Republic of Armenia
Poverty Reduction Strategy Paper

The Poverty Reduction Strategy Paper (PRSP) has been developed for eradicating poverty in Armenia. It analyzes the poverty situation of Armenia, and evaluates the methodology and methodological issues. It discusses the PRSP goals, main policy directions, solution to poverty, and the reduction of inequality. It assesses the social and economic strategies and governance. It reviews the employment issues and trends in the budget framework, and also analyzes the implementation, monitoring, and evaluation of the system.

Abstract

The Poverty Reduction Strategy Paper (PRSP) has been developed for eradicating poverty in Armenia. It analyzes the poverty situation of Armenia, and evaluates the methodology and methodological issues. It discusses the PRSP goals, main policy directions, solution to poverty, and the reduction of inequality. It assesses the social and economic strategies and governance. It reviews the employment issues and trends in the budget framework, and also analyzes the implementation, monitoring, and evaluation of the system.

INTRODUCTION

1. The Republic of Armenia declared its independence in 1991, stepping into a period of radical and fundamental reforms in political, social and economic systems. Nevertheless, since the very early days of independence Armenia found itself in an extremely difficult situation. In addition to the problems related to the break-down of the USSR and structural reforms, as well as a lack of preparation of the country’s institutions to act in a market environment (factors inherent to all other newly independent states) the Government of Armenia had to find solutions for sheltering hundreds of thousands refugees from Azerbaijan, erasing the damage of the devastating 1988 Speetak earthquake, rehabilitation of the border areas that had suffered from shelling by Azerbaijan because of the Artsakh conflict, etc. The situation was further aggravated by the transportation blockade, the complete disruption of former economic ties, the suspension of activities and liquidation of many industrial enterprises, as well as other destructive factors.

2. These and other negative developments resulted in the deep economic and social crisis of the 1990s, one of the most devastating consequences of which was the widespread impoverishment of the population, income inequality, and the polarization of society to an appalling degree.

3. The existing poverty and inequality gives rise to a number of hazards and threats, which may lead to the following consequences:

  • (i) Persistence of social polarization in the country may deepen the cleavage among various social layers, which in turn jeopardizes the socio-economic development of the country and the establishment of a strong state, since the perception of national and social interests will gradually fade away;

  • (ii) High poverty rates hamper the establishment of civil society and harmony, hence the establishment of a country dominated by the rule of law and democracy;

  • (iii) The poor – a group of many thousands – continues to lag behind general human development norms, which will result in a degradation of human capital;

  • (iv) Widespread poverty restricts the potential for self-confidence and actualization, as a result of which the most enterprising part of the population is forced to emigrate. The demographic, social, and economic consequences of this are already evident today;

  • (v) Persisting impoverishment enhances passiveness, psychological depression, nihilism and pessimism amongst the vast majority of the population. Consequently, the motivation, initiative, and participation of the population in the social, economic, and socio-cultural life of the country are reduced to a minimum.

4. All these undoubtedly undermine the foundations of national security. The urgency to address these problems on the part of society and government has necessitated the elaboration and implementation of the Poverty Reduction Strategy Paper.

5. With the aim of preventing the inherent threats and to bring the vast majority of the population out of the existing situation, the PRSP seeks the reduction of poverty, which is a hindrance to economic, social, and human development as well as the progress of our country.

THE PRSP DEVELOPMENT PROCESS

6. The Poverty Reduction Strategy Paper has been developed with the support of scholars, experts, public and political figures, and all those who are interested in eradicating poverty in Armenia. The PRSP development process is not similar to any other program developed previously, since it includes the participatory approach as one of its most important components. This is one of the most important guarantees for the successful implementation of the PRSP.

7. Decision No. 267 of the Prime Minister initiated the development of the PRSP on May 15, 2000. Based on this decision, a Steering Committee (SC) was founded, headed by the Finance and Economy Minister and consisting of representatives from line ministries dealing with social and poverty issues, standing committees of the Armenian National Assembly, National Statistical Service, political parties, NGOs and the donor community. The main responsibility of the PRSP SC was to organize and to coordinate the development of the Interim1 and later, of the full-fledged PRSP.

8. For the day-to-day management of the PRSP development the PRSP Working Group (WG) under the direct supervision of the SC was established on April 14, 2001, where, as in the case of the SC, governmental, non-governmental as well as international organizations were represented. The PRSP WG was responsible for the day-to-day management of the PRSP development process, drafting the final document, providing information on various components of the program and ensuring its transparency. It also organized the participation of the population at large and the donor community in developing the PRSP. It incorporated their comments in the document, and submitted the final document to the PRSP SC.

9. The work on the full-fledged PRSP started in November 2001, when a team comprised of WG members and independent experts prepared the PRSP Terms of Reference (TOR). The TOR defined priority PRSP objectives and targets for political, social, economic and governance development. It also identified the main directions for policies and specified the relevant rules regulating the PRSP development process. The PRSP TOR were widely discussed within central, regional and local governments, NGOs, scholarly and educational institutions, the mass media, and the international and donor communities. Numerous publications, radio and TV programs, information booklets, analytical bulletins, round tables, club discussions, seminar-workshops, and other events were organized on the main concepts of the PRSP TOR.

10. Parallel to discussions on the TOR, about fifty independent experts, who were selected through an open competition announced by the SC, developed the PRSP. In accordance with the TOR, the experts were divided into the following five Expert Groups (EG):

  • (i) Poverty assessment and analysis;

  • (ii) Methodology and methodological issues;

  • (iii) Social strategy;

  • (iv) Economic strategy;

  • (v) Governance, participation and monitoring.

11. The Medium Term Expenditure Framework (MTEF) was developed by the government parallel to the PRSP’s development. Since it was necessary to harmonize and coordinate the PRSP and MTEF documents, a special expert group was formed. It actively participated in discussions on the draft PRSP and provided numerous comments and suggestions. As a result of the work of this group, a number of measures proposed in the draft PRSP were incorporated in the 2003-2005 MTEF and the necessary funds were allocated in the 2003 state budget. This made it possible to start the implementation phase as early as 2003.

12. Expert groups finalized their work in September-October 2002 and the Steering Committee circulated the draft PRSP for discussion among all stakeholders. In the subsequent three months, a large number of comments and suggestions resulting from discussions were received. The results of processing these comments and suggestions revealed that they mainly referred to defining priorities in the document and in its structure. It was also considered necessary to harmonize the PRSP with programs being implemented in the country through support from the donor community. An Expert PRSP Consolidation Group was set up on February 12, 2003, in order to consolidate and finalize the Document, incorporating all the received comments and proposals. The expert group completed its work in May 2003.

ORGANIZING THE PRSP PARTICIPATORY PROCESS

13. With the objective to publicize the PRSP development and to organize public participation, the NGO Institute for Human Rights and Democracy and the Analytical Informational Center for Economic Reforms, CJSC, of the Government of Armenia were selected through an open competition organized by the SC.

14. Throughout April-November 2002, these agencies organized and implemented (i) public discussions with the participation of representatives of society, deputies of the National Assembly, local governments and the press; (ii) seminars in all regions of the country with the participation of society, the private sector, central, regional, and local governments; (iii) preparation, publication and dissemination of information and analytical materials for the public, including through the Internet2; (iv) TV and radio programs; (v) articles in the provincial and national press; (vi) public opinion surveys; and (vii) public awareness campaigns in communities, various representative groups of the population, educational institutions, etc. A PRSP Internet site3, including information on the participatory process, has been set up and is regularly updated.

15. At the same time, the development of the PRSP participatory process was not limited to activities of the above-mentioned agencies selected through the competition. In accordance with the tripartite agreement signed (on June 17, 2002) by the Government of Armenia, the World Bank and the UNDP, a list of measures for the development of the PRSP participatory process was approved. The coordination and implementation of these measures was done by the joint UNDP/GoA “Creation of a Social Monitoring and Analysis System” project. Experts developing the PRSP also conducted activities related to the Participatory Process.

CIVIL SOCIETY PARTICIPATION

16. Viewpoints and comments of various groups of society were included in the draft PRSP, and conditions were created for a broad civic participation and social partnership. This took the form of public and expert discussions, the creation of print and electronic materials, information collection and dissemination, and the involvement of the more active organizations. Representatives from governmental bodies, non-governmental and private sectors, as well as international organizations and the donor community were involved in this process.

17. Some participants acted as partners of organizations implementing the participatory process. These included 11 TV companies, 6 radio stations, the editorial boards of 14 newspapers, associations of NGOs (Trade Union Confederation of Armenia, Anticorruption Coalition), about 20 NGOs operating in provinces and in Yerevan, PRSP working groups formed in ministries and regional governments, the staff of regional Monitoring and Analysis units, and international organizations operating in Armenia.

18. Participation of governmental bodies Representatives from the government were included in the PRSP Steering Committee and Working Group. In order to ensure the active participation of all central and regional governmental bodies, by the Decision No. 48 of the Prime Minister dated January 30, 2002, working groups were formed in all ministries and agencies, headed by deputy directors of the agencies. These ensured he continuous cooperation between specific ministries or agencies, and individuals or groups responsible for the relevant area in the PRSP. Representatives from ministries and Provincial Administrations participated in joint discussions on the draft PRSP with experts and representatives from the donor community. These representatives presented their comments and recommendations on the draft.

