Stephen Rapawy
[All data from The World Bank, Poverty in Ukraine; Report No. 15602-UA. June 27, 1996, unlessotherwise stated.]
Introduction
The economic crisis in the former Soviet Union depressed living standards, but the extent is unclear. Data presented in value terms are to be treated with caution because price deflators do not adequatelyaccount for the extreme inflation that has occurred, as consumer prices rose 38,000 times over between1990 and 1995. At the same time, the reported decrease in production seems incorrect. Gross domesticproduct (GDP) reportedly fell 52 percent during the 5-year period. A sizeable share of the decreaseprobably is due to reduced production for the military, but even a less dramatic drop could not sustain thepopulation, which lived at near subsistence levels during the Soviet period. However, faulty adjustmentsfor inflation and other shortcomings in the statistical system cannot account for changes of this magnitude. The principal explanation seems to be the shift from the official to unofficial economy. This "second"economy was a feature of the Soviet economy for decades and by all accounts increased substantially afterthe breakup of the Soviet Union. Some activities purposely are concealed, while others simply are difficultto enumerate and measure. Besides permanent employment, many people are engaged in such diverseactivities as using privately owned cars as taxis, selling edibles and consumer goods, providing a widerange of services, and working a variety of odd jobs. These activities are difficult to capture in officialstatistics, even when no attempt is made to conceal them.
Measuring Standard of Living
The standard of living is difficult to gauge from official income, consumption, and expenditure databecause a large share of economic transactions are not recorded. Surveys, especially of household budgets,are the principal sources of information. Survey data always contain some error, but external factorsintroduce considerable additional distortion. Most adults derive income from several sources: theirprimary jobs, a second job or a combination of odd jobs, cultivation of land, or peddling. None of thesesecondary activities result in the issuance of statements of earnings at the end of the year. Payments aremade in cash, whether the transaction is with an individual or in a store. There are no canceled checks orcredit card statements to indicate how much was spent. Individuals would have to keep detailed records ofincome and expenditures to accurately answer survey questions, and there is no indication that householdskeep such records. At the same time, a sizeable share of income is derived from quasi-legal or illegalactivities, earnings from which individuals presumably wish to at least partially conceal. These deceptionsand lack of records produce a situation in which expenditures are considerably larger than income. Thediscussion which follows below is based largely on the annual household surveys conducted by theMinistry of Statistics of Ukraine and a 1995 World Bank survey of 2,024 Ukrainian households.
The Ministry of Statistics has been surveying almost 15,000 households annually for many years. Households are asked to keep a log of their income and expenditures, for which they are compensated. While the exercise should yield reasonably accurate data, experience indicates that the sample may not berepresentative of the general population. On the other hand, the World Bank survey, conducted in thesummer of 1995, questioned what was deemed to be a representative sample of 2,024 householdsthroughout Ukraine and their adult population, 15 years of age and older. Comparison of the surveysrevealed substantial discrepancies for some components of income and expenditure. Nevertheless, there isconsiderable agreement on many overall trends. In both surveys, expenditures exceed income. The WorldBank data indicate that expenditures are approximately twice as large as income. In the case of Ministry ofStatistics surveys, income equals expenditures but there are internal inconsistencies indicating that thefigures were forced. Presumably, the Ministry chose not to publish figures implying a sizeable share of theincome derived from illegal activities. It should not be assumed, however, that the difference betweenincome and expenditures represents only illegal income because there are other contributing factors.
The Ukrainian family budget surveys show that wages' share of total family income declined from67.5 to 41.2 percent between 1990 and 1994. The decrease was off set, in part, by income from privateplot farming, which rose from 10.2 to 30.5 percent, and income from other sources, which increased from8.9 to 18.4 percent. Among expenditures, both sets of data agree that a disproportionate share of familyincome is spent on food. The Ukrainian data show food expenditures (including alcohol) rising from 35.5to 66.0 percent during the 5-year period (Ministerstvo statystyky Ukrayiny, Statystychny shchorichnykUkrayiny za 1994 rik. Kyiv, Tekhnika, 1995, p. 349). The World Bank, based on the 1995 survey, reportsfood expenditures in excess of 80 percent of family income. Under either scenario, little is left forconsumer goods and personal needs.
Lower consumption of meat and dairy products further underscores growing impoverishment of thepopulation. Despite larger outlays for food, people are eating more starchy food. Ministry data show thatconsumption of meat, dairy products, and eggs declined by about a third (Ministerstvo statystyky Ukrayiny,Byudzhety simey v hrupovannyakh za rozmirom seredno-dushovoho sukupnoko dokhodu iryadu inshykhsolsialno-ekonomichnykh oznak. Kyiv, 1995, p. 9). People now consume more bread, potatoes, cabbage,and less animal fats. The new diet is less tasty but more healthy. Lower ownership of consumer durablesis another indicator of growing impoverishment. Ownership of basic appliances fell between one-fifth andone-third in the last few years (Figure 1) and outlays for footwear and clothing decreased by about 60percent. If the present economic crisis persists, a growing share of the population could become destitutein the near future.
There is general agreement that the standard of living has been falling, but not regarding the numberof people living in poverty. It is difficult to obtain accurate, representative figures and define poverty. Different analysts get widely varying results depending upon how the minimum subsistence level isdefined and whether or not to indicate cultural factors in the definition. Given this caveat, the World Banksurvey accepted the minimum consumption basket developed by the Ukrainian Government whichincludes edibles and other goods and services. The items were priced as of June 25, 1995 to determine thepoverty line in value terms. The monthly cost of the basket was estimated to be 3.675 millionkarbonvantsi (the Ukrainian monetary unit at the time) implying that 29.5 percent of all households livedin poverty because they consumed less than this amount.
Analysis of the consumption of 1,980 households for which data were obtained shows considerablevariation. Although nearly 30 percent of households live in poverty, the average consumption level for allhouseholds is 7.087 million karbonvantsi, nearly double the poverty level. At the low end, 1.5 percent ofhouseholds spent less than a million karbonvantsi and an additional 6.7 percent of households spentbetween one and two million karbonvantsi. The average per capita consumption for these households atthe first decile is 1.5 million karbovantsi. Clearly these people live in abject poverty and the second decileis only marginally better off. Almost all households in the third decile are just below the poverty line andthose in the fourth slightly above. Thus, 20 percent of the population is destitute and another 20 percent areleading a precarious existence.
The incremental progression of consumption from decile to decile is gradual until the tenth decile isreached. Here, consumption rises 112 percent over that in the ninth decile and is almost 15 times greaterthan in the first decile. The top 5 percent of all households consume, on average, 31 million karbovantsi,35.8 percent above the decile average.
Economic differentiation has increased since the Soviet period. However, comparisons with theSoviet era are precarious because top officials received food and other amenities for little or no cost thatwere not available to the general population. The current economic stratification is more politicallydangerous because it is more open, and there is a general perception, largely correct, that the new"businessmen" obtained their wealth by siphoning off government property. But any forecast of socialupheaval must be tempered by the fact that people in this part of the world are unusually tolerant of suchinequalities.
Poverty status is affected by sex, family size, age, education, and location of residence. Poverty issomewhat more prevalent among females than males (32 percent versus 29 percent). Of all householdsheaded by a single woman, 41 percent are in poverty, while only 5 percent of all households are in thiscategory. Only 27 percent of households without children are in poverty, but the rate rises to 34 percentwith two children under 15 years of age, and 48 percent with three or more children. Similarly, 23 percentof households without individuals 65 years or older are in poverty, compared to 49 percent with two ormore elderly persons. As expected, the less educated are more likely to be poor. Those with primaryeducation or less had the highest poverty rate, 37 percent. The rate keeps decreasing as the educationalattainment rises; individuals with higher education have the lowest rate, 20 percent. Poverty is morewidespread in urban areas than in rural areas, 33 and 27 percent, respectfully. Poverty is more frequent inthe east (Donetsk, Luhansk, and Kharkiv oblasts), 35 percent, compared to 26-29 percent in the othersections of the country.
Output and Consumption
Agriculture
[All data in this section are from Ministerstvo statystyky Ukrayiny, Statystychnyy shchorichnyk Ukrayinyza 1994 rik. Kyiv, Tekhnika, 1995, pp. 162, 209-19, and 322-35; and Ministerstvo statystyky Ukrayiny,Ukrayina y tsyfrakh, 1995. Kyiv, Tekhnika, p. 72.]
Reports of fuel and equipment shortages notwithstanding, inputs to agriculture such as electricpower, tractors, combines, and trucks decreased little since independence. Application of fertilizer andpesticide is less certain because data are unpublished, and production of both these chemicals droppeddrastically in recent years. At the same time, prior to independence, Ukraine had been exporting largequantities of fertilizer, although this leakage from domestic use had decreased sharply in recent years. Presumably, domestic needs continue to be met.
