Health and Education Expenditures in Russia, the Baltic States, and the Other Countries of the Former Soviet Union

Russia, the Baltic states and the other countries of the former Soviet Union inherited health and education systems that were in need of substantial structural and financial reform. In spite of a sharp decline of real resources, this reform has barely begun. While health and education have not suffered disproportionate cuts, employment has been maintained, with real wages sharply compressed, purchases of materials reduced and energy-related spending taking a greater share of resources in many countries. Structural and financial reform would include reducing staffing and physical capacity, while increasing expenditures for materials and wages for the more highly qualified.

Abstract

Russia, the Baltic states and the other countries of the former Soviet Union inherited health and education systems that were in need of substantial structural and financial reform. In spite of a sharp decline of real resources, this reform has barely begun. While health and education have not suffered disproportionate cuts, employment has been maintained, with real wages sharply compressed, purchases of materials reduced and energy-related spending taking a greater share of resources in many countries. Structural and financial reform would include reducing staffing and physical capacity, while increasing expenditures for materials and wages for the more highly qualified.

I. Introduction

1. At independence, Russia, the Baltic states and the other countries of the former Soviet Union inherited health and education systems that were in substantial need of rationalization and structural reform. Spending levels for health and education—in percent of GDP and in percent of total expenditures—in the countries of the former Soviet Union were and continue to be comparable to those in industrial countries (e.g., the Netherlands, the U.K.) and in countries in Eastern Europe (e.g., the Czech Republic) in which health and education services are provided largely by the state (Tables 1 and 2). However, in broad terms, the health and education systems of the countries of the former Soviet Union were based on meeting physical norms for inputs, such as beds, physicians or teachers per person, or regional square meters of hospital or school space, rather than on meeting specific health and education objectives (or “outputs”), such as a level of or reduction in infant mortality or of incidence of disease, through cost effective resource allocation. The reliance on physical norms evolved from the central planning process, the weakness or nonexistence of price signals and competition, and the desire to ensure provision of comparable resources to each republic and region. Health and education systems in the region came to be characterized by excessive physical capacity and employment, in comparison with industrialized countries and with, for example, Turkey, while supplies such as pharmaceuticals or classroom and laboratory materials and equipment, as well as secondary services (e.g., management and maintenance), were provided in insufficient quantity to ensure that physical assets and employees were used most effectively.2

2. During the Soviet era, substantial progress in meeting conventional health and education objectives was certainly achieved; however, these achievements were based excessively on provision of large-scale, if poorly directed, physical resources.3 The severe economic difficulties experienced in recent years in the Baltic states, Russia and the other countries of the former Soviet Union have placed considerable pressure on public expenditures and consequently on the availability of resources for publicly provided health and education services. This, in turn, has contributed to a decline in health and education indicators (see Box 1). At the same time, a meaningful rationalization of expenditures and staffing—and more broadly, of sectoral management and planning—has not yet begun to take place; such a rationalization is necessary to improve cost effectiveness and quality of services. Instead, the authorities in the countries most affected by the transition have relied in large part on substantial real wage compression, while their counterparts in countries where conditions have begun to improve most recently (the Baltic states, the Kyrgyz Republic) and those in a number of the region’s energy-producing countries (e.g., Russia, Kazakstan and Uzbekistan)—where it would appear that lower gas prices and utility rates have eased matters somewhat—have not been compelled to compress as severely real wages or the overall health and education wage bill. In both of these latter groups of countries, however, the necessary systemic changes have thus far been postponed.

Attainment Indicators

Comprehensive data on attainment indicators are difficult to obtain, in particular, for education and after 1994. Sector studies prepared by the World Bank provide some data and insight, and annual editions of the Bank’s World Development Report (WDR) provide some statistics for more recent years. The following developments have taken place:

  • in Armenia, preschool enrollment declined by more than 25 percent during the period from 1990-91 to 1994-95;

  • in Estonia, the overall mortality rate (OMR) increased by 6 percent from 1990 to 1993, as mortality from alcohol intoxification, suicide, violence and accidents increased by 32 percent;

  • in Georgia, the OMR increased by 20 percent from 1990 to 1993, while the infant mortality rate (IMR) increased by 13 percent;

  • in Kazakstan, the OMR increased by 19 percent from 1990 to 1993, while the IMR increased by 8 percent;

  • in the Kyrgyz Republic, the IMR increased by 7 percent from 1990 to 1993, but decreased by the same magnitude in 1994. Maternal mortality rates (MMR) decreased during 1990-1993 and remained unchanged in 1994, at a level 8 times that of the European Union average;

  • in Latvia, preschool enrollment declined by nearly 46 percent during 1990-1993, while overall enrollment declined by 15 percent;

  • in Moldova, the OMR increased by 22 percent from 1990-1994, while the IMR increased by 19 percent;

  • in Tajikistan, the IMR rose by 4 percent during 1989-92 (by 28 percent in urban areas, flat in rural areas), while the MMR rose by 31 percent;

  • Life expectancy at birth has decreased in most countries throughout the region, including by 6 years in Russia, by more than 4 years in Estonia and Latvia and by 3 years in Ukraine (1990-1994).