19. Involvement of provinces Discussions and round-tables were conducted in all the provinces of Armenia. Yerevan had the broadest involvement in the participatory process, followed by Sheerak, Lori and Gegharqooneeq. NGOs involved in the PRSP participatory process in Gyumri and Vanadzor organized numerous discussions. Gegharqooneeq was also one of the most actively involved provinces, where events were organized jointly with NGOs in the town of Martuni and with representatives from provincial schools in Shorja. Discussions were organized in Ararat, Gegharqooneeq, Vayots Dzor and other provinces with the support of the staff of Monitoring and Analysis Units. Discussions on specific issues, such as agriculture, employment and education, were conducted in Syooneek, Lori and Vayots Dzor provinces. Experts from the groups for the development of social policies initiated a discussion in Lori province. Events organized in the provinces revealed that there is a significant lack of information there, especially in rural areas, and many people are left out of discussions and the decision-making processes due to a lack of awareness about these possibilities, a lack of information and knowledge, and poor communication.

20. Participation of community governments The PRSP SC initiated the dissemination of the draft PRSP to all communities of the country for comments and recommendations. Almost half of the communities responded by discussing the document and by coming up with a large number of recommendations, which were summarized and further passed on to Expert Groups. A number of representatives from community governments participated in a three-day workshop on the issues of community governments.

21. Participation of the non-governmental sector of society Within the framework of the joint UNDP/Government of Armenia project “Creation of a Social Monitoring and Analysis System” a study of social groups in Armenia was conducted in the spring of 2000. This study revealed that despite some differences in the level of societal development in Yerevan as compared to provinces; and differences between urban and rural areas, some progress was achieved in this respect. In particular, various organized groups, such as NGOs, Water Users’ Associations, specialized centers, business centers, etc., were being formed especially in provincial centers and small towns, as well as in some villages. Out of more than 20 types of social organizations, the following were the most active in the participatory process: (i) NGOs; (ii) scholarly and educational structures; (iii) mass media; (iv) private sector; (v) trade unions; and (vi) community governments.

22. NGOs, (being one of the more developed groups of society), were actively involved in the PRSP’s development. NGOs submitted their comments and recommendations on the draft PRSP throughout all the stages of the PRSP’s development. Some NGOs discussed the draft within their organization, as well as with their beneficiaries and other NGOs active in the same field. NGOs were actively involved in topic discussions, as well as in all public and group discussions. A number of NGOs organized their own discussions or were actively involved in events organized by the group responsible for the participatory process (e.g. Women’s Council of Martuni, “Millennium Association for Educational Studies”, “Education for Sustainable Development” NGO, “Asup” NGO, “Support to Universal Management of Quality” NGO, “Burg” Youth Environmental Center, Association of Sheerak NGOs, “Versia” Analytical-Information Center). In discussions related to other topics, numerous NGOs emphasized poverty issues and included the PRSP on their agendas (e.g. Women’s National Council, “Mush-2”, “Vega”, “Araza”).

23. Scientists and university lecturers directly participated in the PRSP discussions and development in a number of directions, including direct involvement in the elaboration of the program as members of the Working Group and Expert Groups. Representatives from scholarly and educational institutions were involved in numerous events organized within the framework of the participatory process. Higher educational institutions (Yerevan State University, Medical University, Brusov Foreign Languages Institute, Pedagogical Institute, Engineering University) have provided consultancy to experts developing the PRSP.

24. The mass media is also one of the most developed groups of society. It was actively involved in PRSP activities. The mass media covered all the large-scale public discussions and a number of specialized discussions. A number of newspapers and radio stations, as well as some TV channels, broadcast various presentations on PRSP issues and related intensive discussions. A number of representatives from the mass media presented their comments and recommendations on the PRSP.

25. Representatives from trade unions have participated in a number of club discussions. Numerous heads of sectoral trade unions participated in the discussion on “Trade Unions and the PRSP Participatory Process”. A number of heads of sectoral trade unions presented their recommendations on the draft PRSP.

26. Participation of political parties Deputies and experts of the National Assembly were actively involved in both the PRSP SC and EGs. At the same time, deputies were invited to, and actively participated in, seminar and topic discussions and round-tables. A discussion of the draft PRSP with opposition political parties was organized in Yerevan on November 28-29, 2002, with the participation of deputies from the opposition parties in the National Assembly and representatives of various political parties.

27. Participation of the private sector. The private sector also contributed to the PRSP development through its representatives in the PRSP WG and EGs. At the same time, three round-tables were organized especially for associations of businessmen, farmers and industrialists, to discuss the PRSP economic policies.

28. Participation of international organizations. International organizations were very active in the PRSP through provision of consulting and financial support to those who coordinated and developed the PRSP. The donor community provided joint comments on the TOR and the drafts of PRSP. Seminars were organized by donor organizations to provide technical assistance to PRSP experts and the Working Group (UNDP, WB, GTZ). A number of organizations (WB, UNHCR, DFID, CRS, OXFAM GB, AED, and others.) provided support in organizing the participatory process events and have referred to the PRSP in their projects. The have also emphasized the importance of the participation of societal groups in the discussions on various projects.

29. Participation of the Diaspora. Organizations representing the Diaspora participated in joint discussions on the PRSP. The NGO Center of the Armenian Assembly of America provided support in organizing discussions in the area of education.

PUBLIC AWARENESS AND FEEDBACK

30. Information provision on the PRSP already started during the development of the Interim PRSP. Mass media coverage, through the provision of information and special programs, however, became more intensive later during the development of the full-fledged PRSP. A number of national newspapers dedicated pages to the PRSP and more than 100 articles were published in various national and provincial papers. Programs were broadcast by the national radio and other radio stations. A number of radio discussions were organized, during which listeners had the opportunity to participate in live discussions and Q&A sessions. TV programs about the PRSP were broadcast by Prometevs, Armenia, Abovyan, Yerevan, and Gavar TV channels. Some included live interviews with experts. Reports were also broadcast by MIR TV station. A number of interviews on the PRSP took place and the main seminars organized within the framework of the PRSP were covered by the Public TV’s “Dzeragir” program. Information on the PRSP is presented in the PRSP Development Process section of the Government’s web page, as well as on other web-pages created by NGOs efforts4. A number of 2002 issues of the “Hayatsk Tntesutian” bulletin were devoted to the PRSP. Advisory, analytical booklets on a number of topics directly refered to, or touched upon, the PRSP. The informational-participatory brochure for the general public titled “What is the PRSP?” was published with a print run of 2500 copies.

31. Various mechanisms were used for collecting recommendations and incorporating them in the PRSP, including recording comments and recommendations brought up during discussions, using e-mail for receiving comments and sending them further to PRSP experts and the Working Group, conducting surveys, collecting information on social and economic conditions in communities, collecting recommendations by fill-in forms during discussions. Information on the level of incorporation of the recommendations in the PRSP was disseminated by publishing the recommendations in “Hayatsk Tntesutyan” bulletin, posting summaries of discussions to participating organizations by e-mail, sending the experts’ responses to organizations that had originally submitted the recommendation, direct discussions between experts and organizations submitting recommendations, as well as providing opportunities for discussing individual recommendations.

CONSTRAINTS, RESULTS AND FUTURE STEPS RELATING TO THE PARTICIPATORY PROCESS

32. A number of constraints to the participatory process emerged. Overcoming them needs urgent action and the implementation of long-term policies. These constraints include: a lack of faith in the implementation of the PRSP; difficulties of accessing information (small number of copies of the press and their not being affordable for the poorer groups of the population); a “Soviet” mentality, specially among middle-aged and senior citizens; the low level of institutional development of society; lack of knowledge on fundamental democratic values and their alienation in communities; the inactive mid-level governmental structures; the prevalent reluctance in the attitude of governmental bodies toward public participation; frustration and disappointment resulting from difficult social conditions, little or no hope for the future resulting from the lack of possibilities to overcome difficulties; little knowledge on participatory community governance, inadequate skills among some community governments, few or no initiatives from the public.

33. Quantitative results of the participatory process are the following: more than 100 written recommendations were received. These were mainly incorporated in the draft PRSP. More than 1800 people participated in events organized within the framework of the participatory process. Overall, about 700 recommendations were recorded based on questionnaires completed at the end of discussions. Although it is difficult to produce a numerical assessment of the incorporation of recommendations, it can be stated that about 40% of the recommendations received have been included in the PRSP, and about one-third were taken into account at least in part.

34. Topic seminars, round-tables, discussions, surveys of public opinion in provinces and communities took place. In order to discuss urgent issues of the PRSP’s development, and so as to present the intermediate results of the work of experts to representatives from society, governmental structures (including provincial and community governments), and the donor community two large-scale seminars at the Writers House in Tsaghkadzor were organized for more than 100 participants (March 9-11, 2002, July 23-25, 2002). On June 28-30 and September 27-29, 2002 two topic seminars “Poverty Reduction Issues in Armenia and Community Governments” and “Social Partnership: Actors, Developments” were also conducted at the Writers House in Tzaghkadzor. Later, on August 12-28, 2002, the PRSP SC initiated expert discussions with specialists from relevant ministries and agencies at the Ministry of Finance and Economy, and on September 6, with specialized NGOs as well.