Cultivation of land, output of major crops, and livestock holdings are more internally consistent andmore comparable to the reported data of the Soviet period than production of industry. Cultivation of landfell from 32.4 million hectares to 31 million hectare, a 4.3 percent drop between 1990 and 1994. Thereduction is confined almost exclusively to wheat, a drop from 7.6 to 4.6 million hectares during theperiod. The decline has been mitigated somewhat by increased sowing of barley, which went from 2.7 to5.2 million hectares. Presumably, barley assumed a larger role as an animal feed. The decrease in theamount of cultivated land is accompanied also by a small rise in the share of crops left unharvested. Theincrease is confined mostly to grain, and rose from 0.4 percent in 1990 to 2.0 percent in 1994.
Agricultural production has declined since independence. Crop production peaked in the late Sovietperiod, with record grain crops (of over 51 million tons) in 1989 and 1990. Since then, grain productionhas fluctuated, but in a downward trend, with wheat registering a precipitous drop. Output of potatoes andvegetables, on the other hand, has been steady. The decline in animal husbandry has been sharper than thereduction of crops. The reduction in the number of cows totaled 10.1 percent, while remaining cattledeclined 32.3 percent. The reduction of livestock parallels the one-quarter drop in animal feed. The sharein the public sector is declining while private sector is growing. Between 1990 and 1995, stocks of cowson publicly-owned farms fell 26.0 percent while privately held cows rose 34.2 percent.
The reduction of livestock and poultry is accompanied by reduced production of meat, milk, andeggs. The decrease seems to be largely related to the reduced quality of feed. Imports of high value feedfrom the West virtually ceased after the collapse of the Soviet Union, and the quality of domesticallyproduced feed decreased as well. Production of sugar beets and sugar beet pulp, a by-product of theproduction of sugar and a nutritious feed, declined. On the other hand, use of roughage (grasses), a poorersubstitute, increased.
Lower animal productivity probably is exaggerated as some output is sold privately and is notreflected in official statistics. The private sector played an important role during the Soviet period and hasexpanded since independence. The share of cows held privately increased from 26.1 to 38.9 percentbetween 1990 and 1995 and the increase for pigs was even greater, rising from 27.5 to 45.5 percent. Theincreases were both relative and absolute. Much of the animal products from this sector are consumed athome, and the remainder is sold to individuals or on a private market. Official statistics include productsconsumed domestically or sold privately but presumably a large portion goes unrecorded.
While there has been a decrease in basic agricultural products, it is much smaller than the 53 percentdecline of processed food production during the 1990-95 period. Wheat production, for example, dropped23 percent compared to a 33.4 percent decrease of flour and 42.5 percent decrease of bread. And while thewheat harvest fluctuates annually, production of flour and bread has been declining continuously. Thedisparity between the output of basic animal products and the corresponding processed foods is evengreater than for crops. Meat in slaughter weight decreased 46.8 percent, while basic meat productsplummeted 70.9 percent. Milk and dairy production show a similar trend. Milk output fell 29.8 percent,production of butter decreased 50.8 percent, and that of cheese, 60.8 percent. Analysis of the publisheddata indicates the following pattern, some decrease in output of basic agricultural products, followed by amuch steeper decline in processed foods, and the reported sales figures are absurdly low. Sales of meat tothe population in 1995 amounted to 25 percent of the 1990 figure, while milk and milk products weredown to 17 percent. Production of potatoes fell 18 percent, although the reported output remained at aboutthe same level during the 5- year period.
Several factors contribute to this disparity, but they are difficult to quantify. By all accounts, thesecond economy is booming, especially in trade. The distributors have to get processed food fromenterprises still owned mostly by the state, and these illegal or quasi-legal sales are not reported. Inaddition to the illegal sales, there is considerable anecdotal evidence that employees occasionally are paidin kind and production used as wage payments presumably are not recorded as sales. Finally, eliminationof price controls resulted in extremely high food prices. As a result, private gardening, which had beenthriving during the Soviet period, expanded as employees were given additional plots of land to grow food. This effort is confined to raising vegetables and livestock--milk cows, pigs, and poultry. The output isconsumed by the family, and whatever surplus remains is sold privately. This type of production anddistribution is hard to capture completely, despite government efforts. Thus, the sales figures obviously donot reflect actual consumption but establishing the true level of consumption is difficult, much lessdetecting changes over time in consumption. Limited consumption data based on surveys do not alwaysseem reliable, are highly aggregated, and reported in value terms. Because of difficulty in adjusting forhuge increases in consumer prices, another distortion of unknown magnitude is introduced.
