Republic of Armenia
Second Poverty Reduction Strategy Paper
Author: International Monetary Fund
Publication Date:
22 Dec 2008
eISBN:
9781451801705
ISBN:
9781451801705
Language:
English
Keywords:
ISCR; CR; economic growth; family benefit; poverty line; private sector; judicial system; monetary policy; civil society; economic system; management system
Download PDF (2.2 MB)

The key findings of Republic of Armenia’s Second Poverty Reduction Strategy Paper are reviewed. Macroeconomic and fiscal framework has been completely revised, taking into account the 2007 outcomes, tendencies developed during 2008, and challenges, particularly the projected increase of consumption prices and the GDP deflator. The structure of the economy has been reconsidered, targeting a larger share of industry and service sectors, mostly owing to the reduction in construction.

Abstract

The key findings of Republic of Armenia’s Second Poverty Reduction Strategy Paper are reviewed. Macroeconomic and fiscal framework has been completely revised, taking into account the 2007 outcomes, tendencies developed during 2008, and challenges, particularly the projected increase of consumption prices and the GDP deflator. The structure of the economy has been reconsidered, targeting a larger share of industry and service sectors, mostly owing to the reduction in construction.

1. Key Results of Poverty Reduction Strategy Paper (PRSP-1) Implementation and Justification of Strategy Paper Revision

1.1. Key target indicators and strategic priorities of PRSP

42. The Poverty Reduction Strategy Paper (PRSP-1) was approved by the RA Government in August 2003 for the 2003-2015 period. Actually since the independence of Armenia the PRSP is the first long-term strategic program aimed at social and economic development.

43. The main objective of the program is substantial reduction of the material poverty. According to the program, it is envisaged to get the poverty incidence to 19.7% by 2015 and the extreme poverty incidence to 4.1% as compared with 50.9% and 16%2 in 2001, respectively. Together with the reduction of the material poverty PRSP aims at reducing the very high level of income inequality in Armenia from 53.5% in 2001 up to 44.6% in 2015.

44. With regards to human poverty reduction the program was aimed at: maintenance of the present human potential and its further development; reduction of the human poverty expressions; improvement of the population health, reproduction potential and welfare level, including increase of the accessibility level of the general education and health service quality; reduction of infant and maternal mortality rate; improvement of the quality and accessibility of drinking water and other primary services.

45. Such selection of PRSP-1 key objectives was conditioned by the scope of material poverty; insufficient participation of poor people in the economic, social and political life of the country; their “voiceless ness”, as well as by the fact that the poverty of more than the half of the population constitutes a threat to the stability and further economic and social development of the society.

46. Necessity to reduce human poverty, or in the wide sense, to ensure sustainable human development was identified as the second key objective of PRSP-1 because of a certain social perception according to which the poverty reduction includes not only increase of the material resources of the poor, but also a substantial increase of their opportunities to benefit from the basic social services and welfare, as well as to participate in social and economic life of the country. In addition, the existence of high quality human capital is the major precondition for the modern economic development, and without it in the long-term perspective it is impossible to ensure a sustainable economic growth.

47. In order to achieve the aforementioned objectives, the poverty reduction strategy was composed of three major directions: a) ensuring a rapid and sustainable economic growth; b) implementing an active and targeted social and income policy focused on the vulnerable social groups (including the poor and extremely poor); c) modernize the country’s government system, including improvement of the public governance system and provision of expansion of resource package at the disposal of the country.

48. Provision of stable and rapid economic growth, as well as maintenance of poverty reduction oriented economy growth and its further deepening was the PRSP-1 priority. Based on the fact that they envisaged to supplement PRSP with RA long-term stable development strategic program, which should deeper deal with the development and implementation of an economic policy necessary to ensure a sustainable economic growth, PRSP economic growth policy was mainly aimed at the poverty reduction, provision of the participation of the poor population in the economic life of the country and increase in the earned income. The implementation of the abovementioned policy, which took place in 2001-2006, should become the key factor for the reduction of material poverty.

49. In this regard the following two directions of public policy can be identified:

  • Promotion of self-employment and entrepreneurship by means of improving the business and investment climate, as well as increase of lending resources and cost reduction in the conditions of macroeconomic stability and liberal economic system;

  • Channeling of the public investment resources exclusively to the elimination or mitigation of those infrastructure constraints formed in the economy, which in medium or long-term perspective might hamper economic growth or human development aimed at the poverty reduction; in particular construction and reconstruction of the rural roads, modernization of the irrigation system and provision of the efficiency growth; implementation of the drinking water projects, school reconstruction and modernization, etc.

50. The implementation of the targeted social policy was the second main strategic priority of t he PRSP identified for the reduction of material poverty (especially extreme poverty) and income inequality, which together with the relevant income policy should have been aimed at:

  • In social support area: better targeting of family benefits and highest possible involvement of the poorest population in the system. It was envisaged to increase the sizes of the family benefits so that the food poverty threshold might be surpassed;

  • In social insurance area: increase of the efficiency; transfer of payment of non-insurance pensions to the state budget, and increase of the pension sizes so that that they might surpass the overall poverty threshold, as well as increase of the pension differentiation and creation of the preconditions to make a transfer from pension based on the service period to accumulative pension system.