A number of World Bank sector reports state in qualitative terms (in one case noting that funding is not available for sufficient statistical survey) that the incidence of parasitic and infectious diseases have risen markedly, while diseases that are easily controlled by preventive care (diphtheria, whooping cough) have reemerged. Data that are available on disease incidence or on education indicators (e.g., from the WHO or UNESCO) thus far cover only the initial years of transition and do not allow for an indication of developments during the period.

Keeping in mind the data limitations and possible long-term effects, data presented in the 1995 and 1996 WDRs show that IMRs improved from 1993 to 1994 for all countries of the region other than Latvia and Lithuania.

II. Developments during the transition period4

3. Developments during the transition period in Russia, the Baltic states and the other countries of the former Soviet Union have included:

  • A decline of real GDP by approximately 20-65 percent (Table 3);

  • A sharp decline of general government expenditures in most countries in percent of GDP (Table 1), and even more so in real terms;

  • A sharp decline in real spending on health and education, although health and education expenditures have remained fairly constant or, in a number or countries, risen as a percentage of total government outlays (Table 2);

  • Stability or even some increase in employment in health and education in most countries (Table 4);

  • Stability of relative wages in health and education, in comparison with the average wage (Table 5), although sharp decreases in real wages have taken place in most countries (Table 6), including in health and education;

  • Stability, in some countries a slight decrease, in the health and education wage bill in relation to real health and education expenditures;

  • Steep absolute and relative increases in most countries of the prices of certain nonlabor goods and services, in particular of natural gas, hot water and electricity, which are important to operating health and education facilities.

Table 1.

General Government Expenditures, Including for Health and Education, 1992–95

(In percent of GDP)

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Sources: National authorities and staff estimates; GFS Yearbook.

Final year to initial year.

Republican government only.

Including expenditures on health and education by the regions and by extra-budgetary funds.

Note that some caution must be exercised in making international comparisons, due to large—scale provision of health and education services by the private sector in some countries.

Table 2.

Health and Education Expenditures, 1992–95

(In percent of total general government expenditures)

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Sources: National authorities and staff estimates; GFS Yearbook.

Final year to initial year.

Note that some caution must be exercised in making international comparisons, due to large—scale provision of health and education services by the private sector in some countries.

Table 3.

Real GDP, 1992–95

(In percent change from previous year)

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Sources: National authorities and staff estimates.
Table 4.

Employment in Health and Education, 1992–95

(In persons and in percent of total employment or labor force)

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Source: National authorities and staff estimates.

Final year to initial year.

Final year minus initial year (in percentage points).

Table 5.

Wages in Health and Education, 1992–95

(In percent of average wage in economy)

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Sources: National authorities and staff estimates.

Final year to initial year.

Table 6.

Real Average Wages, 1992-95

(January 1992 = 100.0) 1/

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Sources: National authorities and staff estimates.

January 1992=100 for all countries except Azerbaijan (February 1992 base). Based on monthly average wages (from December) and consumer price inflation.

Final year to initial year.

4. The cumulative decline of real output during the transition period has been severe in all countries of the region, ranging from nearly two-thirds in Georgia to 20 to 25 percent in Estonia and Uzbekistan; general government expenditures also declined sharply, both in percent of GDP and in real terms, with the sharpest declines in real expenditures seen in the three Caucasus countries (by 60-80 percent) and in Kazakstan, Russia, Tajikistan and Turkmenistan (by approximately 65-85 percent) (Table 7).5 The countries of the region that are generally regarded as having progressed furthest in reform efforts—Estonia, Latvia, and Lithuania—have seen a stabilization of government spending in percent of GDP, as output has begun to stabilize or grow; in Estonia and Latvia, real government expenditures appear to have increased.6

Table 7.

Real Indices for Russia, the Baltic States and the Other Countries of the Former Soviet Union 1/

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Sources: National authorities and staff estimates.

Due to differences in the availability of data according to GDP, expenditures, and wages, comparisons in this table may differ from those made in other tables, due to differences in base and end years.

Given the differences in coverage of data, qualitative movements are reported; “0” indicates no increase or a decrease of approximately 5 percent or less; “+ +” and “——” imply changes of more than 20 percent.

5. Throughout the transition period, a relatively constant or increasing share of total expenditures has been devoted to health and education in most countries of the former Soviet Union. Only in Georgia, where extreme macroeconomic and fiscal shocks took place in connection with severe civil strife, did health and education expenditures decline sharply in percent of total expenditures, during 1992-94, although the Georgian authorities moved to restore a higher level of health and education expenditures in 1995 (Table 2). Health and education expenditures have drawn an increasing share of total spending in Belarus, Estonia, Kazakstan, the Kyrgyz Republic, Moldova, Russia, Tajikistan and Ukraine, and have been relatively stable in the other countries of the region.7

6. As with total expenditures, real expenditures on health and education appear to have increased substantially in Estonia and Latvia, as well as in the Kyrgyz Republic (Table 7, column 5). In the Kyrgyz Republic, real expenditures on health and education appear to have increased by nearly 15 percent during 1993-95, in spite of a 35 percent fall in total government expenditures; in Latvia, health care spending grew by more than 20 percent in real terms in 1995, with almost all of the increase coming through spending on primary health care. In the other countries of the region, with the exception of Lithuania, real expenditures for health and education have decreased by 20–85 percent. The most severe declines were in three countries sharply affected by civil strife: Armenia, Georgia and Tajikistan.8

7. Employment in health and education has remained stable throughout the region, in spite of the substantial decrease in real resources (Table 4).9 In some countries, employment within health and education has actually increased during the transition period, including in Azerbaijan (by over 10 percent), Belarus (9 percent), Estonia (9 percent), Russia, Turkmenistan (10 percent) and Uzbekistan.10 In Armenia, Georgia, Kazakstan, the Kyrgyz Republic, Latvia, Moldova and Ukraine, health and education staffing has been cut somewhat, most significantly, by 14 percent in Kazakstan.11 However, in all but three countries for which data are available—Armenia, the Kyrgyz Republic and Ukraine—the percentage of the labor force (or of the total number of employed persons) employed in health and education has increased—in some cases rather sharply (i.e., by 2 percentage points or more), as in Belarus, Estonia, Kazakstan, Moldova and Uzbekistan—indicating that the health and education sectors have managed to avoid the employment shedding experienced in other industries.

8. Wages in health and education have remained relatively stable in comparison with the economy-wide average wage in most of the countries of the former Soviet Union, although real wages have decreased very sharply (Table 5).12 Relative wages decreased severely in some of the countries that were affected by civil strife, for example, in health and education in Azerbaijan and in the education sector in both Armenia and Georgia. In some countries, including Kazakstan, the Kyrgyz Republic, Lithuania, Russia and Ukraine, relative wages in health and education have increased during the past few years, in the Kyrgyz Republic and Ukraine to levels approaching or even exceeding the economy-wide average wage. In most countries of the region, however, relative wages in health and education continue to be very low (i.e., more than 20 percent below the economy-wide average wage); three of the countries with relative wage increases for health and education—Kazakstan, the Kyrgyz Republic, and Lithuania—had the most severe declines in real wages during the past several years (Table 6), along with Armenia, Azerbaijan, Tajikistan and Turkmenistan.13

9. With stable or increasing health and education employment in many countries and stable relative wages in the two sectors, consideration of the change of the proportion of health and education expenditures comprised by the wage bill is influenced by a comparison of real wages to real overall health and education expenditures. This comparison is somewhat difficult, due to deficiencies in coverage of the data; however, it would appear that in most countries, real wages have decreased more sharply than real overall expenditures (Table 7). In Armenia, Estonia, Kazakstan, the Kyrgyz Republic, Lithuania, Russia and Uzbekistan, real wages declined by less than real expenditures. It is worth noting that Kazakstan, Russia and Uzbekistan are major energy producers;14 in the other countries of the region, real wages were compressed more severely than overall real expenditures in response to the large terms of trade deterioration.15

III. Policy actions in health and education during the transition

10. During the transition period the authorities in Russia, the Baltic states and the other countries of the former Soviet Union have made health and education spending a priority, with expenditures in these areas comprising a constant—or in some countries an increasing—proportion of total outlays during 1992-95. A comparison of real indices for the countries of the region shows that while sharp declines in real output and in real government expenditures in recent years have meant that real resources devoted to health and education have fallen substantially, the brunt of fiscal adjustment does not appear to have been borne disproportionately by the health and education sectors (Table 7). Only in Armenia, Georgia, and Uzbekistan have real health and education expenditures decreased by more than real general government expenditures.16 In most of the countries, real expenditures on health and education decreased by substantially less than did total expenditures, implying that health and education benefitted at the expense of other expenditure categories, most likely public investment. In three countries, Estonia, the Kyrgyz Republic and Latvia, spending on health and education appeared to have actually increased in real terms.17

