>products|8.5|4.5|6|3.2|13.9|
|Potatoes|131.0|73.0|136.0|100|90.2|
|Vegetables|92.0|50.0|138.0|70|106.9|
|FFruitand<br>berries|38.0|25.0|50.0|26|61.1<br>l|
|Bread and<br>bread products|143.0|75.0|143.0|100.0|94.0<br>l|
|Vegetable oil<br>and margarine|10.8|4.8|7.5|3.6|7.4<br>__<br>l|
|Sugar and<br>confectionar|45.0<br>y|19.0<br>___=_______|44.0<br>__._.,_l|19.0|26.8|

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