  • In the area of income policy: giving a priority to primary incomes, in particular ensuring progressive salary growth for the lower-paid salaried employees working in the budgetary and social infrastructure sectors, taking into account that the mentioned group of employees should at least twice surpass the overall poverty threshold, and that the legally stipulated minimal salary should be relevant to the overall poverty threshold. Such an approach will help to solve the social issue of the working “poor” and reduce the income inequality.

51. The key priority underlying the human development and the human poverty reduction policy is the progressive development of the major social services, in particular education and health, which may be ensured through the increase of their efficiency and accessibility. The PRSP-1 envisaged achieving the aforementioned objectives by deepening the reforms in the mentioned sectors considering the education and primary health as high-priority directions. In parallel with the reforms, it was envisaged to increase the amount of public financing deemed a major means to ensure the development of social infrastructure. In particular it was envisaged that budget expenditures in the education sector in 2015 would increase by 1.7 percentage points of GDP compared with 2002 and will amount to 4% of GDP. It was expected to increase the state budget expenditures in the health sector to 2.5% of GDP in 2015 as compared with 1.2% of GDP registered in 2002.

52. The next priority of PRSP is to improve the efficiency of public governance at all levels, including the development and consistent implementation of anti-corruption strategy; increase of public participation in the decision making process through enhanced public awareness, development of social partnership, social inclusion and social participation.

53. The PRSP-1 places high emphasis on the necessity to enhance the financial capacities of the state stipulating that sustainable dynamics of economic growth should not be hampered. It was envisaged to ensure such growth mostly by means of tax revenues (annual increase of 0.3-0.4% of GDP) mainly through the improvement of tax administration and simplification of the tax system and keeping the residual of the consolidated budget within safe limits.

1.2. Key outcomes of PRSP implementation in 2003-2006

54. The main results of 4.5 years of PRSP implementation are presented in Table 1.13. As the table shows, the actual indicators of the material poverty and inequality are significantly lower than those envisaged in PRSP (the reduction of extreme poverty and income inequality should be particularly emphasized: while the actual level of extreme poverty in 2005 was relevant to the target indicator of PRSP projected for 2014, the Gini coefficient of income inequality in 2005 was lower than the target indicator projected for 2015).

Table 1.1.

Main Results of PRSP Implementation, 2006

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The poverty and inequality indicators estimated in 2005 on the HS basis with the use of an old methodology are presented in order to compare them with PRSP.

The indicator surpasses the level of 2015.

55. Such a reduction of poverty and inequality was mainly conditioned by the rapid economic growth of recent years, the actual rate of which in 2003-2006 more than twice surpassed the PRSP forecasts4. The rapid economic growth is the major reason for the unprecedented growth of the salaries (in 2006 the actual average salary was 68% higher than that envisaged in PRSP), which in its turn became the major factor for poverty reduction.

56. At the same time as a result of dram appraisal since 2003 up to the present, which is mostly conditioned by the impact of external factor on Armenia and which was impossible to envisage within the PRSP framework, in 2006 the nominal GDP (in US dollar) and per capita GDP are almost twice more than those envisaged in PRSP and are relevant to the target indicators of 2015.

57. As shown in the Figure, the financial resources which were at the state’s disposal in 2003-2006, were growing slower than the GDP and as a result did not demonstrate a progressive growth5. This is mainly explained by the sector structure of 2003-2006 economic growth6, as well as by a low efficiency of tax and customs administration, which did not allow to expand the tax basis and reduce the tax reserves as much as it was necessary.

58. Nevertheless, as shown in Figure 1.1. in 2003-2006, the social expenditures, as envisaged by PRSP, were growing faster than the overall expenditures of the consolidated budget and GDP, as a result of which their share in GDP increased by 1.1 percentage points and in the consolidated budget by 7.6 percentage points. It is fully consistent with the PRSP targets, according to which the public resources growth should be channeled to develop social sector in order to reduce material poverty and income inequality, and ensure human development.

Figure 1.1
Figure 1.1

Social sector expenditures of the consolidated budget in 2003-2006 (% as of 2002-left axis) and their ratios to GDP and total public expenditures

(%, right axis)

Citation: IMF Staff Country Reports 2008, 376; 10.5089/9781451801705.002.A001

Table 1.2.

Distribution of consolidated budget expenditure growth in 2003-2006

(billion drams, in current prices)

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59. Thus, it should be mentioned that the most of the target indicators of PRSP in 2003-2006 can be considered as surpassed, with the rate varying within the interval of 1-10 years. At the same time, in relation to a number of indicators the targets of PRSP have not been achieved. In particular, together with the progressive growth of public revenues, the proportion between the average pension and average salary (in 2006 it was 17.9% instead of 26.3% projected by PRSP), as well as the size of per capita family benefits envisaged by PRSP-1 were not achieved.

1.3. Justification of the PRSP Revision Necessity and major priorities of Sustainable Development Program

60. The aforementioned analysis of the PRSP-1 implementation outcomes obviously comes to prove the relevance of selected key objectives and strategic priorities of the program, which is especially about the promotion of sustainable economic growth as the major factor contributing to poverty reduction, as well as about the redistribution of public resources aimed at solving the social problems, fostering the elimination of extreme poverty and human development.

61. At the same time, the economic growth rates in 2003-2006 (which were twice more than those expected), as well as the substantial growth of public expenditure capacities have lead to a situation that in medium and long-term perspective PRSP targets and the values of the major indicators will be substantially surpassed, which steeply reduces the degree of realism of PRSP and the opportunity of using it as the major strategic program determining the long-term development of the country.

62. A number of other factors come to witness the need of revising the PRSP and elaboration of the Sustainable Development Program (SDP_, which also limit the further use of PRSP. These factors can be divided into two groups: factors that condition the PRSP modernization and factors that condition the need to expand or change the priorities of the issues, targets and developed policies discussed in within the PRSP framework.

63. In particular, the factors of the first group are conditioned by:

  • the revised methodology measuring the material poverty starting from 2004 and the raised extreme poverty and poverty thresholds, which together with the extreme poverty and poverty reduction process that in 2003-2005 turned to be faster than expected, condition the need for the development of new and higher targets for the reduction of the material poverty and elimination of extreme poverty;

  • the economic growth, which was twice higher than expected and which on the one hand expanded the state’s financial capacities and on the other hand identified the new challenges for economic growth, the solution of which requires that the priorities of public policy and expenditures are defined more precisely or revised.

64. The factors of the second group are mainly conditioned by the following new circumstances:

  • According to the analysis of both the economic reforms and economic policy that took place in Armenia during the recent years and the experience of transition countries, the economic growth of the country in the long-term perspective, as well as the degree of the country’s modernization and increase of the institutional capacities will be greatly conditioned by the successful execution of so called “second generation” of reforms7. The fast and effective implementation of these reforms in medium and long-term perspective, together with the maintenance and deepening of the economic growth aimed at improvement of living conditions of the population, will become one of the priorities of the economic policy of the Government. The mentioned priorities have not been duly reflected in PRSP, and their inclusion in the strategic plan of country development requires a substantial enlargement of the economic policy coverage and the necessary measures to be taken.

  • The Government finds that the Sustainable Development Program (SDP) should become the main long-term strategic development document and the basis for other strategic programs (particularly those concerning sector development). This in its turn means that a range of new areas, priorities and targets which were missing in the PRSP-1, should be reflected in the new document including such issues as fostering economic competition and limiting and eliminating the existing monopolies; increasing the country’s involvement into the global economy; promoting the export; ensuring the country’s institutional capacity growth; modernizing the economic, social and administrative institutions; creating the basis and developing a new, knowledge-based economy, etc.

  • During the implementation of PRSP, together with double-digit economic growth, substantial decrease of poverty and inequality disproportions in territorial development, which were weakly expressed in the past, began to rapidly deepen, and today, they have already created precarious conditions. As the study of the modern international experience of regional development shows, the economic development, which lacks a proper territorial policy, as a rule, deepens territorial disproportions. In this regard, the development and implementation of an active territorial policy in the scope of the Sustainable Development Program aimed at the mitigation of disproportions of the territorial development and acceleration of economic growth of underdeveloped regions will be one of the main strategic priorities of the Government;

  • The present demographic situation in Armenia is characterized as a situation of so called “zero” reproduction, which actually does not ensure the simple and expanded reproduction of population and which in the long-term perspective will lead to a number of social and economic problems. Particularly, in case the total fertility rate remains at the existing (low) level8 considerable ageing of the population9, decrease in the labor force volume and increase (up to 40%) in the number of people requiring potential care (0-15-year-old population and those at the age of 60 and above) will be registered in upcoming decades. Under these circumstances, improvement of demographic situation in the country as well as the development and implementation of a policy aimed to increase the fertility rate and support the young families should become the main priorities of the Government. These priorities were not considered in the PRSP.

1.4. Goals and strategic priorities of Sustainable Development Program

65. The successful implementation of PRSP resulted in a substantial reduction of poverty. In 2005 it decreased to 29.8%, in 2006 to 26.5%. As of the extreme poverty, it decreased to 4.6% and 4.1% respectively10. Although it may be assumed that the problem of extreme poverty is mostly solved; however, the poverty still remains a serious social issue, which is able to endanger the social stability of the country and to hamper the economic development in the long-term perspective. Therefore, improvement of the living conditions of the population, including the elimination of extreme poverty, well continues to remain the key objective of the Sustainable Development Program.

66. SDP envisages to get the material poverty level to 8% in 2012 thus mostly overcoming it and to bring the level of extreme poverty to 1.2% thus practically eliminating it. At present, the available information and conducted analysis of the poverty make it possible to foresee the target indicators for reducing poverty also in the territorial context differentiating such territories as the capital, other towns of the country and rural areas11. Such an approach is aimed at further reduction of territorial differences of poverty levels through the development and implementation of territorial development policy.

67. Together with the country’s economic growth and the financial resources at the disposal of the state, PRSP-2 envisages that in 2018 at the latest the poverty threshold will be equal to the minimal consumption basket (MCB)12. According to the program goals, the poverty level assessed on the MCB basis in 2021 will make 11.4%, of which the extreme poverty level will make 1.9%.

68. The overcoming of human poverty and ensuring of human development will be the second set of SDP core objectives. It is expected that during the period of 3-4 years Armenia will switch from the group of countries with a middle level of human development13 to the group of countries having high level of human development, and that in the future the country will permanently increase its human development index (HDI) with the aim that in 2021 through the policy ensuring the advanced development of the social sector it will be in the range of 0.86-0.87.

69. The next goal of the Sustainable Development Program will be to restrain the deepening of existing economic growth disproportions through development and introduction of the targeted territorial policy ensuring the accelerated development of weak regions14.