11. The efforts by the authorities throughout the former Soviet Union to maintain health and education as spending priorities in light of the sharp decline in the availability of resources (or through provision of increasing resources, as in Estonia, the Kyrgyz Republic and Latvia) are commendable; however, it is apparent that adjustments to declining real resources in health and education have taken place mainly through compression of real wages, rather than through rationalization of health and education systems, including retrenchment of excess staff. Adjustments that were made to the declining real resources appear to have been made through substantially reduced maintenance and reduced provision of supplies and materials (drugs, school supplies, textbooks, etc.). As mentioned previously, it is likely that real wages were compressed even more severely in some countries, in order to accommodate higher electric and gas bills, while the underlying physical capacity was not reduced or made more efficient.18 In other countries (e.g., Kazakstan and Russia) where relative wages in health and education increased to offset somewhat the general real wage decline or in other countries where real wage declines were not as severe as declines in real spending (e.g., Uzbekistan), employment was stable or increased, so that relatively lower energy prices (or wage and utility arrears) may have contributed to the delays in enacting structural reforms. More efficient policies in the energy producing countries would have entailed increasing energy prices to world market levels and utility rates towards cost recovery levels, in order to promote more efficient consumption. Additional resources gained from taxation of energy producers could then have supported a relatively higher level of expenditures and services.

12. The stability or growth of employment in the health and education sectors in most countries of the region is an important indicator that restructuring of sectoral finances and service provision has not begun to take place. In fact, it is likely that cost effectiveness actually worsened, as the same or an increased level of employment was maintained for health and education systems that are being provided with fewer auxiliary, nonstaff resources (e.g., equipment, pharmaceuticals, textbooks) that are essential to worker productivity and efficiency. In addition, the effects of economizing on maintenance and investment over the past several years will inevitably be felt for the facilities that will remain an integral part of reformed health and education systems. Finally, implementation of planned policy reforms in the health and education sectors will require substantial investments in such areas as teaching materials and textbooks, as well as an upgrading of skills of sectoral staff (teachers and doctors) in accordance with new practices, technology and curricula.

13. Sectoral studies confirm that the necessary changes to health and education programs and policies are not yet being made and that physical assets are not being closed or consolidated. For example, a recent World Bank study of health and education spending in Kazakstan indicated that vocational education has continued to receive a considerable portion of total education resources—12.7 percent in 1992 and 14.3 percent in 1994—even though this type of training has not only been linked closely to employment at specific enterprises, rather than being broad-based and highly flexible, but costs on average twice as much per student as general education.19 By contrast, textbooks accounted for just 0.3 percent of expenditures in Kazakstan in 1992 and 1.0 percent in 1994.20 Long-term, hospital-based treatment accounted for three-quarters of health spending in Kazakstan during 1992-94;during the transition period, spending on specialized and research institutions was maintained in full, at the expense of spending on primary and secondary public health services (see Box 2 for more information on expenditure composition in countries of the region).

Composition of Expenditures

Sectoral studies indicate that considerable portions of health and education spending continue to be devoted to wages and benefits. World Bank staff note that the share of salary expenditures in total spending in countries of the region is not excessive in comparison with OECD countries; however, given low teacher salaries (and real wage compression), the figures are indicative of overstaffing. In addition, the studies note the low level of spending on auxiliary goods and services.

In Armenia, health wages accounted for 28 percent of health expenditures in 1995, down from 44 percent in 1992; spending on utilities accounted for 21 percent of health spending in 1995, down from 35 percent in 1994, and roughly equivalent to 1992 levels. Proportional spending on supplies—financed by Armenians abroad and by relief—increased five-fold during 1992-1995. Wages accounted 53 percent of education spending in 1995, down from 75 percent in 1993, while supplies and maintenance accounted for 12 percent in 1995.

In Georgia, health wages and benefits decreased from 52 percent of health spending in 1990 to 32 percent in 1994, due mainly to rising energy costs.

