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
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. …