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The author would like to thank the Lithuanian Ministry of Social Security, and in particular Vita Safjan and Gražina Jalinskiené, for the provision of numerous time series and valuable comments on previous drafts. The paper has also benefitted from comments by Wayne Camard, Daniel Citrin, Peter Doyle, Adalbert Knoböl, Ashok Lahiri, and Gunnar Tersman. Finally, special thanks are due to Ingrida Grivačiauskaité for able research assistance. The views expressed in this paper are solely the author’s.
However, the extent of poverty both in the FSU and the Baltic countries would have probably been considerably higher if the poverty line had been drawn based on the approach employed by the 1990 World Development Report. While the actual subsistence minimum was set at rub 75 per month, the World Development Report used a global cut-off point on a purchasing power parity basis of US$370 per year. At the commercial exchange rate of the FSU, the US$370 poverty line would have translated into about rub 50 per capita per month. At the noncommercial rate, however, the poverty line should have been about rub 180. Thus, a poverty line between rub 100 and rub 150 might have been considered comparable to international standards (IMF et al., 1991, vol. 2, p.155).
This law was adopted on September 27, 1990. Reprinted in English in Parliamentary Record No.12 (1991).
Following an approach suggested by Popkin, Mozhina, and Baturin (1992), food prices are taken from the monthly household survey. While food prices vary considerably from income group to income group, minimum incomes are constructed on the basis of the lowest actual food prices paid across different income groups.
Sen (1976) has shown that the head count violates both the so-called monotonicity axiom and the transfer axiom. The first axiom stipulates that—ceteris paribus—a reduction in the income of a person below the poverty line must increase the poverty index; the latter requires that—ceteris paribus—a pure transfer from a person below the poverty line to someone who is richer, but may still be poor, must increase the poverty index.
Thus, the poverty gap also violates the transfer axiom.
Provided that the parametric form for the Lorenz curve L(p) can be specified on the basis of these approaches, the two poverty measures may be calculated as follows. With μ denoting the mean income, the head count may be obtained using the fact that x = μ L’(P) is the inverse function of the distribution function P = F(x). Thus, L’(H) = z/μ. This can be solved numerically, employing, for example, Newton’s method (Ravallion, Datt, and van de Walle (1991). The poverty gap ratio can then be obtained taking into account that μP = ML(H)/H.
As is well known, a valid Lorenz curve L(p) must be monotonic increasing and strictly convex in the (0,1) interval. Also, it should have the limiting properties that L(0)=0 and L(1)=1.
The minimum Kolmogorov-Smirnov estimator is based on the Kolmogorov-Smirnov one-sample test, which measures goodness-of-fit between the distribution of a set of sample values (here, the observed distribution of income) and a specified theoretical distribution by comparing their cumulative frequency distributions. While the Kolmogorov-Smirnov test aims at finding the largest deviation between the sample distribution and the theoretical distribution, the Kolmogorov-Smirnov estimator looks at the parameters of the theoretical distribution which best fits the observed sample. For more details on the test methodology see Alexeev and Gaddy (1993, pp.34-35).
Notwithstanding this problem, the authors (Alexeev and Gaddy, 1993, p. 30) conclude on the basis of the estimated summary statistics of income inequality that “… the Baltic and Slavic republics have the lowest inequality, the Christian southern republics fall into the middle, and the Muslim republics show the greatest inequality.”
However, these results may overestimate the true extent of poverty. As the household surveys reveal, household expenditure in some months exceeded household incomes. To some extent, this might be explained by unrecorded intra- and inter-group transfers, in particular between family members, as well as the fact that households may have been able to maintain expenditure by borrowing or drawing on savings. More importantly, however, households might have underrecorded their incomes, possibly for reasons of tax evasion and/or having access to direct income support. These problems are relatively common, and a number of studies have therefore employed an alternative approach, measuring poverty in terms of consumption rather than income. However, since in general expenditure distributions exhibit a lower degree of inequality, the head count index and the poverty gap ratio based on expenditure data may be biased downward relative to income-based measures.
The special social benefit is based on a separate negative income tax scheme. This scheme involves a guaranteed payment and then the withdrawal of payment at a certain rate as specified by the formula given in Table 4. It overlaps with the income tax so that some people receive negative tax supplements while paying ordinary income tax.
It is important to note, however, that these estimates are derived under strict ceteris paribus assumptions. In particular, they do not take into account that the financing of social benefits may have significant macroeconomic implications, which affect different income groups in different ways. For example, to the extent that the financing of the social safety net contributes to inflation, which usually affects the poor more than the relatively better-off, the impact of social assistance on poverty may be even over-estimated. Those effects would need to be studied in a general equilibrium framework.
According to a recent proposal put forward by the Lithuanian Ministry of Social Security the number of social assistance benefits would be reduced to eight.
There is general agreement, however, that from the standpoint of health policy maternity benefits should remain a categorical benefit.
Such a scheme would make sure that the poorest gain most from the reallocation of social benefits. Provided that this scheme is closely coordinated with the tax system, it would have the virtue of reducing the effective marginal rates of tax. As is well-known, means-tested benefits may result in a poverty trap, implying that an increase in earnings above the poverty line could actually lead to a decline in total income because the individual would no longer be eligible for social benefits.
These results crucially depend on how social benefits are reallocated. The head count index, for example, would be reduced further if the relatively better-off among the poor gained most from the redistribution. While—as discussed above—both the head count and the poverty gap ignore the distribution of income among the poor, the proposed redistribution scheme implicitly attaches more weight to the poverty gaps of poorer individuals, which would be reflected in the Sen poverty index.
For example, assuming an unchanged take-up rate of 70 percent among the poor, only 35 percent of a targeted redistribution of 50 percent of social benefits currently allocated to households with average incomes above the AMLL would actually be absorbed, with the difference representing a reduction in social expenditure. As a result, the head count index and the poverty gap ratio would decline by about 1.8 and 8 percentage points, respectively, compared with 2.34 and 10.23 percentage points, respectively, if redistributed social benefits were fully absorbed by the poor.