Reception for fighting poverty

World Bank Chief Economist Apurva Sanghi and his colleagues Samuel Freihe-Rodrigue and Nitin Umapati in a column for Kommersant summarize and highlight the peculiarities of the poverty.

The COVID-19 pandemic continues to impact our lives and stifle economic activity around the world. The World Bank estimates that by the end of this year alone, more than 100 million people will be in extreme poverty. The global food security situation is deteriorating and the pandemic is expected to have a long-term and profound impact on the entire world. How did the Russian economy perform during the pandemic? And how has the pandemic affected employment, food prices and poverty rates?

First, according to the latest edition of the World Bank’s Russian Economic Report, Gdp Russia contracted by 3.0% in 2020, while the world economy contracted by 3.8%, the economies of developed countries – by 5.4%, and the economies of commodity exporting countries – by 4.8%. There are several factors that have helped Russia achieve these results.

These factors include the accumulation of significant fiscal and buffering reserves and an incentive monetary policy.

This made it possible to implement a large package of anti-crisis fiscal stimulus measures of about 4.5% of GDP (on par with the packages of measures adopted by comparable countries).

Less well known are factors such as the relatively small size of the service sector and the large public sector that has provided protection against unemployment. The progress in digitalization achieved by Russia before the start of the pandemic also played a role and allowed Russian society to function quite effectively during the period of self-isolation. The economy was supported by:

  • closer and expanding ties with China, which is experiencing relatively high growth rates,
  • stabilization of the number of new cases of COVID-19,
  • softening the parameters for cutting oil production under the OPEC + agreement.

Indeed, the pace of economic recovery is accelerating, and we are now projecting 3.2% GDP growth in Russia in 2021 and 2022, albeit with reservations due to uncertainty surrounding the evolution of the pandemic.

Secondly, regarding employment, the labor market is improving, although the employment rate is still below pre-crisis levels.

In March 2021, the unemployment rate stood at 5.4%, up from 6.4% in August last year. Interestingly, most of the new jobs were created in the informal sector of the economy – about 828 thousand in the second half of 2020. However, job losses were unevenly distributed among economic activities. The overall decline in employment, amounting to 1.78 million jobs, mainly affected four areas:

  • processing sector,
  • building,
  • retail and hospitality industry,
  • health care and social services.

The loss of jobs in manufacturing, construction, retail and hospitality can be attributed to the imposition of restrictive measures and the difficulty of moving these activities to teleworking modes. However, the decline in employment in health and social services is much more difficult to explain. Possible explanations could be an increase in the level of psychological and physical fatigue among medical workers, an increase in the number of coronavirus infections among workers in this category, or a decrease in employment in social services (including private ones) affected by the pandemic.

Thirdly, food prices… Cyclical and structural factors are behind the rise in food prices such as sugar and eggs. These prices were raised by:

  • growth in global demand,
  • interruptions in supplies to the world market due to bad weather conditions,
  • lower yield of domestic oilseeds and sugar beets,
  • and the significant weakening of the ruble last year.

Structural factors are associated with the ban on the import of food products from some countries into Russia, introduced in 2014, which reduced the level of competition in the domestic market, since Russian producers were unable to fully meet the existing demand.

At the same time, the short-term (cyclical) policy measures adopted in response to the rise in food prices included mainly the imposition of restrictions on exports (bans, quotas and tariffs), as well as the imposition of caps on retail prices and the provision of subsidies to producers. While such measures are politically attractive, they distort the economic environment. As one of the latest studies by the Higher School of Economics has shown, annual consumer losses amount to 2,000 rubles. per capita, and the beneficiaries are Russian manufacturers and importers of products that are not prohibited from import.

In addition, the rise in food prices disproportionately affects poor families and poor citizens, as they spend almost half of their income on food. Therefore, a better approach to helping those most affected by malnutrition would be to better target the Russian social support system to improve food security and reduce poverty.

Russia has managed to contain a possible increase in the level of poverty associated with the COVID-19 pandemic.

In many respects, this success was made possible thanks to various measures of social support, including an increase in unemployment benefits, benefits for children, as well as for single-parent families with children. Taking into account the economic recovery and assuming the effective implementation of the announced measures, we forecast a decrease in the poverty level in Russia to 11.4% by the end of 2021 (compared to 12.3% before the start of the pandemic). However, this indicator remains high, so strong economic growth will play an important role in achieving the national development goal of halving poverty by 2030.

We also believe that economic growth alone will not be enough. It needs to be complemented by more flexible and inclusive social support measures. Under the current social security system, the poor account for only about 10% of the total budget allocated for this purpose. Successful implementation of the President’s message will require a social support system that can meet the multiple needs of vulnerable groups of citizens for additional finance, health care, employment and long-term care.

An example of an inclusive social protection system is the national program of financial assistance to those people who find themselves below the poverty line (guaranteed minimum income program). Such citizens can be paid an allowance that compensates for the difference between personal income and the poverty line, as well as support in entering the labor market. If all the parameters of such a system are taken into account, taking into account good targeting, then, according to our forecasts, the cost of such a program will amount to at least about 0.3% of GDP. Our analysis suggests that there is still a window of opportunity for achieving the poverty reduction goal.

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