Poverty Profile Executive Summary Azerbaijan Republic December 2001 Japan Bank for International Cooperation
1. POVERTY AND INEQUALITY IN AZERBAIJAN 1.1. Poverty and Inequality Measurement Poverty Line The Government of Azerbaijan has not officially defined a poverty line. The World Bank (WB) had assessed the poverty in Azerbaijan in 1997 and in the assessment, in order to measure poverty and inequality, WB made use of an adjusted poverty line, which is based on a poverty line which was developed by the Ministry of Labor and Social Protection (MLSP) in 1992. The unique poverty line in Azerbaijan is based only on the cost of food basket expenditure and revised with price escalation rate at 1995. According to the Poverty Assessment (PA) by WB, the national poverty line in 1995 was 121,960 manat per capita per month (equivalent to approximately US$ 27 by the exchange rate in 1995). In addition, the PA defined each poverty line for seven economic zones, including the Southwest Zone, Far Northwest Zone, Center North Zone, Nakichevan, Far South Zone, Near Northwest Zone, Central Zone and Apsheron. While the highest poverty line is 174,539 manat for Nakhichaven, the lowest one is 112,373 manat for the Central Zone. Poverty and Inequality Indicators The results of the poverty measurement by WB indicated 60 % of either households or individuals were living in poverty. There is obvious regional difference in poverty rates. In particular, the poverty rates for Nakichevan are extremely high. Approximately 85 % of households or 90 % of individuals live in poverty in Nakichevan because of economic difficulty which is caused by the geographical isolation from the mainland and the dispute between Azerbaijan and Armenia. The dispute also brought about a large number of internally displaced people (IDPs), and IDPs have seriously suffered from the poverty. Regarding the inequality indicators, we can t obtain enough data to analyze the situation of inequality in Azerbaijan. The limited data show the possibility that the inequality level in the country had been getting worse. While the gini coefficient increased from 0.44 to 0.43 between 1995 and 1999, the theil index decreased from 0.37 to 0.48 in the same period. 1.2. Socio-Economic Indicators Access to Utilities The official statistical data on the provision of utilities has not been published, including electricity, safe water, and so on. In 1995 the government conducted a social assessment which was conducted in 91 population points throughout the country in parallel with the Azerbaijan Survey of Living Conditions (ASLC). According to the assessment, all households in 90 % of the targeted population points had electricity and only 6 % had no electricity within their community. In terms of water supply, in 1999, UNICEF reported that a maximum of 92 % of the population in Azerbaijan had an access to safe water. At the same time, the UN Common Country Assessment 1999 assumed that pollution of drinking water was one of the principal causes of diarrhoea which accounted for 10% of the under-five mortality. The WB Poverty Assessment also pointed out the problem of water supply in terms of both quality and quantity. 1
Industrial Structure and Employment Opportunities According to the official statistics of the Government of Azerbaijan, the number of unemployed who are officially registered as unemployed is 45,000. However, both MSLP and the Federation of Labor Unions believe the real number of unemployed is approximately 500,000. Based on the estimation, the unemployment rate could be more than 11%. In 1995, even the average monthly wage for oil industry workers, whose salary is the highest among all industries, was only 70,000 manat, which is far below the national poverty line of 121,960 manat. Poverty rates by occupation of household head indicated that the number of the Very Poor among the workers in public services, including electricity, water supply, gas and so forth, was 70 % larger than the national average. Education Educational indicators of Azerbaijan are relatively higher than the indicators of the developing countries at the similar level of GDP per capita. A gross enrolment ratio of primary schools in the country is 103%. At the same time, there is no difference in enrollment ratios between the Poor and the Non-Poor. Even among IDPs, enrollment rates for 11-15 year olds are over 90 %. However, rates of extended absence for 6-16 year olds are varied by expenditure group: 11% for The Poor and 7% for the Non-Poor respectively. Although it is generally said that a strong correlation exists between the educational level and economic growth, the case of Azerbaijan is an exception because 60% of the household heads of the Poor completed secondary education. The reason for the high secondary completion ratios of household heads in the Poor is attributed to a break out of a large number of unemployed caused by the drastic change in the economic structure of Azerbaijan. Even the secondary education