35. Besides large-scale seminars, awareness campaigns were carried out with 14 round-table sessions, 7 club discussions, and 4 public discussions. These were organized in the framework of more than 120 organizations of 80 communities in Yerevan and 9 provinces. In total, 12 issues of “Hayatsk Tntesutyan” bulletin were devoted to the PRSP (18000 copies), 5 joint publications of regional newspapers, 12 informational booklets (22800 copies), two journals, as well as 18 special pages and more than 100 articles in the press were published. Some 23 TV programs (total duration of 13 hours), 17 radio programs (a total of 6 hours), 3 live radio discussions and 2 live TV discussions were broadcast. Furthermore, 2 surveys with 1000 respondents each were conducted in Yerevan and in 35 communities of 7 provinces.

36. Achievements of the Participatory Process. Due to the participatory process, the PRSP tends to become a program developed not by the authorities, but by the participation of the public and independent experts. Due to the participatory process, an atmosphere of dialogue has been created from top to bottom. Through awareness campaigns, meetings, and discussions, the public and the organizations representing it, have directly participated in the development of the PRSP.

37. Through information provided by the mass media and the dissemination of printed materials and informational booklets, meetings, discussions with expert groups, TV and radio debates, the public was informed on the process of the PRSP’s development and poverty issues. A framework of cooperation and partnership has been formed between participants of the PRSP awareness building and participatory process. It is very important to maintain and further deepen this framework during the next stages: PRSP implementation, monitoring and evaluation.

38. At the same time, this completed phase of the participatory process was a valuable experience and provided for a number of lessons based on the work done. During discussions, the interaction of various groups dealing with the same set of problems revealed that this exchange of experience is very important both in itself and for the coordination of future activities. In this regard, the exchange of information on data, experience, and implemented projects regarding a specific area, region or problem was a significant achievement and a signal pointing to the necessity of further activities in this direction.

39. Further steps. As a first step after the approval of the program, it is planned to organize and implement PRSP informational activities. The necessary mechanisms for public participation in the PRSP implementation, the monitoring of its results and its social impact will be developed. It is expected that societal organizations and groups will establish partnerships with the government. During the implementation of the PRSP, societal groups will contribute their potential for the implementation and monitoring of the PRSP policies, programs and sub-programs at both the national and community levels. Awareness-building activities will be conducted in order to ensure the participation of vulnerable groups of the population in the PRSP’s implementation. Mechanisms for social partnership will be developed so that the institutional framework for cooperation between the state and civil society organizations and groups is established both for the PRSP and other purposes. Broad discussions will be organized for the exchange of opinions and experiences among government bodies, the donor community, and social organizations. Surveys of opinions of the poor and vulnerable groups, as well as of societal representatives will be conducted. The participation of organized groups of society in the PRSP review activities will be broadened, and their involvement in decision-making for effective implementation of the PRSP will increase.

SECTION 1. POVERTY SITUATION ANALYSIS

CHAPTER 1. DEFINITIONS OF POVERTY AND EVALUATION METHODOLOGY

40. The evaluation of poverty evaluation derives from its definition. Modern definitions are based on the concept of poverty as a multidimensional issue. According to the World Bank5, poverty is manifested as:

  • (i) Lack of opportunity: Low levels of consumption/income, usually relative to a national poverty line. This is generally associated with the level and distribution of human capital, social assets and physical assets, such as land. Market opportunities determine the returns on these assets. The variance in the returns to various assets is also important.

  • (ii) Limited capabilities: Little or no improvements in health and education indicators among a particular socio-economic group;

  • (iii) Low level of security: Exposure to risk and income shocks, which may develop at the national, local, household, or individual level.

  • (iv) Empowerment: Empowerment is the capacity of poor people and other excluded groups to participate, negotiate, change, and hold accountable those institutions that affect their wellbeing.

41. On the basis of the above definition, poverty here is considered as the impossibility to meet minimum biological, social, and cultural needs. “Biological needs” should be perceived as meeting minimum food and personal hygiene needs, as well as minimum seasonal clothes, a residence and the affordability of a minimum consumption of water, heating and electricity. “Social needs” include health, education, job, and minimal social life (marriage, birth, and death-related ceremonies), interaction with judicial systems together with relevant material capacities, stability of intra-household relations and the accessibility of minimum information (press, television, radio or other mass media), as well as socializing with other people (telephone, transport, other means of communication), and possibilities to participate in public events. “Cultural needs” include a minimal affordability of spiritual and cultural activities (not in the context of subjective demands and perceptions, but rather by objectively-defined groups, such as a minimal participation in traditional ceremonial life, opportunities to read, listen to music, etc.).

42. A person will be defined as being “poor” or “non-poor” based on the combination of the three groups mentioned above. Meeting the exclusively material (biological) needs should be considered to signify a widening of the social opportunities of a person and a reduction of poverty. The majority of poverty studies undertaken – both in Armenia and other countries – are nevertheless anchored to indicators of “biological needs”, partially covering health and access to education. In the main, they exclude other social needs, and socio-cultural factors.

43. Poverty, being a multidimensional concept, requires the development and introduction of a system of indicators for its assessment. The Poverty Assessment Indicators System (PAIS) will be developed and introduced as the basis for poverty monitoring methodology. The development of PAIS will start in 2004. This should allow the assessment of various aspects of poverty at national and regional levels, as well as the description of poverty among vulnerable groups of the population. Thus, an integrated picture of poverty should emerge and changes may be better monitored. PAIS will specify the following in a coordinated manner:

  • (i) definitions and characteristics of various types of poverty;

  • (ii) poverty assessment indicators and methods for their calculation;

  • (iii) sources for collecting data on poverty indicators and the mechanisms for their regular reception;

  • (iv) types and frequency of studies on different aspects of poverty;

  • (v) organizations and institutions responsible for conducting studies and collecting indicators;

PAIS will be the core of the comprehensive strategic program for PRSP monitoring, analysis, and impact assessment. It will be developed for the management, monitoring and coordination of PRSP implementation (see Section 5 of this document).

44. Sample household surveys (hereinafter, household surveys) serve as the basis to evaluate the depth of poverty, to measure various poverty indicators, as well as to monitor poverty programs. With the support of the World Bank, the National Statistical Service (NSS) carried out three such surveys in Armenia, in 1996, 1998/99 and 20016. The 1998/99 and 2001 Surveys generated a time-based series of poverty indicators based on the same methodology of poverty evaluation. This ensures consistency of the indicators in time and comparability with other countries. Furthermore, it may be applied from the perspective of the evaluation of poverty-reduction trends.

45. In the absence of PAIS, the elaboration and evaluation of the PRSP is necessarily based on the NSS methodology, with the primary emphasis placed on the evaluation of the material aspect of poverty.

46. According to the latter, the basis for evaluating the poverty of a country’s population reflects two absolute poverty thresholds: the estimation of the poverty food threshold and the general poverty threshold. Both are construed on the actual food expenses of households. The minimum level of food consumption is considered to be the quantity of actually consumed food containing 2100 kilocalories per day per capita7, while the value of the minimum food basket is considered to be the financial resources necessary to acquire such food. The value of the minimum food basket, adjusted with the coefficient of expenditures for commodities and services, serves as the consumption basket, or, as mentioned earlier, the general poverty threshold.

47. On the basis of these two poverty criteria, the population of Armenia (households) is divided into three major groups in terms of poverty: (i) the very poor, whose current average per capita expenses are lower than the poverty food threshold; (ii) the poor, whose current average per capita expenses are higher than the poverty food threshold, but lower than the general poverty threshold; and the non-poor, whose current average per capita expenses are higher than the general poverty threshold. In addition to the poverty level indicator, there are others such as: depth of poverty, degree of poverty, distribution of incomes, expenses and consumption by decile and quintile groups, as well as the Gini coefficient. The depth of poverty describes how far below the poverty threshold8 the households are situated. The degree of poverty shows the number of the poor at the lowest level of poverty9. Distribution by decile or quintile groups is an indicator of the direct measure of inequality. It shows the ratios amongst decile or quintile groups, or their share in the total. The Gini coefficient shows the inequality of income distribution among the population. The closer this coefficient is to 1, the higher is the degree of income polarization of the population.

CHAPTER 2. POVERTY AND INEQUALITY IN ARMENIA: FACTORS, CURRENT SITUATION AND TRENDS

2.1. EVOLUTION OF POVERTY AND CONDITIONING FACTORS OF POVERTY

2.1.1. POVERTY AND INEQUALITY IN SOVIET ARMENIA

48. During the last 20 years of the Soviet Union, and, consequently Soviet Armenia, poverty and inequality had not been important political or economic issues.

49. According to the 1988 data, only 20 % of the population in Armenia received salaries lower than the poverty threshold. This was set at 78 rubles per month per capita (equivalent to USD 8710), while the average monthly monetary income was 134.4 rubles per capita (USD 149.911). The composition of the income sources was the following: 76% salary, 11% formal transfers, 13% income generated from the sale of agricultural produce and other incomes. Expenses were distributed in the following way: 41% for the acquisition of food, 28% to buy non-food products, and 9%12 to purchase services. Taking into account the peculiarities of the Soviet economic and political system (high level of social spending and low variances in salary rates), the inequality level was one of the lowest in the world, with the Gini coefficient estimated at 0.27 in 1987-199013.

50. The reasons for the substantial increase in the poverty rates and in the number of the poor in 1998-1991 were primarily a consequence of non-economic factors. The devastating December 7, 1988 earthquake -besides taking thousands of lives, created a huge number (some 400.00014) of people who were left without shelter, property, and the basic means of existence. This coincided with the immigration of some 360 000 refugees. They fled from Azerbaijan into Armenia as a consequence of the Karabakh conflict. The vast majority of these refugees added to the number of people in desperate need of social protection. The consequences of the conflict were not limited to the problems of the refugees. More than 100 populated areas in a number of bordering regions were annihilated because of bombing from Azerbaijan and more than 70 000 people left their homes: thus becoming the group of internally displaced persons15.

2.1.2. REPUBLIC OF ARMENIA: SYSTEMIC CRISIS AND POVERTY

51. At the beginning of the 1990s, the newly independent Armenia entered a period of radical changes that involved political, social, and economic systems - exacerbated by an unprecedented energy crisis. From 1990 to 1993, GDP shrunk by more than twice. In 1993, it was only 46.9% of the 1990 level: the largest decline in GDP among the CIS countries. Due to the transportation blockade, the tangible reduction of fuel imports, and the closure of the Armenian Nuclear Power Plant, electricity production in the same period decreased by 58%.

52. As a consequence of the deep economic crisis some 645 000 jobs were cut in the non-agricultural sector of the economy16. In agriculture, however, from 1991 to 1992, as a result of land privatization, the number of jobs increased by almost twice and, subsequently, productivity fell more than twice, enabling a huge segment of the population to survive the economic crisis. At the same time, the entire agricultural sector was at a subsistence level, drastically decreasing the share of agricultural products for sale.

53. In contrast to the Soviet period, the reasons for the prevalent spread of poverty during the period of economic crisis were of an economic nature and were preconditioned by the unprecedented economic decline. Having caused the widespread impoverishment17 of the population, this decline drastically widened income inequality as well18.

54. The economic and energy crises, and the accompanying transportation blockade, made the socioeconomic and living conditions of the population practically unbearable: driving hundreds of thousands people to leave the country expecting to find jobs, relatively better living conditions and social protection in foreign countries19. The 1991-1993 period left deep scars in the psychological and historical memory of the part of population that stayed in the country.

2.1.3. ARMENIA: 1994–2002 ECONOMIC GROWTH, POVERTY AND INEQUALITY

55. Economic growth in Armenia restarted in 1994. It has continued to the present at quite a high rate, averaging 6.68% in 1994-2002. The main growth factor has been the start of large-scale financial inflows from two sources in the environment of economic and stabilizing social activities: macroeconomic stabilization, and the adoption of a liberal model of economic and trade regulation. The two sources of financing were official foreign and international assistance, which averaged some 7% of GDP, extended mainly through grants and concessional loans, as well as a substantial inflow of unofficial money transfers. These averaged around 8-9% of GDP. Those who had migrated from Armenia, in the 1980s and 1990s, to work abroad on a temporary basis, made unofficial money transfers.

2.1.3.1. Economic Growth and Poverty

56. According to official statistics, up to 2001, employment did not increase as a result of economic growth20. In the 1990-1993 economic crisis, after a substantial increase of employment in agriculture, the situation stabilized in the range of 550 000 to 580 000 employed persons, while each percent of growth in the non-agricultural sector in 1994-2001 coincided with a 0.6 percentage point decrease in employment. The main reason for this was that economic growth in Armenia has not been broad-based and has been concentrated in a few developing clusters, which were linked to grant investments or concessional loans (for example, construction), import substitution (for example, food processing and, to some extent, light industry), or the export of goods, the raw materials for which are mainly imported for processing and finishing (jewelry, and diamond processing).

57. On the other hand, employment remains relatively stable in the inflated and poorly paid social infrastructure. This factor does not allow for the proportionate increase of remuneration of employees in this sector, since the swift and substantial increase of budget resources allocated for the maintenance of this sector and household consumption directed at this sector, is objectively impossible to assess.

58. As a result, new jobs created in developing clusters did not exceed absolute reductions in non-competitive sectors of the economy. Redundancy measures have been undertaken primarily in large and medium size industrial enterprises inherited from the Soviet Union.

59. Despite the above-mentioned employment trends recorded during the previous years, according to the preliminary data for 200221, employment in 2002 increased by 17 000 people compared to 2001, or 1.34%. In other words, 1 % economic growth in 2002 resulted in an increase of employment by 0.1038 percentage point.

2.1.3.2. Economic Growth and Poverty Reduction

60. According to the 1996, 1998-99, and 2001 household surveys, economic growth has been one of the main factors behind poverty reduction. Reduction of poverty, including reduction in the number of the very poor in 1996-1998 (see Table 2.1) took place thanks to the increase in wage income of the employed population, resulting in reduction of the number of employed poor. However, according to the authors of the above surveys, the discrepancies between methodological aspects and sample sizes (4260 households in 1996, and only 900 in Q4 1998) do not allow for a reliable consideration of such comparisons. These may only be descriptive of poverty development trends.

Table 2.1.

Poverty and economic growth in 1996 and 1998

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Source: Armenia. Poverty Update, WB, 2002: Data on 1998 reflect information of the 1998/99 Survey pertaining to Q4 1998.

61. Poverty in Armenia, and particularly the number of very poor, also declined in 1999-2001, according to the data in Table 2.2. The most favorable changes took place in Yerevan, where the fraction of the poor decreased by 18.89 % (against a national average of 9.23 %), accompanied by less inequality of incomes and expenditures. The relevant Gini coefficients decreased by 9.66 and 18.89 % respectively. This is primarily explained by the concentration of economic activities in Yerevan and hence the greater opportunities for income generation compared to other parts of the country. In 2001, Yerevan (where 33% of the country’s total population and half of the total urban population resides) produced approximately 50% of the industrial output, 80% of the registered retail turnover, and 76.3%22 of services.

Table 2.2.

Poverty in 1998/99 and 2001*

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Estimations made per capita.

Changes of indicators are calculated in percents.

Gini coefficients of income concentration are calculated for the households that showed current income.

Source: 1998/99 and 2001 household surveys.

62. In other cities, a certain reduction in poverty and inequality took place: the fraction of the poor decreased by 8.06 % and the income concentration Gini coefficient decreased by 14.82 percent. However, more limited chances to find jobs and generate income, or engage in agricultural activities in places other than Yerevan and rural areas, are the main reasons for the tangibly higher poverty rates in other cities. The lowest degree of poverty and inequality reduction is in rural areas, where the proportion of the poor decreased by only 4.18 % (against the national average of 9.23 %), while inequality remains evidently higher than in urban areas. Low rates of poverty reduction are a consequence of unfavorable dynamics of prices for sales of agricultural produce. In 2001, it was 84.7% of the year 1997, while the consumer price index was at the level of 102.9%23 from 1997. In other words, a relative deterioration of the conditions for producing and selling agricultural produce took place. A high level of income distribution inequality is preconditioned by large and persistent differentiation24 between agricultural produce for sale and productivity. This particularly depends on climatic conditions and the size of land parcels, as well as on a limited potential for income diversification and involvement in non-agricultural activities as compared to urban areas.

63. The major specifics of poverty dynamics during 1999-2001 pertain to changes in its structure. The number of the very poor decreased by 30.16 percent. Such a decrease in the number of the very poor basically refers to two factors, one of them being the introduction of a family allowance system in 1999 (see Table 2.3) and the second is economic growth, which resulted in an increase of incomes generated from hired employment and self-employment. The above-mentioned increases, as well as the volume of family allowances, however, have not been sufficient to exceed the poverty threshold and a substantial share of the very poor moved up to the category of the poor. Taking into account that during 1999-2001, the family allowance budget decreased from 21.1 billion drams to 16.09 billion drams, and that the number of households eligible for benefits decreased from 226.5 thousand in 1999 to 173.3 thousand in 2001, the major factor for the reduction in the number of the very poor should be the increased wages as a result of economic growth. Evidence for this is the fact that during 1999-2001, despite a stricter scoring formula, the degree of proper targeting of allowances has not essentially increased. On the contrary, inclusion error (share of non-poor receiving family benefits) in 1999 totaled 22.9%, and in 2001 it was 32.1%. However, family allowances together with other social transfers constituted a substantial share of household incomes. Thus, in 1998/99, these constituted 71.4% of total income of the poorest 10% of the population (of which all benefits represented 12.5%), 45.5% of the next 10% (of which 18.7% are all the benefits), 35% of the third decile group (and 12.9% of total benefits). The 2001 situation is as follows: social transfers were as high as 57.7% (including 18.7% benefits) of total incomes of the first 10% of the poorest population, 48.4% of the next 10% (including 15.3% benefits), and 52.9% of the third decile group (including 8.6% benefits)25. According to the 2001 Integrated Household Survey, 1 % growth in the targeting level for family allowances in the four poorest decile groups, where money incomes were lower than the poverty food line, will reduce poverty at the national level by an average 0.163 percentage points, and the number of the very poor will be reduced by 0.66 percentage points.

