Social Assistance and the Challenges of Poverty and Inequality in Azerbaijan, a Low-Income Country in Transition

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Although low-income countries in transition are facing the challenges of poverty and inequality, evidence on the performance of safety nets in these countries is scarce. This article uses micro-file data from a nationally representative household budget survey to analyze the existing social assistance programs in Azerbaijan, a low income country in transition, from the perspectives of poverty and inequality reduction. The empirical evidence presented in this paper indicates that the poverty and inequality reduction effectiveness of social assistance programs is inadequate. First, the benefits are very modest and the poor receive only a small proportion of them. Second, some programs are not aimed at poverty reduction by design. Third, the heterogeneous nature of poverty and the significant scale of shadow economy during transition make the identification of the poor complicated. Finally, the existing patchwork of numerous programs with small-scale benefits is costly and administratively demanding. A consolidated and better designed social assistance program is needed to effectively tackle the challenges of poverty and inequality in Azerbaijan.

Keywords: Income distribution, welfare, poverty, inequality, safety net, social assistance, transition, and Azerbaijan

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Starting with the same ground of the Soviet-style social assistance of the 1990s, countries of the former Soviet block have demonstrated divergent patterns in reforming their social welfare safety nets. However, most of the literature regarding social assistance reform focuses on the Baltic or Slavic countries, while the development of social assistance systems in the low-income transitional countries of Central Asia and Caucasus has been largely ignored (Klugman, 1997; Manning, 2004; Manning & Tikhonova, 2004; Rimashevskaia, 2003; Whitefield, 2002). This study attempts to fill this gap in the literature by focusing on the assessment of social assistance in Azerbaijan, a low-income transitional country, located on the Caucasus between Russia and Iran. There are two major benefits of this study. First, the analysis in this study is based on high-quality micro data from a nationally representative household budget survey. Second, the analysis of social assistance is relevant for Azerbaijan given that the government of the country has recently reiterated a commitment to reform social assistance in the framework of the Poverty Reduction Program of Azerbaijan (GoA, 2004; 2005).

Background: Social Assistance and Transitional Shocks

Until 1991 Azerbaijan was a part of the USSR, and the development of social assistance in the country followed the unified Soviet model that had three major legs. The first leg was a broad net of cash benefits for several categories of households such as families with children, veterans, the disabled, elders, parentless children, and certain categories of workers such as miners and teachers. Thus, by the end of 1980s, families with children in the Soviet Union were eligible for up to 10 types of benefits which were effective tools in decreasing child poverty and promoting women's employment (Bradbury & Jantti, 1999; OECD, 1996). The second leg included: day care, sport, food and leisure services subsidized by the state-owned enterprises, as well as consumer goods, housing, transport, communication and utilities subsidized by the budget revenue of the state. It is estimated that the consumer and producer subsidies together accounted for about 10 percent of GNP by the end of 1980s (Rashid et al., 2000). The third leg was the centrally-planned economy with primarily state ownership of the means of production, which guaranteed full employment and made unemployment assistance unnecessary.

The first years of transition were marked by profound economic crisis in Azerbaijan, which negatively affected all three legs of social assistance. First, privatization of the economy made guaranteed full employment impossible. Employees of the former state-run enterprises were forced to move to the informal sector of employment that exceeded 38 percent in Azerbaijan (Yoon et al., 2003). As a result, the share of shadow economy of the total GDP of the country grew to 60 percent (Schneider, 2002). Second, by the year 2003, the private sector share of GDP reached more than 70 percent (MED, 2003). The former state-run enterprises reemerged as privately-owned companies and ceased playing an active role in delivering social assistance benefits, considered to be inappropriate for profit-oriented businesses. Third, the government's capability to administer social protection was severely undermined by the profound decline in state revenues. Consequently, Azerbaijan lagged far behind the high and middle income countries of the former Soviet Union in public spending for social programs (Table 1).

Economic depression, multiplied by the dismantling of the Soviet-style social assistance, led to a sharp increase in poverty. The poverty rate, the share of the total population living below the poverty line, grew in Azerbaijan from 33 percent in 1989 to 50 percent in 2001 (Falkingham, 2004). In total, about 24 percent of the population of Azerbaijan or 1, 860,000 people live under the international extreme poverty line of 2.15 USD PPP/day (Falkingham, 2005). In addition, the determinants of poverty have changed. Determinants of poverty were fairly homogenous before the transition: the majority of the poor were pensioners, families with a large number of dependents or single mothers (Klugman, 1997; Manning & Tikhonova, 2004). Since the transition began, poverty has become more diffused, and demographic characteristics have ceased to be strong determinants of poverty.

Finally, the impoverishment was accompanied by a significant increase in inequality. The Soviet society was fairly equal in terms of income; before the independence of Azerbaijan, the Gini coefficient, a measure of inequality, was only 0.27 in the country (Falkingham, 2004). By the end of a transition decade, in 2000, the Gini coefficient nearly doubled to 0.50.

Objectives of the Study

Responding to the rising poverty and inequality during transition, the government of Azerbaijan has administered new social assistance programs. However, on the basis of the data sketched in the previous section (e.g. high level of poverty and inequality), the actual impact of social assistance on poverty and inequality is expected to be minuscule. This intuitive observation allows us to articulate the two objectives of this study. First, this study attempts to quantify the performance of social assistance programs in Azerbaijan from the perspectives of poverty and inequality reduction. Second, it seeks to provide specific recommendations to improving the existing social assistance programs.

Data

Collecting data about income distribution in Azerbaijan has a long history, the Family Budget Survey (FBS), a nationwide survey of family income, was administered in Azerbaijan quarterly since 1922 (Dmitrichev, 1992). However, the FBS was extensively criticized for being unrepresentative of the total population and providing misleading information about income distribution (Flemming & Micklewright, 2000; Micklewright & Marnie, 2005; Shenfield, 1983). In 2003, the State Statistics Committee of Azerbaijan, the national statistical agency, introduced a new survey, the Azerbaijan Household Budget Survey (AHBS). The new survey is an instrument from a "familyhood" of the Living Standards Measurement Surveys developed by the World Bank to assess poverty in developing and transitional countries. In this section, we provide a brief description of the distinguished features of Azerbaijan's survey, since the Living Standards Measurement Surveys has already been described in detail elsewhere (Deaton, 1997, Grosh & Glewwe, …