In Kazakstan, wages, payroll contributions, and utilities accounted for 73.5 percent of education spending in 1993 and 71.1 percent in 1994; equipment and supplies accounted for 2.6 percent of spending in 1993 and 2.1 percent in 1994. Wages, payroll contributions and utilities accounted for 67.4 percent of health expenditures in 1993 and 61.4 percent in 1994, while supplies and equipment accounted for 15.9 percent in 1993 and 19.3 percent in 1994.

In Latvia, teachers’s salaries for pre-school and general education account for 37 percent of total education expenditures in 1994.

In Moldova, salaries and benefits (45 percent), maintenance and utilities (34 percent) and food (12 percent) accounted for 90 percent of education outlays in 1995, up from 73 percent in 1993. Maintenance and utilities increased from 20 percent of education spending in 1993 to 34 percent in 1995. Training and materials accounted for 1 percent of spending, as did equipment, furniture and supplies. Only half of education wages goes to teachers. Eighty-five percent of health spending is for hospital care—as compared with 55 percent in France and 45 percent in Germany—leaving limited funding for preventive care. Salaries, maintenance, utility costs and food account for 82 percent of health spending. Recent installation of meters in health facilities has led to a 30 percent decrease in energy consumption.

In Tajikistan, salaries and benefits accounted for 66.9 and 72.2 percent of spending in health and education, respectively, in 1992. Expenditures on pharmaceuticals amounted to 5.9 percent of health spending in 1992.

In Turkmenistan, 53 percent of health spending in 1994 was for staff (salaries and benefits), 11 percent for utilities, and 7 percent for food; 8 percent was spent on drugs.

14. Continuing to make substantial expenditures on excessive staff, under-utilized capacity or misdirected programs diverts resources away from badly needed supplies and services, and from more adequate salaries for highly skilled workers. The sharp compression of real wages, combined with the still low relative wages in health and education and the stable or growing work forces, suggests that little progress has been made to introduce greater differentiation of wages. Anecdotal evidence suggests that the most qualified doctors and teachers are finding higher paying jobs in the private sector, in other sectors (including second jobs) or are emigrating; the departure of the best staff suggests further that sectoral expenditures may be increasingly less cost-effective.21

15. Only in the Kyrgyz Republic have relative wages in health and education increased, while employment has been cut, and relative expenditures for health and education increased.22 Relative wages (and certainly real wages) will have to increase with retrenchment in order to provide incentives for talented individuals to enter and remain in the health and education sectors and to provide additional resources for other, more cost-effective, expenditures.

16. One concern is that some measure of fiscal stabilization—possibly achieved in part due to real wage compression—may lead country authorities to postpone the necessary structural reforms and rationalization of health and education systems, thereby delaying gains in the quality of service provision. With subsequent gains in real wages following stabilization, fiscal pressures emanating from excessive, “nonrationalized” staff and physical capacity could reemerge. In Estonia and Latvia, increases in real expenditures on health and education appear to have gone mainly to increased real wages (and likely to higher utility bills), as staffing had not been rationalized; in Estonia, there has also been a growth in health and education staffing of approximately 10 percent during the transition period. A similar pattern appears to have been followed in Lithuania, although expenditures have not increased in real terms in that country. Clearly, demands for increased real wages will pose problems, in countries where real and relative wages have been sharply compressed while employment has been stable or increasing and sectoral reforms delayed.

IV. Need for Rationalization

17. The scope for net expenditure savings through rationalization of physical capacity and retrenchment of staff in health and education in Russia, the Baltic states and the other countries of the former Soviet Union may be limited by the need for investment, maintenance and repair, supplies, increasing energy-related costs, and higher wages to attract and keep the best workers.23 Nevertheless, considerable rationalization and retrenchment are needed, in order to employ resources more cost effectively and thereby bring about improvements in service provision. In fact, improvements in service quality may come about with net expenditure savings, if there is appropriate restructuring and rationalization.24 In the medium-term, there will be a substantial need for spending (from still-constrained resources) to improve health and education facilities and to purchase new equipment. Central and local governments also confront financial and managerial issues related to the divestiture of kindergartens, clinics, and other facilities by enterprises. Finally, with restructuring of health and education systems, there will be a greater need to train and employ more flexible, highly skilled workers to take on a stronger, more autonomous role in system management and planning. At the same time, an increasing share of services clearly will be provided by the private sector.25

18. The authorities in a number of the countries of the region have relied excessively on real wage compression in recent years to achieve adjustment of health and education expenditures, rather than to have undertaken much needed structural reforms. This real wage compression is not sustainable and service provision likely will continue to deteriorate and/or fiscal pressures will build if deficiencies in sectoral management and planning are not addressed. While specific changes to management and planning of the health and education systems in the former Soviet Union are beyond the scope of this paper, there is clearly a need to move away from the continuing use of physical norms for budgetary planning and allocation.