Table 2.3.

Distribution of social benefits by population income groups, 1998-2001

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Note: The 1998 social benefits include child allowances, single mothers’ and other allowances. Pensions, unemployment benefits stipends and privileges are not included. The 1999 social benefits include only family benefits. Benefit distribution indicators are generated on the basis of 1998/99 and 2001 Surveys. The 1998 and 2001 indicators are annual, while the data on 1999 reflect January-June.Source: Armenia, Poverty Update, The World Bank 2002, Results of 2001 Sample Household Survey.

64. As Table 2.4 below shows, a substantial increase was recorded with respect to employment income of the very poor, which is a direct result of economic growth. The 1998/99 and 2001 household surveys show that the number of paid jobs has not increased26 in the economy, however, self-employment27 has increased. Official statistics services are not in a position to collect comprehensive information on this factor28. During 1999-2001, the incomes of the population, especially of the very poor, including income from work, increased at rates that are tangibly higher than the average. In contrast to the reduction in the number of hired employees, the employment of poor and very poor people in this period did not decrease. The growth of self-employment among the poor and the very poor is almost twice as high as that among the non-poor. This trend, at various rates, has been observed at the national level, in Yerevan, in other cities, and rural areas.

Table 2.4.

Dynamics of indicators on poor population’s income from work, hired employment and self-employment in 1998/99 and 2001

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65. However, the gap between employment incomes and employment rates of the poor and the non-poor still remains very large despite the substantial decrease that took place in 1999-2001, as shown in Table 2.5 below:

Table 2.5.

Population employment incomes, and indicators on hired and self-employed people, 1998/99 and 2001*

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Employment and income indicators for the poor are presented as an average for the first 5 deciles. Employment and income indicators for the non-poor are presented as an average for the last 5 deciles.

Employment indicators are calculated by extrapolating the survey results over the whole population. They do not coincide with official statistical data. Employment in agriculture is not taken into account.

Source: 1998/99 and 2001 integrated household surveys.

66. The impact of economic growth on poverty reduction during 1999-2001 is presented below in quantitative terms: economic growth in this period was 119.8 % of the 1998 level, of which GDP in agriculture was 111.9% and growth in the non-agricultural sector was 123.4% of their respective levels in 1998. The poverty rate during the same period decreased by 9.23 percentage points, including 15.26 percentage point in urban areas (18.89 percentage points in Yerevan, and 13.02% in other cities) and 4.18 percentage points in rural areas. Thus, 1 % of economic growth results in 0.468 percentage points of poverty reduction. In the agricultural sector, 1% growth of GDP resulted in 0.35 percentage points poverty reduction in rural areas, while 1% growth of GDP in the non-agricultural sector led to 0.65 percentage points of poverty reduction in the urban population, including 0.804 in Yerevan and 0.554 in other cities.

67. An analysis of population income dynamics during 1999-2001, shows that the primary factor preconditioning growth of income has been economic growth (see Table 2.6). Economic growth was the source of the 58.1% (62.3% in Yerevan) income growth among the poor (first 5 deciles of income). Social policy measures provided for 45.8% (36.5% in Yerevan) of the growth in the income of the poor; 0.37% of the growth is attributed to internal and foreign assistance (8.8% in Yerevan); and 7.15% of the growth is attributed to other incomes (7.3% in Yerevan).

Table 2.6.

Factor analysis of income dynamics in 1999-2001

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Source: 1998/99 and 2001 integrated household surveys.

2.1.3.3. Economic Growth and Inequality

68. Despite a certain decrease from 1999 to 2001, inequality in Armenia, and particularly income inequality, is still at a very high level. This is rather dangerous for the stability of the population. Inequality was 0.535 in 2001 (0.593 in 1999), which is one of the highest indicators in the world29. As in other CIS countries, and in contrast to Western and Central European transition countries, the degree of inequality of consumption expenses is tangibly lower than in the case of incomes, with Gini coefficients of 0.372 in 1999 and 0.344 in 200130. The reasons for such discrepancies in Armenia in 1998/99 and 2001 may be found in the increasingly proportional distribution of expenses. Consumption expenditures of the 1st to the 6th decile groups totaled 6,973.5 drams in 1999; the average money income was 3,135 drams. In 2001, these indicators were 7,269 drams and 5,163 drams respectively. The indicators of the 7th to the 9th decile groups were 15,798 drams and 11,883 drams respectively, and, in 2001, 16,325 drams and 16,396 drams. The indicators of the 10th decile group in 1999 were 37,013 drams and 53,539 drams, and 37,645 drams and 56,547 drams in 2001. Thus, incomes and expenditures were consistent only in the 7th to 9th decile groups. In the 1st to the 6th deciles, expenditures substantially exceeded incomes. In the 10th decile, incomes were higher than expenditures31. Income inequalities are primarily preconditioned by a reduction of incomes generated from hired employment and social transfers. These changed both in volume (drastically reduced absolute rates of wages, pensions and benefits) and structure (drastic increase in the unequal distribution of wages) as compared to Soviet Armenia. The number of recipients of incomes from hired employment has tangibly decreased. Other incomes, including property and business activity related incomes, including informal transfers, are distributed very unevenly. The growth of their share of total income leads to a growth in inequality. The reduction in inequality during 1999-2001, is primarily preconditioned by the faster growth of employment income as shown in Table 2.1. In addition, inequality in Armenia is related to the place of residence. In both 1998/99 and 2001, inequality in rural areas was higher than in Yerevan and other cities, mainly because of the disproportionate distribution of income generated on the sales of agricultural products - the main source of income for rural residents. Inequality reduction in rural areas during 1999-2001 took place because of a shrinking share of income from the sale of agricultural products and its substitution by hired employment and self-employment incomes. These were substantially more equally distributed.

Table 2.7.

Income inequality in Armenia in 1998/99 and 2001*

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The “Impact” column describes the percentage change of general income inequality in the case of a 1% change in the relevant income source. A negative value in this column means inequality reduction, and a positive value signifies growth. The rate of impact depends on the change in the relevant Gini coefficient (inequality in distribution of the given and total income) and the share of the given source of income within the composition of total income.

Source: 1998/99 and 2001 integrated household surveys.

2.2. DESCRIPTION OF POVERTY AND SPECIFIC FEATURES

69. Despite a certain reduction in poverty and inequality during 1999-2001, poverty in Armenia remains widespread, with approximately half the population being poor. The income concentration Gini coefficient persists at a socially tense value higher than 0.5. Poverty has special features depending on territorial, seasonal, gender, and age differences - as well as on the size of families, their education level, and vulnerability.

70. The territorial differences in poverty levels in Armenia reflect the existence of favorable conditions for agriculture, the number of border regions, and the relationship to the earthquake zone (for the urban population). Thus, in 2001, the poorest population was in rural regions having the most unfavorable conditions for agricultural activities, or which had suffered the consequences of the Artsakh conflict. Thus, in 2001, the highest poverty levels were recorded in the Provinces of Gegharqooneeq, Aragatsotn and Tavoosh (62.2%, 60,3% and 59.7% respectively - while the national average was 51.9%)32. The next area is Sheerak, where the poverty level was 57.8%33.

71. Poverty in Armenia is clearly of a seasonal nature, as shown in Table 2.1. Incomes and expenditures reach their highest values in the 4th quarter and their minimum level is in the 1st quarter. If it were more evenly distributed, it would generally correspond to the dynamics of economic activity in the country. This situation is true for 1998/99 as well. This factor should be considered when designing and implementing economic (and especially social protection) policies. Given the clearly manifested seasonal nature of poverty, it is appropriate to carry out reforms, particularly those that might have a negative impact on the living conditions of the population over the second half of the year.

Table 2.8.

Composition of current expenditures of the population in 2001

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Source: Provinces of Armenia in Figures, 1998-2001, Yerevan, 2002, p140.

72. The poverty analysis in terms of gender and age shows that women are more frequently below the poverty threshold than men, but the risk of poverty for women is not much higher than that for men. The picture is different in case of households headed by women (see Table 2.2). Such households are much more (33%) vulnerable to falling into extreme poverty than other households. The main explanation lies in the lower rate of employment among women as compared to men34. Hence, the absence of a man as head of the household increases the vulnerability of falling below the poverty threshold.

Table 2.9.

Gender poverty in 1998/99 and 2001, percentages

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* Source: NSS Integrated Household Surveys 1998/99 and 2001

73. Despite the widely held opinion, the risk of pensioners (and especially of households with members who are pensioners) to fall into poverty in Armenia, as in other CIS countries, is not higher than the risk attributed to the rest of population (Table 2.3). The basic explanation for this is the fact that despite the insufficiency of pensions in absolute terms, these are more equally distributed than other incomes of the population. They represent a stable source of income for a predominant share of the elderly. The availability of other sources of income would reduce the vulnerability to poverty for the vast majority of pensioners.

Table 2.10.

Poverty among pensioners in 2001, in percent, by members of household

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Source: NSS Integrated Household Survey 2001

74. Among the age groups that are the least protected are minors, whose level of poverty in 2001 was substantially higher than in all other groups (Table 2.4). The levels of poverty for those of working age and the elderly are almost the same. The risk of inclusion of children in poverty, however, is 18% and 17.7% higher than that of the working age and elderly people, respectively. In addition, the high risk for the age group between ages 30 and 39 to fall into poverty is very typical, since this group suffers the greatest unemployment risks and faces the highest vulnerability to unemployment.