70. The main strategic and expenditure priorities of the Sustainable Development Program will not be changed; although as compared with PRSP-1 they envisage a substantial expansion of the areas covered by them. The strategy of SDP will also be composed of three main priority directions in order to: ensure sustainable and rapid economic growth; implement the targeted social and income policies aimed at the active and vulnerable (including the poor) social groups; and modernize the country’s administration system, including the increase of the efficiency of the public governance and provision of the advanced growth of the resources package at the disposal of the country. At the same time the mentioned priorities will be brought about in parallel with measures aimed to tackle such crucial issues as environmental ptotection and effective management of natural resources.

71. One of the major differences between PRSP-2 and PRSP-1 is the steep expansion of the policy measures aimed to ensure the lasting economic growth, which is necessary to take into account the challenges and circumstances newly emerged in the public policy.

72. The economic priorities of RPSP-1, which were connected with the economic growth, poverty reduction, including the involvement of poor population into the economic life of the country through the permanent improvement of business and investment climate; promotion of the local and foreign investments and advanced development of small and medium entrepreneurship, as well as channeling of state investment resources to the settlement of the accumulated infrastructure issues, will remain priorities also for PRSP-2.

73. At the same time the following will be regarded as PRSP-2 economic policy priorities:

  • Targeted territorial policy -to mitigate the territorial development disproportions;

  • Intensive policy of the “second” generation reforms–to ensure the modernization of the country and the nearest approach to the standards of the developed countries;

  • Policy aimed at ensuring free economic competition and monopoly limitation - to create and maintain equal conditions for all those involved in economic activities;

  • Policy aimed at the increase of the country’s competitiveness, the major characteristics of which are: promotion of output growth; ensuring of competitive levels of unit labor force value; promotion of new, higher value added forming jobs;

  • Export promotion and increase of the country’s involvement into the global economic system, including intensification of EU integration process within the ENP, including the establishment of free trade regime with EU and unilateral elimination of visa regime;

  • Intensive adaptation of the country’s economic institutions and legislation to the EU requirements and standards;

  • Establishment and development of new and knowledge-based economy’s key elements and institutions.

74. The targeted social policy, like in PRSP, will continue to remain the SDP second strategic priority, which will be aimed at:

  • In social assistance area: ensuring the increase in the sizes and targeting of the family benefits and possible maximum involvement of the poor population in the system, with the view that up to 2012 the number of the beneficiary families will be equal to the number of poor families, and in 2021 it will be equal to the number of poor families estimated by MCB. It is envisaged to increase the sizes of the family benefits so that in 2020-2021 they might make 70% of the poverty threshold15. In 2010, they envisage getting the family benefit targeting rate is expected to reach 78%; then starting from 2015 it should to make 90%16 and keep that level in the future.

  • Family benefit policy of, in contrast to the PRSP, which was aimed at the reduction of extreme poverty, under the conditions of steep decrease of the extreme poverty and substantial increase of the state’s financial opportunities will be mainly aimed at helping out of poverty the vulnerable social groups that have limited possibilities to get involved into the economic life on their own.

  • In social insurance area: the main expenditure priority of SDP will be the steep increase of pensions with the view that in 2012 the average pension will be equal to minimal consumer basket and in 2018 it will make 150% of MCB maintaining that proportion in the future, which will enable to supplement the existing pension system with the accumulative pension system.

75. In the employment area the state policy will be focused on sustainable and continuous improvement of the labor force competitiveness; mitigation of imbalance between the labor force demand and supply; creation of job opportunities for young people, especially those living in rural areas; expansion of programs aimed to ensure employment opportunities for noncompetitive groups of the population, particularly disabled; and on building social cooperation and partnership. At the same time, indicators characterizing the real level of unemployment will help targeting this crucial problem. To ensure the efficiency of the mentioned process certain measures will be taken to improve the quality of respective statistical methods and increase the reliability of statistical data.

76. In the area of revenue policy: it is projected to continue the policy of PRSP of giving priority to the primary revenues, in particular increase of the salary of budgetary and social infrastructure employees with the view that starting from 2015 they will at least 1.4 times surpass per capita GDP indicator. In addition, the minimal salary will be stipulated in a way that the persons with minimal salary and their family members be able to get saved from poverty thus eliminating “the working poor” phenomenon.

77. The main priority of human development strategy will continue to remain the advanced development of fundamental social services, in particular education and health through increase of their efficiency and accessibility. SDP envisages achieving these priorities through continuous complex reforms of the mentioned sectors, where the general education and primary health care will be regarded as priority directions. There will be an increase of public financing, which is deemed as the main device of ensuring the development of social infrastructure. In particular, in comparison with 2006, the public expenditures in education (as compared with GDP) are envisaged to increase by 1.8-percentage point - by 2021 getting them to 4.5% of GDP. It is planned that in 2021 the public expenditures in health sector will make 3.5 % of GDP instead of 1.5% in 2006.

78. The third main strategic priority of SDP is the increase of public governance efficiency at all the levels of governance, including substantial updating17 and consistent implementation of anti-corruption strategy; enhancement of public participation in the decision making process by means of increasing public awareness and assuring gender equality, through the promotion of social partnership, social inclusion and social participation as well as through intensive introduction of e-governance systems.