Industry
The official index of industrial output decreased 47 percent between 1990 and 1995 withconsiderable variation by branch. Production of electric power had the lowest decline, while the otherbranches typically decreased by 50-60 percent (Ministerstvo statystyky Ukrayiny, Ukrayina u tsiyfrakh,1995. Kyiv, 1996, p. 50). The drop in branches related to weapons production--coal, ferrous metallurgy,and machine building--is quite understandable, but the decrease in production of consumer goods and foodindustry are more difficult to explain. The decline of major foods has been steep, but the decrease in lightindustry is even greater, 69 percent.
Tracing the reduction of consumer goods through the various stages of production is more difficultthan in the case of foods, where basic inputs are grown domestically. Soviet manufacturing was extremelyintegrated, and production of even simple household items required parts from plants scattered throughoutthe Soviet Union. Post-Soviet disruption of old links established by central planning and shortage ofmoney to pay for imports has contributed to the decreased output of consumer goods. This can be seenmost clearly in textiles. Manufacture of textiles declined precipitously, led by reduction in cotton and silkfabrics, whose fibers are imported. Production of consumer goods decreased, but probably less thanoverall output because there was a more drastic reduction in military and heavy industries. Sales ofconsumer goods to the population decreased even more than production, a pattern similar to that inprocessed foods. Typically, then, there was a decrease in production of raw materials, followed by a sharpdecline of goods produced, and then a steeper decline in sales.
While production and distribution of consumer goods are understated, there can be little doubt thatthe population is sinking deeper into poverty. Since the breakup of the Soviet Union, fewer families ownbasic household appliances. Comparable figures for clothing and footwear have not been published, butthe situation presumably is similar in view of the sharp reduction of output. Reduced ownership ofconsumer goods, however, is due largely to the drop in income and a steep rise in food prices, forcing thepopulation to divert an overwhelming share of income for food.
Services
The service sector was the most neglected segment of the Soviet economy. In recent years, servicesdeteriorated still further, but the extent was unclear due to the role of the newly established private sector,with incomplete coverage in official data. There are, however, some statistics for two crucial services;housing and medical care.
Available housing does not appear to have deteriorated despite a 76.8 percent decrease in investmentfor housing and public buildings in the 1990-1995 period (Ministerstvo statystyky Ukrayiny, Ukrayina utsyfrakh, 1995. Kyiv, 1996, pp. 84, 85). The decrease did cause a sharp reduction in the number of newbuildings commissioned. But even a smaller addition to the housing stock, coupled with a slight decreaseof the population, caused per capita living space to increase from 17.8 to 19.0 square meters. The qualityof housing probably deteriorated because less money was available, but more apartments are now ownedprivately and the new owners can be expected to do some repairs of their own.
Measured by the number of doctors, hospitals, and hospital beds, health care seems adequate andmay not have deteriorated. The number of physicians per 100,000 population, for example, is comparableto that of the United States. The problem with health care in the former Soviet Union and now in Ukrainewas and is quality rather than quantity. Antiquated equipment, low quality pharmaceuticals, and a rigidbureaucratic system produced health care that was inferior to that of the developed West. (Data on healthcare are from Ministerstvo statystyky Ukrayiny, Ukrayina u tsyfrakh, 1995. Kyiv, 1996, pp. 67, 130.) While the quality care is difficult to quantify directly, it can be assessed indirectly by examining healthtrends of the population over time. Life expectancy at birth, a good overall indicator, shows a decreasefrom 71 to 67 years between 1985 and 1995. Men account for much of the drop; their longevity decreasedfrom 66 to 62 years, while for women the drop was smaller, from 75 to 73 years. Infant mortality rosefrom 12.8 to 14.4 per 1,000 births. By contrast, U.S. life expectancy was 73 years for males and 79 forfemales, and infant mortality was estimated at 6.7 per 1,000 live births for 1996 (World Factbook 1996). Cardiovascular diseases, blamed for 56.8 percent of all deaths in 1995, increased by more than a thirdbetween 1990 and 1995. Malignancies increased slightly and alcohol induced deaths doubled--the latter isprobably more a reflection of stress caused by economic crisis than poor health care. Some increases maybe attributed to the aging population but, of course, aging is not growing at the same rate as illness.
While there is considerable annual variation, production of medicine is generally declining. Of the24 medicines for which data are reported for 1995, 16 decreased since 1990 and eight increased. However, the largest decreases occurred in medications designed to treat illnesses that account for thelargest share of deaths. The most obvious example are medicines to treat cardiovascular diseases. In fact,there is an association between increased deaths and the reduced output of medications for these diseases. Some production deficits might be mitigated by imports; however, there is no indication of large imports.