Table 2.11.

Poverty by age groups in 2001*

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Relative risk of falling into the categories of the poor and/or the very poor shows the extent to which the given age group deviates from the average indicator.

Source: NSS integrated household survey 2001.

75. The relative exposure of children to extreme poverty is also the highest (23.75%) and is much higher than the poverty risk. Note that the relative exposure of elderly people to extreme poverty is the lowest among all the age groups: 2.1 and 3.6 times lower than that of working age population and of children, respectively. This shows, once again, that even small, but equally distributed incomes will substantially reduce the risk of poverty - especially that of extreme poverty.

76. Poverty level is directly related to the size of a household: the more members in a household the higher its exposure to poverty.

Table 2.12.

Poverty and size of household (h/h) in 1999 and 2001

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Source: NSS Integrated Household Surveys 1998/99 and 2001.

There is also a direct correlation between the poverty level and the number of children in a household. The larger the number of children, the higher is the poverty level and the exposure to poverty and extreme poverty. There is another relationship between the number of children and the poverty level: according to regression analyses of the NSS, an increase in the number of children aged 0-14 years old, resulted in a 7.5% (in 1999) and 5.3% (in 2001) decline in living standards per child. Note that despite the fact that the general poverty level in rural areas is slightly lower than in urban areas, children residing in rural areas are more often poor.

Table 2.13.

Poverty level by the number of children in households in 1998/99, %

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Source: NSS Integrated Household Survey 1998/99.

77. Sample surveys also show a direct correlation between level of education and exposure to poverty. This correlation is clearly manifested in the case of people who have higher education. The risk of falling into poverty and extreme poverty for this group has substantially decreased in 1999-2001, taking into account that the number of the very poor has drastically decreased as well. To a certain extent, exposure to poverty among people with secondary vocational education has also shrunk. As to people with secondary and elementary education, their exposure to poverty increased in 1999-2001 - more sharply for the latter. These processes are mainly preconditioned by the fact that if work-force redundancy measures are instituted, they will first affect people without professional qualifications. Furthermore finding a new job for a person with secondary or elementary education is much more difficult than for those with a professional education. Note that the greatest risk of poverty is present for people with a secondary education. Once again, this is related to the lack of a profession/qualification, as well as to the fact that people with secondary education constitute more than half of the officially registered unemployed35.

Table 2.14.

Poverty by education in 1999 and 2001, percentage *

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18 years old and above.

Source: NSS Integrated Household Surveys 1998/99 and 2001.

78. In addition to the above-mentioned factors preconditioning poverty in rural areas (unfavorable conditions for involvement in agricultural activities and small quantities of agricultural production for sale) it is important to consider the size of plots, access to credit, and the conditions of the roads leading to the principal markets. According to the results of the 2001 integrated household survey, the larger the plot-size, the smaller the poverty risk. Only a small share of rural households makes use of borrowed funds, i.e. only 18%, of which 58.7% are non-poor households, 32.6% poor and 8.7% are very poor rural households. Concerning roads, it should be mentioned that their absence or their poor condition substantially restricts the mobility of the rural population, increases costs, and tangibly limits job opportunities outside a rural community. According to the Survey of Poorest Communities in Armenia36, it is significant that a distinctive feature for the poorest rural communities is the bad road links with provincial centers and other communities.

79. The relationship between residential conditions and poverty is clearly manifested among people residing in hostels (populated primarily by refugees) and temporary shelters (populated primarily by refugees and earthquake area residents). The share of the poor and the very poor population is higher than the average national figures: 34.5 and 37.9% in 2001 in hostels, and 44.6 and 7.7% in temporary shelters.

80. Concerning access to utilities, the differences among households are a function of the place of residence (rural or urban), rather than to purely poverty factors (except for heating issues). Thus, in 2001, 41.6% of households residing in urban areas had decent residential conditions (kitchen, cold water, bathroom and toilet), while in rural areas only 14.2% of households had such conditions.

81. According to the results of the 2001 integrated household survey, 94.2% of households had heating, including 99.8% in rural areas, and 91.5% in urban areas. Central heating was made available to 9.7% of urban households and 1.2% of rural households. Households without central heating, used wood (56.5%), electricity (17.9%), gas (7.2%), and oil (1.7%). Heating for 1.7% of households was provided by individually owned heating systems.

82. Centralized drinking water supply services were provided to 85% of households, but 29% of households had only 2 hours of water per day, 30% had water for 3-4 hours, 11% had it 5-6 hours, 5% had it for 7-10 hours and 18% had a 24-hour drinking water supply. Of the households having a centralized water system, 94.2% were in urban and 64.7% were in rural areas. Springs or wells supplied 7% of households, 6% received water delivery services, and 1% had their own water supply system.

83. The results of the poverty analysis presented above, enables us to identify the following major poverty categories:

  • (i) Multi-member households, especially households with many children;

  • (ii) The unemployed and employees with low wages (including employees of the education, culture and arts sectors);

  • (iii) Refugees and post-conflict groups, especially those residing in hostels and temporary shelters;

  • (iv) Those single pensioners and disabled persons who have no sources of income other than their pensions.

84. Children: The risk of poverty largely depends on the structure of a household and the number of dependants in it. Households having children below 7 years of age, or with 3 or more children are among the most exposed to the risk of poverty. Very poor households are more burdened (by a factor of 1.5) with children than non-poor families. The presence of a child strains a family’s expenses in terms of ensuring an education for the children (education is considered to be one of the most important human development factors). The largest portion of expenses related to a child’s education is born by the household37. According to the 2001 integrated household survey, the average monthly expense per pupil is 2600 drams.

85. Unemployed: Unemployment and poverty are closely linked. According to the Sample Labor Force Survey conducted by the NSS in 2001, unemployment constituted 32.8% of the economically active population38, more than triple the officially registered unemployment statistic. Regression analysis shows that an unemployed member aggravated the depth of poverty of the household by 12.6% (in 2001). In 2001, the relative risk of extreme poverty in a household headed by an unemployed was 70%, which is the highest among all age and social categories. The risk of poverty was 8.9%.

86. Concurrently, one fifth of the employed is very poor. Moreover, poverty studies identified that 45%-47% of the employed population is poor. According to the methodology of the International Labor Organization (ILO), the employed who receive low wages and are not able to maintain the minimum needs for their families and dependants, should be considered part of the hidden unemployment category. The employed poor are primarily represented in the sectors of education, culture and arts. Their average monthly wage has for years lagged two or more times behind the national average.

87. Refugees: A specific study39 of vulnerable groups within the population of refugees and local Armenians identified at least three types of poverty. The indicators describing refugees are substantially worse than those of local people. Thus, the human poverty indicator was 1.7 times lower, the extreme poverty indicator was 1.4 times lower, and the subjective self-perception indicator was 1.2 times lower than similar indicators for the local group. The most hopeless conditions exist for refugees living in temporary shelters. Every fifth member of the group is seriously ill, 60% are chronically ill, or single, or physically challenged. It means that the extremely harsh conditions of refugees set the picture of poverty, both in a particular location and in the country as a whole. In-depth studies of refugees have also identified that the persistence of poverty is not only preconditioned by the fact of being a refugee (loss of flat and property, moral and psychological shock, etc) but also by even more pronounced increase in their vulnerability because of the unsolved poverty problems accumulated over many years.

2.3. HUMAN POVERTY IN ARMENIA

88. As in almost all transition economies, poverty and inequality in Armenia are issues40 largely preconditioned by material (income) factors. The characteristics of human poverty and inequality per se are different from those peculiar to developing countries. Table 2.15 shows that social and demographic indicators during the transition period have not substantially deteriorated. This holds, in particular, for the life expectancy indicator that should have dropped in view of the drastic increase of poverty and inequality after regaining independence.

Table 2.15.

Armenia: main social and demographic indicators

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89. The relatively mild impact of the drastic increase in poverty and inequality on a number of major demographic and social indicators during transition, and the relatively good position of Armenia in terms of the human development index of the UNDP41 (international comparisons are presented in Table 2.16) are explained by the sufficiently developed social infrastructure inherited from the Soviet Union. Though inefficient, obsolete, and under-financed, it is, nevertheless, in working condition.

Table 2.16.

Major social and demographic indicators in Armenia and other countries (1998)

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Calculations are based on the number of the actual population.

Countries of Eastern Europe only.

Source: UNDP Human Development Report 2000, Poverty Reduction, Growth and Debt Sustainability in Low-income CIS Countries, IMF, WB, 2002

90. The number of births decreased twice during 1989-2001. The decreases are preconditioned by the drastic decline in living standards during the transition and reflect the increase in expenditures related to delivery and the bringing up of children. The trend of a reduction in the average size of families is further evidence of the above and was recorded in all three integrated surveys.

91. The increase in the mortality rate is not related to economic developments and reflects the current aging of the population. It has not influenced life expectancy, which has shown stabilization trends in the current period.

92. Another matter of concern is the reduction of the number of pupils in the school-age education network. This reduction is particularly pronounced in the higher grades (9 and 10), while the proportion of pupils in the lower grades (1 to 8) remains stable and constitutes about 97%.

93. While maintaining quantitative education and health sector indicators comparable with OECD countries, Armenia is substantially behind these countries. Developing and other transition economies, in terms of relative volumes of financing42 in terms of absolute amounts per capita in Armenia is 5.45 times lower than the average indicator in East-European and CIS countries, 55.1 times lower than the average of OECD countries, and 2.5 times lower than the average in developing countries (for health sector, these indicators are 10, 137 and 2.91 times respectively). Under such circumstances of substantial under-financing, these sectors could not survive in the existing volumes if funded only from state resources. The volume of officially recorded co-financing by population of higher education only, constituted 0.73% of GDP in 2001 and was twice more than that of state financing. Financing of the health sector by population in the first quarter of 2002 totaled 23.613 billion43 drams, or 1.74% of GDP in 2002 (1.5 times more than the volume of state financing in 2001).

94. Maintaining such levels of state financing for education and health sectors jeopardizes the possibility to address issues related to the UN’s declared human development concepts and adopted by our country. Moreover, shifting the financial burden on the population will aggravate the fundamental problem of human poverty. Results of several surveys44 undertaken in Armenia showed that 31% of households are not able or can barely survive the incremental expenses needed for education. Among poor children, 7% do not attend public schools. Of those who are ill, 70% do not have access to health services.

95. The above situation is evidence of the limited capacity for the Government to effectively implement redistribution and social functions.

96. Qualitative Description of Poverty: The qualitative approach to the study of poverty addresses human behavior, a description of behavior of the poor in particular, and examines its social, cultural, political and economic components45. Qualitative studies of poverty in Armenia46 identify the following matters for particular concern:

  • (i) Increasing social stratification, distrust - by the poor and middle class - of the rich, and the state and local authorities;

  • (ii) Changes in intra-household relations in poor families mainly based on the impossibility of many men to sustain the functions of head of the family. Other changes that affect these relationships are based on the risks of falling into poverty and its impact on family stability. These cause a reduction in the number of marriages and births, an increase in the age at which people marry, as well as a distortion - because of mass migration - of the normal ratio between the sexes;

  • (iii) Weakening of the traditionally strong intra-family ties and the lowering efficiency of informal mutual assistance arrangements, particularly for the elderly and refugees;

  • (iv) Withdrawal of the poor from social life and participation in ceremonies. This gives rise to the perception of being isolated from society: one of the most dangerous socio-psychological consequences of poverty.

SECTION 2. PRSP GOALS AND MAIN POLICY DIRECTIONS

CHAPTER 3. PRSP GOALS

3.1. POVERTY AND INEQUALITY REDUCTION

97. PRSP measures aimed at ensuring sustainable and high economic growth and the implementation of efficient social protection policies are expected to result in poverty reduction at the following rates: to 41% in 2005; to 29.1% in 2010; and to 19.7% in 2015, down from the 2001 level of 50.9%. At the same time, the population of the very poor will make up 14.2% in 2005, 10.6% in 2010 and 4.1% in 2015, down from the 2001 level of 16%.

98. In 2005, the internationally recognized indicators for the measurement of poverty, i.e. the number of people with daily expenses below 1, 2 and 4 US dollars47, will equal 13.8%, 35.9%, and 68.3% respectively. In 2010, the respective figures will be 4%, 20.5%, and 42.1%. In 2015, they will drop to 2.7%, 6.8% and 27.6% respectively. In 2001, these figures were 29.4%, 58.6% and 81.5%.

99. Such a reduction in the poverty levels will largely depend on increasingly high growth rates of employment incomes and of social transfers (pensions and benefits) to the poor.

100. Main indicators of poverty reduction are presented in Table 3.1 below.

Table 3.1.

Main benchmark indicators of poverty reduction under the PRSP

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Calculations are based on the number of de facto population.

PPP for the entire period is assumed at the level of 3.38.

Poverty indicators estimated in USD PPP are based on the projections of incomes of the population.

2001 figures are as of October 10, 2001. Projections do not take migration into account.

Source: NSS data, PRSP projections.

101. Inequality will also decrease in the program period. The Gini coefficient of income concentration in 2005 will be 0.491, in 2010, 0.466, and in 2015, 0.446 (It was 0.535 in 2001).

102. The reduction of inequality will mainly depend on the reduction of income inequality resulting from the income policies of the government (correspondence of the minimum wage to the poverty food threshold and ensuring an increase of remuneration to employees in social infrastructures and public administration), and an increase in pensions and a substantial improvement in benefit targeting.

103. The main target indicators with respect to income inequality reduction are presented in the Table 3.2.

Table 3.2.

PRSP main indicators of inequality reduction

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Source: NSS data, PRSP projection.

3.2. HUMAN POVERTY REDUCTION

104. As shown in the PRSP poverty analysis section, the level of human poverty in Armenia is substantially lower than that of material poverty. Human development, however, is comparable to economically far more developed and richer countries. To this end, maintaining the human poverty potential and its further strengthening, and reducing the currently more tangible manifestations of human poverty, are the priorities of the PRSP.

105. Fulfilling these priorities will be contingent upon two principal factors, measures to enhance the efficiency of relevant structures and an increase in public spending.

106. The main objective for the education sector is to improve the quality of education and enhance the access to it. The expected results of the programmed measures are:

  • (i) By 2015, increase the school-life expectancy for 6-year old children to 12.3 years, up from 11.6 years estimated for 200348;

  • (ii) The completion rate (ratio of number of graduates to respective number of entrants) for general schools will reach 85% in 2015 (it was 65% in 2002)49.

107. The main objectives for the health sector are to upgrade the quality of and enhance the access to health services, particularly for the poor. The expected results of the programmed measures are:

  • (i) Reduction of child mortality: mortality rate for the under-5 group will decrease to 10 per 1 000 live births from 15.9 registered in 2002. Infant mortality will decrease to 8.5 per 1 000 live births from 13.450 of 2002;

  • (ii) Reduction of mother mortality from 34.451 per 100 000 live births in 2001 to 10 per 100 000 live births in 2015.

108. Target indicators of human poverty are presented in Table 3.3 below:

Table 3.3.

Main target indicators of human poverty reduction

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Aged between 6 and 21 years old.

Three-year average.

CHAPTER 4. POVERTY AND INEQUALITY REDUCTION POLICY PRIORITIES

109. From the perspective of poverty reduction, an important precondition is to ensure sustainable high economic growth. As the analysis shows, economic growth is the factor that in 1999-2001 preconditioned a 58.1% increase in the income of the population (Table 2.6). Notwithstanding widely held opinions, economic growth in Armenia in 1996-2002 has become a factor contributing to poverty reduction. Economic growth has resulted in a substantial reduction of hired jobs. The substantial boom in self-employment, and the accelerated growth of incomes, however, canceled these reductions. Major directions related to the poverty reduction aspect of economic growth policies will be enhancement of self-employment and the promotion of small businesses. The improvement of the business environment will also lead to increased work incomes of the poor. Policies for stimulating economic growth will be analyzed and the ones with a more pronounced orientation towards the poor will be advocated.

110. Improving governance at all levels will have a significant impact on poverty eradication, including the development and relentless implementation of anti-corruption policies. Governance-related factors that impede the eradication of poverty (factors propagating poverty) would be identified and taken into account in the future elaboration and implementation of reform programs.

111. Redistribution technologies will be revised, including those at the political, economic and social levels. Increasing the level of public participation in decision-making will be given special importance and will underline the necessity for enhanced public awareness and knowledge. Democratic mechanisms are also considered to be important, emphasizing the need for improving social partnership, social inclusion, and social participation. The government anticipates a significant contribution and support from the wealthy segment of the population and will make efforts to create conditions conducive to that support.

112. From the perspective of inequality reduction, the main priorities are efficient social and income policies. Social transfers in 1999-2001 ensured 45.8% growth in incomes of the poor (Table 2.6). The priorities of social policies are presented below:

  • (i) In the area of social assistance: ensure better targeting of family benefits and maximum possible rate of inclusion of the poor in the scheme, increase family benefits to exceed the poverty food threshold;

  • (ii) In the area of social insurance: increase efficiency, transfer of pensions of a non-insurance nature to the state budget, increase pensions to exceed the poverty food threshold, a regular increase of pensions, and a transition from a system based on the number of years worked to one based on an insurance contribution system.

113. The main priority in income policies will be the creation of opportunities for the population to generate income exceeding the general poverty threshold, including the increase of salaries for employees in budgetary and social sectors so that these salaries are at least double the level of the general poverty threshold. Furthermore, the minimum salary rate will be increased to the level of the general poverty threshold.

114. The next priority is in enhancing the financial capacities of the state in order not to jeopardize sustainable economic growth rates. Such growth may be reached through increasing tax revenues (annual increase of 0.3-0.4% of GDP, mainly through the improvement of tax administration and simplification of the tax systems) and expanding the state budget deficit within safe limits. From the perspective of poverty and inequality reduction, such growth is crucial to ensure the increase of the social spending share within total public expenditures.

115. The next priority in terms of poverty and inequality reduction is the increase of public investment programs and their targeting to mitigating poverty (including human poverty) and inequality problems. Such programs include, in particular:

  • (i) A program of construction and improvement of rural roads, which would improve the efficiency of agriculture, close the gap to the main agricultural markets. It will also optimize the distribution of educational and health establishments and enhance their efficiency;

  • (ii) A program of water supply with the objective to enhance accessibility of drinking water to the population, ensure, in principle, a 24-hour water supply and increase the quality of the supplied water;

  • (iii) An irrigation program that aims to increase the irrigated land areas while regulating the irrigation water supply systems.

116. In the area of mitigating rural poverty and inequality, the priorities are in accelerating growth in incomes from sales of agricultural produce, introducing insurance schemes (co-financed by the government and agricultural firms) against natural and climatic risks, increasing access to financial and credit resources, creating an effective land market, introducing of micro-credit facilities for the development of cooperatives, self-employment opportunities, and small businesses.

117. The promotion of self-employment and small businesses through the establishment of micro-crediting facilities is a priority for the most vulnerable groups as well, such as households headed by women, the unemployed, refugees and displaced persons.

118. Within the context of poverty and inequality reduction, the main priority in education sector will be the further development of a general education system with particular emphasis on increased enrolment in the higher grades of schools. Special attention will be given to affordability issues existing in the vocational education sector. Enhancing efficiency and increasing public financing of the sector are the main ways to reach these targets. In particular, budget expenditures in the education sector in 2015 will increase by 1.7 percentage points of GDP compared with 2002 and will amount to 4% of GDP.

119. The accessibility to health services will be enhanced through increased public expenditures targeted towards that sector, relevant intra-sector redistribution of public funds, as well as optimization and administrative reforms leading to increased efficiency. It is expected to increase the state budget expenditures in the health sector to 2.5% of GDP in 2015 – up from 1.2% of GDP registered in 2002.

120. The priorities in respect of poverty reduction among refugees and internally displaced people include the improvement of the residential conditions of people living in hostels and temporary shelters, including their inclusion in the residence-title distribution system.

CHAPTER 5. THE PRSP AND THE MILLENNIUM DEVELOPMENT GOALS

121. Target indicators for reducing poverty, including extreme poverty, as set in the PRSP are fully compatible with the targets envisaged in the Millennium Development Goals52: to reduce the number of people living on less than 1 USD per day to half, by the year 2015 (compared to 1990). In other words, the number of people living with less than USD 1 per day should be reduced to 14.5 % of the total population. Armenia will achieve this indicator by 2005,53 and in 2015 this indicator will be 2.7 percent.

122. According to the PRSP projections, Armenia will exceed the MDG projected average indicator for Europe and Central Asia (8.7 % of the population living on less than 2 USD per day) by 201554. In 2015, it will amount to 6.8 % in Armenia.

123. These indicators can be achieved only through stable and rapid rates of economic growth. It is planned that in 2003-2015, the annual GDP per capita growth will be 5.1%, instead of the 3.6 % projected for poverty reduction by MDG.

124. Armenia currently is not developing programs to eradicate hunger55. Nevertheless, facts pointing to malnutrition are alarming, particularly those indicating the large share of children with below normal weight and height. In 2000, these indicators for Armenia were as follows:56

  • (i) the share of children with below normal weight was 3 % on average, with substantial regional variation: from 0.7 % in Yerevan up to 9.3 % in Kotayk Province;

  • (ii) the share of children with below normal height was 13 % on average, with substantial regional variation: from 8 % in Yerevan up to 32 % in Gegharqooneeq Province.

These facts are directly linked to poverty and malnutrition. The PRSP targets corresponding to the relevant MDG targets are presented in Table 3.1.

125. The second MDG goal deals with universal enrolment in lower grades of school by 2015, was, in effect, already achieved during the early years of the Soviet Union. In 2001, the enrolment of children aged 8-15 in the educational system was 98.7 percent, whereas the literacy rate among the population aged 15-24 was 99.8 percent57. According to the PRSP projections these levels will be maintained.

126. The third MDG goal is to promote gender equality and women’s empowerment. This is a multi-factor issue. Women have formal equality and a higher level of education (a characteristic of Armenia and a number of other CIS countries) than men. In 2001, the ratio of girls to boys in school was 1.02 and in the tertiary educational system, the ratio was 1.2. While having comparable poverty levels (see Table 2.9), women, nevertheless, lag behind men in their average salaries, earning about 69 % of men’s salaries in 200158. This fact, in the absence of formal discrimination, is explained by the smaller share of women in areas of activity with high incomes and their large share in the social services sector, where salaries are noticeably lower. According to the PRSP projections, a high enrolment level in the educational system among women will continue in 2003-2015. Differences in incomes will decline due to an increase in salaries of workers in the social sector. On the other hand, the government will promote wider involvement of women in income-generating activities, particularly small businesses, for example, through micro-credit systems. Currently women’s participation in the governance system is very low. Here also the government will take measures, even including the establishment of quotas, in order to substantially increase women’s participation in governance.

127. The maternal and infant mortality projections presented in Table 3.3 ensure the achievement of the fourth and fifth MDG goals, namely, by 2015 compared to 1990, reduce the under-5 mortality rate by two-thirds, (this indicator amounted to 23.8 in 1990), and also reduce the maternal mortality rate by three-quarters, (this indicator in 1990 was equal to 34.8 per 100 000 live births)59.

128. The sharp increase in the financing of health care projected within the PRSP will provide for more effective countermeasures against socially dangerous diseases, particularly HIV/AIDS, malaria, and tuberculosis. It will aim to prevent the spread of HIV/AIDS, almost totally eradicate mortalities from malaria and sharply reduce tuberculosis mortalities, and thus achieve the 7th and 8th targets of MDG.

129. In the environmental sector, it is planned to maintain and increase the country’s forest resources.

130. Projections of indicators on access to drinking water presented in Table 3.3 are also in line with the relevant MDG target.

131. At present, people living in temporary shelters (earthquake zone and refugees) constitute 5.1 % of the entire population. According to PRSP projections, by 2015 their numbers will amount to 1% to 1.5 % of the population, and the issue will be totally solved by 2020 (MDG target 11).

SECTION 3. POVERTY REDUCTION STRATEGY

CHAPTER 6. SECURING ECONOMIC GROWTH AND ITS ACCOMPANYING REDUCTION OF POVERTY

6.1. THE PRSP MACROECONOMIC FRAMEWORK

132. The comprehensive solution to poverty and the reduction of inequality depends mainly on economic growth. High economic growth will, in the long run, necessarily result in employment expansion and in increase of wage incomes, the main source of income of the population. Concurrently, being the primary source for government revenues, it will enlarge the capacity of the government to redistribute incomes.

133. Starting in 1994, continuous economic growth (average of 6.68 % per annum) has been recorded in Armenia. Nevertheless, as of 2002, it has still been impossible to restore the income levels prevalent in the first three years of transition. Should these rates be maintained, however, in 2005 it would be possible to double the GDP level of 1994, and exceed the 1990 level.

134. Economic developments in recent years give ground to think that the stable and favorable macroeconomic environment together with the microeconomic and structural changes supported by external assistance, may ensure high rates of economic growth in the coming decade, at an average of 5.5% to 6.5% per annum. The baseline scenario for macroeconomic projections rests on SAC-5 and PRGF programs implemented by the Government in cooperation with the World Bank and the IMF. It calls for a consistent and comprehensive implementation of agreed policies and measures.

135. The following developments are projected for the main macroeconomic indicators:

  • (i) Real GDP in the program period will show stable growth trends. A GDP real growth rate of at least 7% is projected for 2003. In 2004-2008, the annual GDP growth will be 6%, while by the end of the program period, it will stabilize at a level of 5% per annum;

  • (ii) Consumer prices will stabilize, with average annual increases of 3% throughout the program period;

  • (iii) Investments (investments/GDP) in 2015 will grow by 5 percentage points from the level of 2002, reaching 24.3%. At the same time, national savings will increase at higher rates (6.6 percentage points of GDP increase compared to 2002) thus narrowing the investment/savings gap. Public investments will stabilize as a percent of GDP in the range of 4%, and government savings will show gradually growing trends;

  • (iv) Total revenues of the state budget, by 2015 will amount to about 20% of GDP, which is 2 percentage points higher than the level of 2004. At the same time, significant changes will take place in the structure of budget revenues due to a higher increase in tax revenues (an increase of 3.4 percentage points of GDP in the period). State budget expenditures will grow at lower rates leading to a lower budget deficit. The deficit-to-GDP ratio during 2005-2010 will stabilize at a level of 2% of GDP. For 2015, it is projected at 1.6% of GDP.

  • (v) The export of goods and services during 2004-2015 (in dollar terms) will grow at higher rates than imports (annual average of 9.2% and 7.4% respectively). This will serve as the main factor for the improvement of the current account. Starting in 2010, the current account deficit/GDP ratio will stabilize at the level of 4.5% of GDP, against 6.5% programmed for 2003.

136. Macroeconomic projections for the program period are presented in Table 6.1 below60.

Table 6.1.

PRSP macroeconomic framework: projections of main indicators

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Calculations are based on the de facto population.

137. Developments projected within the macroeconomic framework of the PRSP are presented in Table 6.2 according to the main sectors of the economy.

Table 6.2.

Development of economy by sectors: projections of main indicators