79. The next priority will continue to remain the increase of the state financing capacities, which will mainly be ensured by tax revenues’18 8.2% GDP growth19 - in 2021 getting them to GDP 25.6%, which will require ensuring average annual growth of tax revenues not less than 0.3-0.4% of GDP. Taking into account that SDP does not envisage the increase of tax burden and the tax and customs reforms will be mostly aimed to simplify and make transparent the tax collection processes and procedures, as well as that during 2003-2006 they failed to ensure PRSP-1 stipulated tax collection rate, the main priority of public governance will be to ensure tax and customs administration improvement and tax and customs authorities institutional capacities growth.

80. The Sustainable Development Program envisages keeping the deficit of the consolidated budget within safe limits, i.e. within 2 - 2.5% of GDP. The sate resource package20 in 2021 will make 29.2 % of GDP and as compared with 2006 it will grow by 6.6% percentage points. According to the SDP main goals, this growth will be directed to increase the values and shares of social expenditures in the public expenditures. The main public expenditure policy will be to ensure the distribution and maximum technical efficiency of expenditures. This will be achieved by the completion of the preparatory activities necessary for the transition to program budgeting during the period of 2012-2015. Then, during 2018-2021 the three-year budgeting principle will be adopted.

81. Significant extension of the SDP priorities (as compared with PRSP-1), particularly those concerning the economic policy and the spheres of state interference, implies the existence of relevant tools required to ensure the properly scheduled and efficiently managed distribution of limited resources between the mentioned priorities and spheres. These tools will be based on adopted strategies or sectoral peculiarities (the time required to achieve expected outcome; the number and character of measures to be taken, i.e. one-time, regular or permanent measures; resources to be provided, etc.) and will represent annual action plans of the government including measures related to respective strategies or spheres as well as respective SDP indicators, which will serve as their annually registered outcome. The action plans will need to be developed and approved every year based on scrupulous revision of previous activities and evaluation of previous results.

82. One of the major peculiarities of the program will be the use of three types of indicators including target indicators, settlement indicators and performance benchmarks. The settlement indicators are volumetric, have forecast and indicative nature and show the directions of possible development; and the results will not be used to evaluate the program implementation dynamics. In contrast to them, the target indicators and performance benchmarks are directly related to the Government policy and reflect it.

83. The performance benchmarks will be broadly used for the planning and evaluation of SDP policy results and will be mostly built up by the means of application of internationally accepted evaluation systems, including the World Bank developed assessments of business environment quality; investment climate and governance quality indicators; EBRD published assessments on transition to market economy; corruption prevalence indicators21, UNDP Human Development Index, etc.

2. Overview of Poverty and inequality in Armenia and the PRSP Goals

2.1. Economic growth and material poverty overview in Armenia in 1999-2005

84. The results of household surveys (HS)22 regularly implemented since 1998 on the annual basis obviously witness that the inequality as well as the number of poor, including very poor population gradually decrease (see Table 2.1).

Table 2.1.

Key indicators of economic growth and poverty as compared with PRSP-1 target indicators

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Calculated by the methodology used in 1996-2003–per capita monthly expenditure structure aimed at current consumption based on the general poverty line (share of poor in population) and daily consumption of 2100 kilo calories food poverty line (share of very poor in population). This methodology was used in PRSP to calculate the target indicators of poverty reduction.

Calculated by new methodology used since 2004. The consumption aggregate together with the consumption of food, non-food commodities and services, the value of the long-term usage goods used by the households is also included. The equivalent of consumption of one adult person–taking into account the existing differences between the consumption of adults and children is used as well. In addition, in 2004 they have recalculated the food poverty line, which has been passed in 2004 equivalent of average daily 2 232 kilo calories food in Armenia and which will be applied in several follow-up years.

85. As envisaged by PRSP, economic growth remains the main factor contributing to the reduction of poverty. As the 2003-2005 economic growth rates were higher than those envisaged by PRSP (average annual growth rates of GDP in that period were 12.8% instead of envisaged 6.3%), the poverty reduction dynamics were higher than PRSP targeted indicators. Figure 2.1 obviously shows the link between the economic growth and poverty reduction23.

Figure 2.1.
Figure 2.1.

Economic growth and poverty reduction in Armenia in 1999-2005

(cumulative percentage change to 1999)

Citation: IMF Staff Country Reports 2008, 376; 10.5089/9781451801705.002.A001

86. The quantitative analysis of the link between economic growth and poverty reduction in 1999-2005 shows that in those years, one percent of economic growth resulted in an increase of non-poor population by 0.547 percentage points, which in its turn led to the reduction of poverty incidence from 55.1% to 34.5%.

87. The most tangible poverty reduction took place in Yerevan–from 54.7% in 1999 to 27.3% in 200524 (calculated on the basis of new methodology, the poverty in Yerevan made 23.9% in 2005 and 21.0% in 2006 instead of 58.4% in1999).

88. Such reduction of poverty was conditioned by essentially faster economic growth in Yerevan25, as compared with the marzes of Armenia. At the same time in Yerevan, the degree of the economic growth aimed at the poverty reduction especially in 2003-2005 was much lower than the average rate estimated for the entire Armenia. This stems from the qualitative analysis of link between the economic growth and poverty reduction in Yerevan in 1999-2005, according to which each percent of economic growth in those years resulted in increase of non-poor population share by 0.431 percentage points (0.547 percentage points in Armenia). This in turn is conditioned by non-linear nature of the economic growth and higher degree of disproportion in Yerevan, than in rural areas and other towns.