19. According to World Bank staff, excessively stringent budgetary guidelines and administrative overlap and confusion have thus far prevented rationalization from taking place throughout the region. Administrators have had little incentive to reduce or use capacity in more cost effective ways, as they do not retain savings.26 As a consequence, the burden of adjustment to lower real resources has been more in terms of lower quality of output rather than in terms of reduced quantity of inputs (e.g., beds or wards are maintained, as are obsolete research institutes, even if the money would be better spent on pharmaceuticals or on textbook development). There may be a need to rationalize sectoral planning and operating responsibilities among economic ministries, sectoral ministries, specialized agencies, research institutions, local governments and other institutions (e.g., enterprises operating health and education facilities prior to divestiture). Such fragmentation of authority continues duplication of services, overspecialization, excess capacity and poor planning and management.

20. In view of staffing and capacity indicators, such as low student-per-teacher ratios, high physician- and hospital bed-per-person ratios, and excessive length and frequency of hospitalization for the countries of the former Soviet Union, there would appear to be considerable scope for cutting of staff and closing and consolidating facilities.27 The countries of the region are only now initiating efforts to make these changes, with the support of multilateral and bilateral agencies and targeting, among other measures, the scrapping of the use of physical norms and—along with other sectoral reforms to improve the quality and efficiency of service provision—moving to funding on a per capita basis, along with monitoring of health and education indicators as a basis for allocating resources more flexibly among facilities, regions and expenditure categories to achieve the desired outcomes.

References

  • United Nations Development Program, Human Development Report 1995, (New York, Oxford University Press, 1995).

  • UNESCO, Statistical Yearbook 1995, (Paris, UNESCO Publishing and Bernan Press, 1995).

  • World Bank, Armenia: Strategies for State Spending, unpublished paper for Consultative Group meeting, (Washington, World Bank, Country Department IV, Europe and Central Asia Region, May 30, 1996).

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  • World Bank, Armenia: Poverty Assessment, unpublished paper for Consultative Group meeting, (Washington, World Bank, Country Department IV, Europe and Central Asia Region, May 30, 1996).

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  • World Bank, Estonia: Staff Appraisal Report, Health Project, Report No. 13297-GE, (Washington, World Bank, Country Department IV, Europe and Central Asia Region, January 19, 1995).

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  • World Bank, Georgia: Staff Appraisal Report, Health Project, Report No. 15069-GE, (Washington, World Bank, Country Department IV, Europe and Central Asia Region, April 2, 1996).

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  • World Bank, Kazakstan: The Impact of Transition on Budgetary Expenditures in Health and Education, unpublished mimeo, (Washington, World Bank, Country Department IV, Europe and Central Asia Region, February 14, 1996).

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  • World Bank, Kyrgyz Republic: Staff Appraisal Report, Health Sector Reform Project, Report No. 15181-KG, (Washington, World Bank, Country Department IV, Europe and Central Asia Region, April 22, 1996).

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  • World Bank, Turkmenistan: Rationalizing the Health Sector, Report No. 14861-TM, (Washington, World Bank, Country Department IV, Europe and Central Asia Region, January 19, 1996).

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  • World Bank, World Development Report 1995: Workers in an Integrating World, (Oxford University Press for the World Bank, 1996).

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1

Data and other information were provided by European II Department desk economists. Comments were given by John Odling-Smee, Vito Tanzi, Sanjeev Gupta, Henri Lorie, Leif Hansen, David Owen, Adrienne Cheasty, Gerd Schwartz, Dennis Jones, Mark De Broeck, Chris Lane, Nita Thacker and Thanos Arvanitis. Research assistance was provided by Sepideh Khazai, Mandana Dehghanian and Alex Keenan.

2

Excessive capacity and overstaffing can be seen from various ratios. For example, in 1994 Kazakstan had 8.8 students per teacher, while Moldova had 13 students per teacher in 1995; by comparison, Germany, Turkey and the U.K. had ratios of 17:1, 29:1 and 20:1, respectively, in 1994. Ratios of physicians per 1,000 persons in 1994 far exceeded the OECD average of 2.5 in 1993 or ratios of 2.1 and 0.9 in Poland and Turkey (1992), respectively; these included Estonia (3.4 in 1993), Georgia (5.1), Kazakstan (3.7), the Kyrgyz Republic (3.1), Latvia (3.2 in 1993), Moldova (4.0 in 1995), Russia (4.7) and Turkmenistan (3.5). The number of physicians has been declining throughout the region, however, due to emigration and insufficient remuneration. Indicators for hospital beds per 1,000 persons (12.0 in Latvia, 12.2 in Moldova, 11.5 in Turkmenistan in 1994, as compared to an OECD average of 9.3 and ratios of 5.3 in the U.S., 4.3 in Holland and 4.5 in Canada) and inpatient length of stay also exceed those in the OECD and in countries of comparable development (16.2 days in Estonia, 17 days in Latvia, 17.6 days in Moldova and 15 days in Turkmenistan, as compared with 7-9 days in upper income countries). Excessive health staffing may lead to excessive costs and capacity through unnecessary appointments and treatments and prolonged medical stays ordered by underemployed staff.