The Second Economy
The second, or shadow, economy received considerable attention from Western economists but wasnot officially acknowledged in the former Soviet Union. The second economy had been expandingcontinuously since the death of Stalin and blossomed in the 1980s, with the pace rapidly accelerating in thepost-Soviet period. Shortages of quality goods in state stores, coupled with the growth of wages, created asituation where many people could afford, and were willing to pay, higher prices to get desired goodsimmediately. At the same time, some individuals were willing to take the risk in satisfying this demandbecause remunerations were great and the state's repressive apparatus had weakened. The lucrative marketinduced some enterprises to create special shops producing for the private market or to divert statedeliveries to persons who established informal distribution networks. Unsatisfied demands in the servicesector provided still another opportunity for individuals--cars, furniture, apartments, and so on are nowrepaired largely by individuals. Russian officials, in an unpublished memorandum, estimated that in 1991,the year of the breakup, the shadow economy accounted for 15 percent of all economic activity in Russiaand 20 percent in Ukraine. A Ukrainian economist estimated that the second economy in Ukrainecomprised 30 percent of GDP in 1994.
The second economy comes in many shades--legal, illegal, and much of it a combination of both. For example, it is legal to repair someone's apartment for money, but needed fixtures or suppliesfrequently cannot be purchased in state stores. The individual then is forced to make purchases on theblack market, where the items either were taken from state enterprises or produced by shops operatingillegally.
This economy encompasses a wide range of activities, including private farming. Cultivation ofprivate plots remains the second largest source of income for most people after wages from their primaryjob. Private farming expanded considerably during the last several years. In 1994, 92 percent of potatoes,65 percent of vegetables, 43 percent of meat, 40 percent of milk, and 54 percent of eggs were produced onprivate plots. The output was produced on 19.1 million plots averaging one-third hectare (about eight-tenths of an acre), amounting to about 20 percent of all the land cultivated in the country. The small plotsof land, however, cannot support the livestock necessary to produce a comparable level of animal products.
Historically, state and collective farm families were given pasturing rights and some animal feed, aform of payment in kind. Farmers also were permitted to buy feed, but considerable quantities apparentlywere taken from farms without compensation. Since independence, livestock-raising by the urbanpopulation increased the number who must rely exclusively on purchased feed. The new marketundoubtedly stimulated trade in illegal feed.
The second economy made considerable inroads in other branches of the economy as well. Based ona survey of 200 privately-owned enterprises in January 1993, approximately 55 percent of their incomewas derived from transactions with the second economy. Income from this source for state-ownedenterprises increased from 10 to 50 percent between 1992 and 1994. The machine building industryreportedly sells 5 to 10 percent of output to the second economy, the sales presumably consist largely ofconsumer durables. Oil crises notwithstanding, 10 percent of oil products are sold to private purchasers. Selling to the second economy apparently is attractive because payments are made immediately and incash. Unregistered conveyance of passengers account for 15 to 20 percent of the people transported, andfor individual car owners, giving rides to people for money is one of the more important sources of income. Medical services nominally are free, but as during the Soviet period, paying physicians on the side to getquality care is widespread and some doctors now have private practices. Individual payments reportedlydefray 30 to 40 percent of total health care expenditures. It has been estimated that this economyencompasses 50 to 70 percent of the service sector.
The second economy is more prominent in domestic trade and services than in other branches of theeconomy. Based on the family budget survey of 1995, 57.5 percent of consumer goods, excluding foodstuffs, were sold outside the registered trade network. The share in services is even greater: 67.9 percent ofapartment renovations, 70.1 percent of construction, 41.9 percent of furniture and appliance repairs, 59.1percent of car repairs, and 48.6 percent of passengers transported by motor vehicles occurred outside theregistered trade network.
The second economy plays an impressive role in foreign trade as well. Export and import data withapproximately 40 non-NIS countries show that a considerable share of trade is not captured by officialUkrainian data.
Conclusion
There is general agreement that the socio-economic situation in Ukraine has deteriorated in the post-Soviet era. Nutritional requirements are being met with less expensive foods, while ownership ofconsumer durables has slipped. While some of the decline in official data is offset by the expanding roleof formerly illegal, non-official sectors of the economy, declining life expectancies and rising infantmortality underscore that people are living less well in the early, post-Soviet era.