Figure 2.2.
Figure 2.2.

Economic growth and poverty reduction in Yerevan in 1999-2005

(cumulative percentage change to 1999)

Citation: IMF Staff Country Reports 2008, 376; 10.5089/9781451801705.002.A001

89. The poverty has been reduced also in other towns of Armenia. It should be mentioned that irrespective of the fact that the economic growth dynamics in other towns of Armenia was substantially slower than in Yerevan (in 1999-2005 the average annual growth rate in Yerevan was 16.4%, in other towns 7.7%, in rural areas 5.2%, the average growth rate in Armenia was 11.1%), the degree of poverty reduction-oriented growth in other towns was two times higher than in Yerevan - making it 0.906 percentage points of poverty reduction in case of 1% of economic growth. This was caused by a higher start-up level of poverty and lower level of inequality in other towns, as compared with Yerevan.

Figure 2.3.
Figure 2.3.

Economic growth and poverty reduction in other towns in 1999-2005

(cumulative percentage change to 1999)

Citation: IMF Staff Country Reports 2008, 376; 10.5089/9781451801705.002.A001

Figure 2.4.
Figure 2.4.

Economic growth and poverty reduction in rural areas in 1999-2005

Citation: IMF Staff Country Reports 2008, 376; 10.5089/9781451801705.002.A001

90. In absolute figures, poverty reduction in rural areas is the lowest as compared with Yerevan and other towns; however, the poverty reduction trend degree in 1999-2005 in rural areas was higher, than in Yerevan, but lower than in other towns - making 0.709 percentage points in case of 1% of economic growth, which is also explained by lower start-up level of poverty and inequality degree of income distribution.

91. The impact of the economic growth of Armenia on the poverty reduction process has been mostly expressed by the means of labor income increase of poor population (employment, self-employment and sales of agricultural products). Taking into account that now Armenia is a labor exporting country, as well as the presence of large Armenian Diaspora, the impact of the external world on the poverty reduction process is expressed by the dynamics of foreign remittances and their distribution among various income groups of the population. And finally, the impact of the public social policy is conditioned by the increase of social payments, i.e. pensions and benefits (including family benefits) and their distribution among various income groups of the population.

92. As shown in the Figure 2.5. in the period under consideration the labor incomes of the poor and very poor population have grown faster than their overall monetary incomes and the latter have grown faster than the overall population monetary incomes26 in nominal terms (352.6% and 630.8% as compared with 231.4% and 352.6% of general incomes and 231.4% of populations’ average monetary incomes).

Figure 2.5.
Figure 2.5.

Dynamics of the population incomes in Armenia in 1999-2005

(in percentage as compared with 1999, in current prices)

Citation: IMF Staff Country Reports 2008, 376; 10.5089/9781451801705.002.A001

93. Thus, in 1999-2005 the per capita incomes of poor27 and very poor28 population conditioned by internal economic growth (generated from labor and sales of agricultural products) have grown faster than the average monetary incomes, and this fact comes to witness that the poverty reduction trend of the economic growth, which existed in 1999-2001 has been maintained also in 2003-2005, i.e. during the PRSP implementation.

Table 2.2.

Income dynamics of poor and very poor population of Armenia in 1999-2005

(in current prices, dram and percentage as compared with general incomes)

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94. As the Table 2.3 data show, in 1999-2005 the incomes of poor and very poor population grew up essentially faster, than the incomes of non-poor population29, which comes to witness the reduction of income inequality between non-poor, poor and very poor30. From the other hand, the labor incomes of poor and very poor and non-poor have grown faster than the overall incomes, and this fact has conditioned the reduction of the general population’s dependence on social and unofficial payments, as well as on other incomes.

Table 2.3.

Monetary income flexibility of poor, very poor and non-poor population income in 1999-2005

(in current prices)

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95. Thus during the period of 1999-2005 a substantial increase of direct impact of economic growth on the poverty reduction took place due to progressive growth of labor incomes and involvement of poor and very poor population in the economic activities.

96. Table 2.3. shows the average elasticity of the population’s incomes for 1999-2005 (the ratio of overall incomes and incomes conditioned by the economic growth to GDP per capita growth; the ratio of the social payments growth to the increased social insurance and social protection expenditures of the consolidated budget; and the ratio of increased unofficial remittances to the global economy growth31), which directly witness the progressive growth of all the aforementioned incomes of poor and especially very poor population and the impact of economic growth on redistribution of the poor and very poor. Eventually, these facts witness that the economic growth and social policy are directed towards poverty reduction.

97. The economic growth and social policy had poverty reduction orientation in Yerevan, other towns and rural areas. The Table also shows that the degree of the economic growth orientation towards poverty reduction was the lowest in Yerevan and highest in other towns. At this conjuncture, when in the entire Armenia, the social policy was almost equally oriented towards poverty reduction, the rapid poverty reduction in Yerevan was conditioned by approximately two times faster economic growth rate. Moreover, the growth of the average monetary income of the population in Armenia32 was substantially lower than the income growth of poor and especially very poor population. This means that not merely the poverty reduction but also the real reduction of inequality took place.