3

A recent World Bank report for a health sector project in Georgia stated that in the Soviet period, “there were significant improvements between 1950 and 1970. Infant mortality was greatly reduced, and preventable, curable diseases were rare. However, [in the] mid-1970s…the health status stagnated and started to deteriorate in [the] late 1980s. This dynamic [was] due to emerging economic difficulties, [and] also a result of failing to recognize new health problems, in particular, deteriorating adult health.” Source: “Staff Appraisal Report. Georgia. Health Project.” April 2, 1996 (Report No. 15069-GE).

4

It should be noted that data from the Baltic states, Russia, and the other countries of the former Soviet Union continue to be characterized by inconsistencies and other problems (e.g., under-reporting, methodological questions), which bear consideration when making firm conclusions about developments.

5

Real government expenditures are obtained using general GDP deflators, based in turn on consumer price indices (CPI). Use of a more narrowly defined deflator, for example based on prices of services, might indicate a somewhat different path for real expenditures. As service prices have increased more rapidly than general consumer prices throughout the transition period, declines in real expenditures may have been more severe than indicated, while increases in real expenditures in some countries of region (Estonia, Latvia)—as discussed below—may have been less.

6

For Estonia, the period under consideration is 1992-94 (Table 7); for Latvia, the period is 1993-95. As discussed below, these additional real resources may not be spent in the most cost effective manner if, for example, rationalizing and restructuring of local health and education systems have not yet begun to take place.

7

Aside from the Caucasus countries, expenditures on health and education in Russia, the Baltic states and the other countries of the former Soviet Union are mostly in the range of 20-30 percent of total expenditures, which, as mentioned, is comparable to the proportion of spending in industrial countries, some East Asian countries (e.g., Korea, Thailand) and in Turkey (Table 2).

8

Data are not available on health and education spending in Azerbaijan prior to 1995; however, given the 60 percent decline in overall government spending in that country during 1992-95, it appears likely that the pattern of reduced spending in health and education during a period of military conflict—severe difficulties in maintaining tax revenues and possibly, diversion of resources to military spending—also holds for that country.

9

The data on employment should be interpreted with some caution, as official statistics may capture the number of positions, rather than the number of persons actually employed, i.e., it may be possible for one individual to hold more than one position, in order to receive additional remuneration. In such circumstances, a reduction in the number of staff may not be reflected in a decrease in the number of positions, or alternatively, a program to reduce in the number of positions may not lead to an expected reduction in the number of persons employed.

10

The labor force in Turkmenistan grew by 7 percent during the same period.

11

Kazakstan is a peculiar case—as is Moldova, where staffing levels decreased by 22 percent—in that out-migration of ethnic Russians and Germans has sharply reduced the labor force in Kazakstan. The sharp decrease in Moldova appears to reflect in part exclusion of workers in the breakaway Transnistria region.

12

Wage arrears, which have been significant in the region including in health and education, may impact assessment of real wage developments, as would additional, unreported income earned by health and education workers through side payments, filling of multiple staff positions, or other informal arrangements.

13

As shown in Table 6, much of the decline in real wages in Lithuania was concentrated in 1992, with real wages growing by over 20 percent since end-1992.

14

The same pattern seems to have held for Turkmenistan, although data on health and education spending during 1992-93 are somewhat limited, while in the other major energy-producing country of the region, Azerbaijan, real wages appear to have been compressed severely relative to real government spending, again perhaps due to pressure related to military conflict.

15

As shown in Table 7, health and education employment in Armenia, as well as relative health and education wages, were compressed, so that the wage bill is likely to have decreased as a proportion of total health and education expenditures.

16

It is possible that real health and education spending decreased by more than total general government expenditures also in Azerbaijan, however, data were available for Azerbaijan only for 1995. In Latvia, expenditures on health and education increased in real terms by somewhat less than total government spending increased.