certificate holders lost their jobs and fell into the Poor in transition to the market economy. Health Health indicators of Azerbaijan are relatively favorable when compared with the other developing countries at the similar level of per capita income. Although life expectancy has been approximately 70 years, which is almost the same level as the developed countries, it declined from 1990 to 1994 due to impacts by the dispute with Armenia, and other economic and social factors. The maternal mortality rate of Azerbaijan used to be the lowest level among the Former Soviet Union (FSU) countries. During 1990 to 1994, it had increased over four times from 9.3 to 43.8 per 100,000. The number of doctors per 100,000 in Azerbaijan is relatively sufficient. On the other hand, several problems in the health sector in the country were pointed out: the excess number of doctors, low moral of medical workers, and low quality of health service. 1.3. Particular Poverty Groups in Azerbaijan IDPs and the pensioners can be cited as a particular poverty groups in Azerbaijan due to special socio-economic conditions in the country. IDPs IDPs are people who were displaced from their own towns within the territory of Azerbaijan since the dispute between Azerbaijan and Armenia in 1989. The number of IDPs in 2000 2
was more than 200,000. The poverty rate of IDPs was 79.2% while the national poverty rate was 68.1% in 1995. Since there are few opportunities of employment for IDPs, they have depended on humanitarian aid from international organizations and NGOs. Pensioners According to the WB PA, in 1995, the poverty rate of households whose heads were non-working pensioners was 10 points lower than that of households whose heads were working, and the household poverty rate of working pensioners was 15 points below households of working heads. The current level of monthly pensions per capita, however, has been sharply decreasing as compared with the level before independence. The average of monthly pensions in 1995 accounted for only 4% of the average monthly pensions in 1991 and 16% of the poverty line for pensioners. It is assumed that the pensioners may have difficulty in their lives because of the small amount of pensions and need another income source such as financial support by other family members or relatives and the sale of their possessions. 3
2. GOVERNMENT POLICIES AND PROGRAMS FOR POVERTY REDUCTION AND EQUITY 2.1. Macroeconomic Performance and Poverty Macroeconomic Impacts on Poverty After independence in 1991, the people s life in Azerbaijan was seriously damaged by macroeconomic instability including hyper-inflation. Therefore, the Government of Azerbaijan introduced a series of stabilization policies supported by IMF and WB, and the policies led to good control of inflation since 1996. The inflation of wages, however, has not caught up with the inflation of prices. In real terms, the average monthly wages in 1995 and 2000 were 0.7% and 2.4% of their 1990 level, respectively. Although recovering gradually, the real household consumption in 1995 and in 2000 was 24% and 43% of the level of 1990, respectively. The indicators show deterioration of the standard of living in Azerbaijan for the last decade, in general. On the other hand, while the stabilization policy has brought about improvement of macroeconomic performance since 1996, public expenditure has been reduced by the retrenchment of the government budget. Although the budgetary expenditure on military as a share of GDP has remarkably fallen, the budgetary spending on education and the social safety net has remained at almost the same level: for education, from 4.5% to 4.8% as a share of GDP; and for the social safety net, from 3.2% to 3.4%. The budgetary spending on health as a share of GDP has dropped from 2.1% to 1.1%. Economic Growth and Income Distribution The economic activities in Azerbaijan have sharply dropped since independence because the newly independent economy did not have enough capacity to absorb enormous impacts, such as the collapse of the FSU economic system, the structural reform for the market economy, and the dispute with Armenia. GDP declined by 20% annually until 1995, and GDP in 1995 was just one third of its 1989 level. Since 1996 when the stabilization policy led to the improvement of the financial imbalance, GDP growth rates have recorded positively. However, in real terms, GDP has not recovered to the level before independence. One of the factors for the economic growth is the rapid growth of the oil sector derived from foreign direct investment. The oil industry has been the engine of the Azerbaijan economy accounting for more than 20% of its annual growth rate. In terms of share of GDP, the oil sector accounts for over 80% of industrial production, which is 25% share of GDP. On the other hand, in terms of employment absorption, the number of employees in the industrial and mining sector including oil has decreased to half number before independence. Since the oil industry can lead to only a limited industrial distribution of GDP and employment, it cannot be expected that growth impacts by the oil industry will spill over nation-wide. In the long run, it is inevitable that growth of non-oil industries will bring about economic growth with larger employment and more equal income distribution which can contribute to poverty reduction in the country. Impacts on Transition to the Market Economy on Unemployment Unemployment in transition to the market economy is one of the critical factors for the poverty in Azerbaijan. Both the industrial and the agricultural production volume has sharply dropped because of the collapse of FSU and transition to the market economy made the 4