98. As regards the income growth of non-poor population, the Table 2.4 shows that it significantly yields to the income growth of poor and very poor population, while the volume of unofficial remittances are even reduced in Yerevan and other towns. Given the aforementioned facts, the HS data concerning the non-poor population incomes cannot be considered fully reliable. However, the comparison of various data mentioned in the table comes to prove that although the incomes of non-poor population are underestimated, the incomes of poor and very poor population, including the labor incomes and unofficial remittances in 1999-2005 have really grown faster than the incomes of non-poor population. Once more, this comes to prove the ongoing nature of poverty reduction orientation of the economic growth.

Table 2.4.

Income dynamics of non-poor population in Armenia in 1999-2005

(in current prices, dram and percentage as compared with general incomes)

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2.2. Regional dimension of material poverty in 1999-2006

99. Despite the fast poverty reduction (including very poor) in the entire Armenia, the poverty level still significantly varies depending on marzes, rural and urban areas. This situation is mostly conditioned by the existing differences of economic development, as well as by the peculiarities of physical, geographical and infrastructure development of different regions. According to 2005 and 2006 HS data, the poverty incidence is higher in marzes affected by the earthquake; in bordering regions; in the regions with unfavorable conditions for agriculture, especially with small share of irrigated agriculture land; and in marzes with predominantly urban population.

100. Owing to a number of circumstances, such as non-representative nature of the 1999 HS; poverty assessment at marz level 33; various shares of urban population; and different levels of poverty and inequality start-up points (1999) in 1999-2006, the impact of the economic growth on the poverty reduction in marzes has been disproportional.

101. As Tables 2.5 and 2.6 show, everywhere the economic growth was accompanied by the reduction of poor and very poor; however, with different speeds. The biggest elasticity of poverty reduction as compared with the economic growth has been registered in Aragatsotn, Lori and Shirak marzes mainly due to a very high start-up level of poverty. In Yerevan, where the poverty reduction levels were the highest in Armenia, the economic growth rate was also the highest and the elasticity was consistent with the average Armenian.

Table 2.5.

Number of poor and very poor population and economic development dynamics by marzes and in the rural-urban context, 1999-2006*

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Number of poor and very poor is given on the basis of new methodology.
Table 2.6.

Poor and very poor population in 1999-2006 and the dynamics of economic development in 1999-2006 by marzes and village-city ratio*

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Number of poor and very poor is presented according to new methodology

102. In both tables the link between the economic growth and poverty reduction is not of linear natures: the higher is the economic development rate, the lower (in case of equal conditions) is the respective elasticity. This is also proven by the data presented in Table 2.8, according to which in 1999-2005 two parallel processes took place in Armenia, i.e. the consistent differences of the economic development levels were combined with poverty reduction, including reduction of territorial differences of extreme poverty.

Table 2.7.

Average territorial elasticity of poverty reduction and economic growth in 1999-2005

(in current prices)

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Table 2.8.

Dynamics of economic development and regional differences of poverty in 1999-2005

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103. Table 2.8. shows that in case, when marz differences of economic development (which have been measured by average quintile deviation of per capita GDP) in absolute terms have grown almost 5 times during 1999-2005, the marz differences of poverty and extreme poverty (in absolute terms) have been reduced 2 and 4 times respectively. Thus, although gradually increasing, the economic development differences did not have a decisive impact on the speed of marz poverty and extreme poverty reduction and on the reduction of their differences.

104. This can be explained by a nonlinear nature of the link between the economic growth and poverty reduction, as well as by the fact that to assess the poverty in Armenia a unified consistent poverty line is being applied, which does not vary in parallel with the economic development and does not take into consideration the differences between marzes. Taking into account that in 1999-2005, the economic growth was registered in all Armenian marzes and keeping in mind the nature of the aforementioned link, one can mention that in 1999 in Armenian marzes with poverty level above the average it was reduced relatively faster (elasticity level higher than 1), while in marzes with below average poverty this process was slower (elasticity level lower than 1). As a result, the poverty levels came closer to each other.

105. According to SDP forecasts, the two mentioned phenomena will continue to combine during forthcoming 10-15 years, and in case of using the same poverty line the marz levels of poverty will be equal.

2.3. Overview of Material Poverty in 1999-2006 by Gender, Age and Social Groups

106. The picture of 1999-2005 poverty dynamics in terms of gender and age groups looks like the territorial poverty dynamics picture: fast reduction of poor and very poor in the groups mentioned in Table 2.9. as well as equalization of poverty levels, which is proven by substantial reduction of indicators describing the average quintile deviation. Such equalization of poverty levels is the result of the application of constant poverty line. Like in case of marz poverty, the differences of gender and age group poverty levels in the future will also be eliminated.

Table 2.9.

Dynamics of poverty levels by gender and age groups, 1999-2006

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Shows the amount of reduction of poor and very poor (percentage point) in 1999 as compared with the relevant level.

107. Table 2.10 shows that the picture is different when the level of poverty depends on the size of the family. During 1999-2005, the poverty reduction in the households with 1–4 members was faster, than average reduction in Armenia. Thus, in the households with 1 member the poverty reduction rate is higher almost 1.3 times than the national average; in the households with 2 members it is higher about 1.2 times; in the households with 3 members - around 1.3 times and in the households with 4 members - 1.1 times. From the other hand, in multi-member (5 and more) households the poverty reduction is lower than the national average rate. As a result, the differences in poverty levels of small and multi-member households have substantially increased. Thus, in 2006 the poverty risk in the households with 7 and more members was higher around 2.5 times than in the households with 1 member; around 2 times higher than in the households with 2–3 members; and around 1.6 times higher than in the households with 4 members. In 1999, these indicators were 1.46, 1.28, 1.3 and 1.27, respectively.

