How to Fight Poverty In Ukraine. A Framework

To increase the pie or to redistribute it?

depositphotos / gunnar3000

Authors:

Ukraine is rather poor but [officially] rather equal country. Thus, when reducing poverty, the focus should be on pro-growth policies. Redistributional policies should target those who live in extreme poverty.

Ukraine is a poor country. And there are many people who live in poverty in Ukraine. What could a government do to address this problem?

Broadly speaking, there are two ways to lift people from poverty. The first one is to take away from the rich and give it to the poor. This is redistribution. It is done through taxes and social support such as pensions, subsidies, and other compensations. The second one is to foster  economic growth that would make the country and therefore everyone richer. The growth should be inclusive, i.e. it should create opportunities for citizens to benefit from it. 

The redistribution approach makes sense when there are poor and rich. If virtually everyone is poor, then the only way forward is economic growth.

Here comes the paradox: Ukraine heavily uses the redistribution approach. Social support is the largest part of the state budget. Yet, the official statistics put Ukraine amongst the least unequal countries in the world as measured by Gini coefficient. If this is true, then the redistribution approach is futile. Since almost everyone is similarly poor, taxes and subsidies create distortions and slow down economic growth. Thus, the redistribution approach should be abandoned and the government should focus on creating opportunities for sustainable economic development.  

Of course, there is the question of quality of the data. Most experts would agree that the official statistics is wrong and there is substantive inequality. But this only makes the point stronger – if the state cannot figure out the real income and wealth of people, its redistributional policies are going to be ineffective and misguided.

So, one important objective for the government of Ukraine is to get better data about people’s wealth. The respective approaches range from (finally) conducting census to surveying and income verification with administrative records. Nevertheless, in the medium term the government of Ukraine is likely to continue to make social policy decisions based on very limited data.

Given limited data, one approach might be to separate the redistributional and growth policies. The redistributional policies could focus on “lifting people from extreme poverty”. The government can set up a clear set of means-tested criteria that identify people below the extreme poverty line and provide them with transfers and social support in a targeted way. The rest of the policies can be focused on providing better opportunities for education, professionalization, access to capital, and opportunities for better state, commercial or self-employment. These policies will fight inequality by reducing inequality of opportunity. To be effective, the policies should ensure that there is appropriate incentives design for the participants to undertake investments into improvement of their opportunities.

So, in short, a possible approach towards policy design would consist of the following pillars:

  1. Improve data collection and analysis about the state of income distribution and poverty in order to make informed policy choices.
  2. Shift focus towards policies that favor sustainable economic growth from the policies that favor redistribution, distortions, and stagnation.
  3. Create a set of targeted policies for “lifting people from extreme poverty”.
  4. Create policies that improve opportunities for employment and self-employment of others through education, professionalization, and better access to capital and other resources.  

Examples of pro-growth policies can be state-supported professionalization programs for adults, support of disadvantaged household tied to educational achievements of their children, provision of small grants for starting own business etc. More high-level policies would imply cutting barriers for starting and administering a business, reduction of legal and macroeconomic risks. Because it’s the poor who suffer most from the high inflation.

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The authors do not work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations