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Dramatic Drop in Poverty Comes With a Warning

Source: World Bank
There was a dramatic drop in the number of people living on less than $2 a day in Eastern Europe and the former Soviet Union over the five years to 2003, according to a new World Bank report.

Some 40 million people were pulled out of poverty in the years from 1998 to 2003, says the report, titled Growth, Poverty and Inequality in Eastern Europe and the Former Soviet Union.

Steady economic growth helped reduce the percentage of poor people living in the region’s 27 countries from 20 percent in 1998 to 12 percent in 2003. In other words, despite impressive progress, 61 million people still live on less than US$2 a day.
One in five people were living in poverty in 1998…..but by 2003, it was one in eight people.

However the report comes with a warning – unless growth is accelerated, by 2007, 40 million people will remain poor.

The report’s team leader, Asad Alam, Sector Manager in the Bank’s Eastern Europe and Central Asian (ECA) region, says that at current growth rates, a further 110 million people will remain economically vulnerable in two years – living in the region on less than US$4 a day.

Pivotal role of economic growth

According to Alam, the main driver behind the significant drop in poverty was high growth in the Commonwealth of Independent States (CIS) countries, where the bulk of the poor live.

“The largest reductions in poverty were in some of the larger countries of the Commonwealth of Independent States – for instance in Russia,” he says.

To some extent the rebound in economic growth rates in CIS countries was unsurprising, since many of them undertook deep structural reforms from 1998-2003. But the report makes the point that, at the height of the 1998 financial crisis in Russia, it was hard to see any prospects for a resumption in growth.

Yet for the region as a whole, the report tells a cautionary tale.

“We have seen smaller reductions in poverty in countries that have now become the new member states of the European Union or in some of the lower income countries such as Tajikistan,” explains Ruslan Yemtsov, Senior Economist in ECA and a co-author of the report.

Two countries, Georgia and Poland, bucked the trend of declining poverty, while in Lithuania, poverty was largely unchanged.

Mixed results on access to services

Mamta Murthi, a co-author and former lead economist in ECA who is now working on the World Bank’s next World Development Report, says that, along with growth, there was a drop in the levels of inequality in the Commonwealth of Independent States.

“Levels of inequality are not as high as is sometimes understood,” Murthi explains,. ” In countries like Russia, Ukraine and Kazakhstan inequality actually declined during this period, contributing to poverty reduction. Elsewhere as in Poland or Romania, Bulgaria, the Balkans, trends are more mixed.”

However Murthi says the report shows people’s access to education, health and other services remains very mixed – despite the drop in poverty levels.

“Trends in access to education, health care, water supply and heating are very variable. In countries like Tajikistan, access to water supply has actually declined. In the case of school enrolments, on the other hand, those are up virtually everywhere and there’s no evidence of increasing gender disparities.”

Not enough jobs

However very few countries, even those which made the best progress in reducing poverty, managed to create enough jobs.

Erwin Tiongson, co-author and Economist in ECA, explains that, with a few exceptions, increased prosperity in the region failed to create more jobs.

“We’ve found that while the number of people in poverty has fallen over the past few years, we’ve also noted a phenomenon called jobless growth – which means employment rates have been stagnant or have in fact been falling in some countries despite overall positive economic growth,” he says.

According to the report, the lag in job growth was expected because much of the economic growth during 1998-2003 came from better utilization of the existing assets within economies, as well as from gains in efficiencies and from better deployment of capital within the countries.

Securing future prosperity

“For future growth to take place, and for future poverty reduction to take place, it is absolutely essential that new jobs are created – jobs that provide workers decent incomes,” explained Alam.

Alam says most of the countries in the region are actively pursuing economic reforms that are helping improve the investment climate for new enterprises to emerge and for there to be better discipline on existing old enterprises – so some of the assets can shift from the old less productive firms to newer, more productive firms. 

But he says another key factor is improving the delivery of basic services for the poor and ensuring there’s better, more targeted social protection – especially for the working poor.

“We need to do a better job of ensuring better access to quality education and health services,” he says. “These are very important to promote the long term growth of the region.”

“It also means that we need to invest in agriculture and rural productivity since most of the poor live in rural areas. We also need to invest a lot more in human capital, so as to create a vibrant labor force that is ready to meet the challenges of the 21st century.”


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