Table 2.10.

Dynamics of poverty level by household size, 1999-2005

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Shows the amount of reduction of poor and very poor (percentage point) in 1999 as compared with the relevant level.

108. On the other hand, as a result of aiming the social assistance policy at multi-member households the number of very poor multi-member households reduced around 4 times, which is consistent with the average nationwide rate of poverty reduction.

109. During the upcoming 10–15 years, the reduction of poverty levels of small and multi-member households will require further increase of purposefulness of family benefit system and orientation towards the multi-member families, as well as introduction of elements for the family reinforcement policy, which is missing now.

110. As Table 2.11. shows, depending on the number of children in the family the 2004 and 2005 poverty risk picture differs from that of 1999. In 1999, the system poverty conditions caused a situation when the poverty level was approximately the same in all types of families, except for the households with women heads and children, the poverty risk of which was the highest. In 2004 and 2005 the poverty risk differences in the mentioned groups substantially grew up: in 2005 the poverty risk of the families with 4 and more children was around 2 times; in the families with 3 children around 1.7 times, and in women headed families with children around 1.8 times more, than in families without children, as compared with 1.04, 0.99 and 1.12 respective differences in 1999.

Table 2.11.

Dynamics of poverty level by the number of children and elderly in a household, 1999-2005*

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The above data is impossible to compare with the 2006 statistical data as the latter is missing. The assessment recently conducted by NSA is based of a new methodology.

Shows the reduction of poor and very poor (in percentage points) as compared with 1999 respective level.

111. The poverty risk depending on the number of elders in the family has been substantially reduced during the period of 1999-2005. The poverty level of the families made exclusively of elders, having been reduced by 2.6 times, is essentially lower than average.

112. As of the poverty risk depending on the employment status in the economy (Table 2.12), the greatest risk is the unemployment, which in 2006 was 1.6 times higher than the average as compared with 1.23 in 1999. The fast reduction of poverty level of retired and other unemployed in 1999-2005 has substantially reduced the poverty risk of the mentioned groups, which in 2006 was practically identical to the average.

Table 2.12.

Dynamics of poverty level depending on employment status and education level (for the population above 16) in 1999-2006

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Shows the reduction of poor and very poor (in percentage points) as compared with 1999 respective level.

113. Depending on the education level in 1999-2006, there has been a fast reduction in the poverty risk among people with higher education (around 3 times) and middle vocational education (around 3 times), as well as people with vocational education (around 1.7 times). However, the poverty risk is 1.4 times higher that the average among people with elementary and incomplete secondary education.

114. Thus, the analysis of poverty dynamics by population groups based on the data concerning the 1999-2006 period of time makes it possible to identify the groups of population to the utmost subjected to poverty risk 34. Table 2.13, which estimates their risk to face poverty and extreme poverty, shows that economic growth of the country have not been sufficient for these groups to exceed the poverty threshold; the results of the social policy have been less effective for them, than for other groups. As a result, the poverty reduction in these groups have been slower and the difference of poverty levels between them and other abovementioned groups of population has substantially increased during 1999-2006.

Table 2.13.

Dynamics of poverty level for the most needy groups of the population in 1999-2006

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• The unemployment rate has been calculated for the population over 16.

2.4. Rural Poverty Reduction Factors and Peculiarities in Armenia in 1999-2006

115. Sustainable economic growth of the country in recent years had its impact on the welfare level of the rural population. One of the major factors conditioning the differences of the rural poverty levels is the agriculture conditions, which are well identified by the altitude from the sea level of the settlement35.

116. Although in 1999-2006 the general picture has not been changed–the poverty level increases together with the altitude; however, as one can see from Table 2.14 the poverty levels in 2005 have been considerably approximated and the steep decrease of average quintile deviation comes to witness it.

Table 2.14.

Dependence of the level of the rural poverty on the altitude above sea level, 1999-2006

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117. It is mainly conditioned by the fact that in rural areas poorer people have gained more from the economic growth, which from the viewpoint of geographical location is relevant to rural settlements located at 1300-1700 and more than 1700m above sea level.

118. Like in case of reducing the territorial rural disproportions it is conditioned by nonlinear nature of link between economic growth and poverty reduction, constant nature of poverty line, as well as difference in poverty start-up positions.

Table 2.15.

Dependence of the level of rural poverty on the size of the owned land, 1999-2006

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119. Similar developments took place concerning the impact on the poverty of another important factor conditioning the difference of rural poverty levels, i.e. the size of managed land plot, which, according to available data, has been substantially reduced. Apart from the aforementioned factors the new non-agricultural activities that took place in rural areas in 1999-200636 played a significant role.

120. During 2002-2006, as shown in Table 2.16, a certain increase in possibilities of formal lending to rural households was registered, which; however, is still very limited. At the same time a reduction of those farms, which borrowed from informal sources took place. Thus, the number of farms that borrowed from bank or other formal entities in 2005, as compared with 2002 grew up by 2.9 times (in non-poor farms by 4.2 times, in poor farms by around 5.4 times)

Table 2.16.

Borrowing capacity of farms and poverty level in 2002-2006

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