Poverty was for many years a subject of great sensitivity in the former Soviet Union. It was generally assumed that the administratively determined system of wages and transfers would be adequate to meet minimum living standards. However, with economic activity sharply contracting following the dissolution of the former Soviet Union, the Baltic countries, as well as the other newly independent states, are facing a serious policy dilemma. While the number of people needing social assistance has significantly increased, the capacity to finance social welfare services has considerably declined.
In order to maintain popular support for economic reforms, a number of countries concerned have recently begun to take important steps to identify the neediest segments of the population and to reform the comprehensive system of cash benefits, under which the state had assumed responsibility from “cradle to grave.” Such a system has widely been perceived as costly and inadequate in preventing poverty and need; however, owing to the lack of data, little empirical evidence has been presented for these countries.
This paper presents some first empirical estimates for Lithuania, where, with technical assistance from the World Bank, the authorities have recently started to conduct monthly household surveys. These household surveys contain important information about the age-sex structure of the Lithuanian population, the sources of income, the consumption pattern of households, and the distribution of income. Based on these surveys, the paper first discusses attempts to define a subsistence minimum and establish a poverty line. Then, it briefly reviews different approaches to measuring poverty and presents empirical evidence about the magnitude of poverty in Lithuania. The paper also analyzes the profile of the poor and discusses the causes of poverty, and examines to what extent poverty has been alleviated by social assistance. Finally, simulations are run to indicate to what extent poverty could potentially be reduced without increasing budgetary resources for social assistance.
The paper contains three principal findings. First about 20 percent of Lithuania’s population has an income that falls short of the calculated subsistence minimum, with the poverty-gap ratio amounting to about one third. Second, the current system of social assistance has had only a marginal impact in reducing the extent of poverty. Third, poverty could be reduced to a much larger extent if social benefits were better targeted. These results seem particularly important in light of the authorities’ plans to reform the social safety net, which aim at achieving a higher degree of transparency by reducing the number of benefits, coordinating the social safety net with the tax system, and introducing means testing.