17

For Estonia, the comparison is for 1992-94, while for the Kyrgyz Republic and Latvia, the comparison is for 1993-95.

18

It is difficult to ascertain the relative effects of arrears in the health and education sectors, as both wage and utility arrears are likely to be built up, as workers and utility companies are unlikely to suspend services to hospitals and schools. Installation of gas meters has helped to ease pressures from excessive consumption of gas at higher prices in some countries.

19

In Moldova, however, vocational education accounted for 6.5 percent of total education spending in 1995 (preliminary) down from 15.3 percent in 1992.

20

General government expenditures on pre-schools have increased substantially in some countries of the region, reflecting largely enterprise divestiture, while capital expenditures have decreased. By the same token, pre-school enrollment has decreased (as noted in Box 1), due in part to increased unemployment and children remaining at home with parents.

21

Although provision of private medical and education services has certainly increased, public sector staffing and expenditures have not been adjusted to account for this.

22

This pattern has been followed somewhat in Kazakstan and Ukraine, where there have been numerical declines in health and education labor forces, although these are more likely due to emigration (Kazakstan) or departure for the private sector, which is less well covered by official statistics (Ukraine), than to retrenchment programs. Emigration was also a factor in the decline in employment in health and education in the Kyrgyz Republic, and increases in relative wages in that country led to increasing instances of wage arrears.

23

It would be important to make provision for these additional or new expenditures in cost-effective ways. For example, in developing textbooks and teaching materials, the World Bank has suggested the use of materials from other countries, in cases in which locally developed materials are not absolutely required. Greater cost recovery may be sought, for example by requiring purchases of textbooks, meals or materials by some students who do not presently pay, although as noted elsewhere, such cost recovery has already been applied to a great extent in some countries of the region.

24

This may occur, for example, if there is substantial retrenchment of unproductive staff (e.g., including removal from the employment rolls of any workers with second jobs who still collect state salaries), with increased provision of supplementary materials from a portion of the savings on wages.

25

A form of private medical service—side payments—has long been common in the health sector throughout the region; the World Bank staff reports that side payments to teachers have now become common. Out-of-pocket payments for drugs are common, covering an estimated 80 percent of drug purchases in Moldovan hospitals and all outpatient drug expenses. Patients in hospitals throughout the former Soviet Union are called on to pay for supplies and drugs—to the extent that they are available—and to bring food and bed linens from home. Total private expenditure on health care has been estimated by the World Bank staff to account for 1.5-2.0 percent of GDP in Moldova and up to 75 percent of all health spending in Georgia. In Georgia, privatization of health facilities is being undertaken, with regional hospitals to remain publicly owned, and other facilities to be sold or auctioned, in some cases with requirements for continued provision of services. In some capitals, the wealthy and well-connected may have access to special clinics or private schools with more substantial resources than public facilities. Such access is only one form of growing inequality in the financing and provision of health and education services among segments of the population and across regions. With local differences in revenue capacity and in the ability to pressure the central government for subventions, previous regional equity may be undermined, without or prior to a reformed system being put in place.

26

One suggestion is to provide schools and hospitals with global budgets, within which managers could allocate resources as they see fit, as long as their institutions met quality and performance standards and provided agreed services. The state budget would not reimburse losses, but could allow managers to keep savings. In Latvia, for example, local governments have introduced both fee-for-service and capitation financing mechanisms, replacing the former system of budgets and salaries. The fee-for-service system is based on allocation of points according to services, which are pre-assigned a set number of points according to a relative scale of service intensity; a fixed amount of budgetary funds are allocated on a quarterly basis according to the total number of points generated. In the capitation system, family doctors are paid a fee per registered patient and are required to prescribe care—and resources—within the overall fees. In both systems, hospital reimbursement is set on the basis of expected durations for different ailments and per diems; per diems are paid at the 60 percent level when expected durations are exceeded. A bonus is paid for shorter-than-expected-duration stays.

27

Recognizing that low student/teacher ratios unnecessarily increase educational expenditures directly through the maintenance of too many teachers on the payroll and indirectly by requiring that too many teachers be trained and too many classrooms operated, some countries of the region have attempted to address excessive staffing through changes in sectoral legislation. For example, education regulations in Moldova now stipulate a targeted class size of 20 or 25 students, depending on the level and type of education. Other governments have resisted measures, arguing that low student/teacher ratios reflect the need to post teachers in rural areas, where costs to transport students to “magnet” schools would outweigh benefits from cutting staff.

Health and Education Expenditures in Russia, the Baltic States, and the Other Countries of the Former Soviet Union
Author: Mr. Mark A Horton