country lose not only her export markets but her suppliers of materials and capital goods as well. The industrial output declined to 30 % of the production level in 1990 by 1995, and then in 1999, recovered 80% of the production level in 1990. The recovery of the industrial output, however, was attributed to only the oil boom since the production level of the manufacturing industry still remained at 20% of the production level in 1990. The serious depression in industrial production has induced a large scale lay-off. Since the industrial production bases concentrate only in some industrial cities, the serious damage to those industrial sites has given rise to urban unemployment. On the other hand, the agricultural sector has also faced a considerable decrease in production. Since 1991, the agricultural output dropped to 50% of the production level in 1990 and has remained at the same low level. In addition to loss of the market in FSU, the main factors for a decline in agricultural production are a break up of the collective farm system and an undeveloped new agricultural system for the market economy. As a result, those who cannot help giving up farming despite hardships have appeared because of the two main reasons: one is low profitability for small or micro farms resulting from farm privatization; another is a drastic change in the working system for agricultural workers. Most of them have not been officially counted in unemployment statistics because they are not registering with MLSP. However, it can be considered that they could be one of the critical groups for the poverty risk in rural areas and could contribute to an increase in rural poverty. 2.2. Government Policies Socio-Economic Development Plan and Poverty Reduction and Equity Since 1997, the Government of Azerbaijan has prepared a mid-term public investment program for each three years. The main purpose of the plan is not only to promote infrastructure development stimulating economic growth, but also to enable execution of efficient public investment within a limited government budget. In the program, priority sectors and specific projects by sector are clarified. While there is room to flexibly reconsider the program according to a change in development needs, the current program has put priority on transportation, oil and gas and power rather than social sectors. The Government of Azerbaijan has produced a 10-year national development plan starting from 2002. In the development plan, one of the key issues is poverty reduction, in particular for the first three years. At the same time, the Government has been also preparing the National Poverty Strategy including PRSP. The national development plan will be finalized in March 2002. Government Budget and Public Expenditure Since independence, public expenditure has dramatically dropped due to insufficient public revenue, in particular tax revenue. As a result, public spending especially on social sectors such as education and health has been decreasing. In addition to that, the budget allocation has not been fully disbursed. While the total budget disbursement was just 70% of the commitment, the disbursement for education and health was less than that: 68% and 53% of the commitment respectively. In real terms, by 1996, public spending on education and health each declined to 20% of the level before independence. Afterwards, public spending on education has been kept at the same level as the share of government expenditure and the share of public spending on health in the total government spending has been continuously decreasing. This fact indicates that the real amount of public spending on education and health has not recovered yet. 5
Owing to the tight budget, oil revenues are one of the essential revenue sources for the Government. Therefore, the Oil Fund was established in order to manage the oil revenues properly. Although allotments from the Oil Fund to public spending on support for refugees and IDPs was declared by a Presidential Decree in August, 2001, no other allocation from the Fund to other social sectors has implemented. While preparing PRSP, the Government of Azerbaijan had not directly made an allocation for public spending on poverty reduction at all. While the social expenditure directly addressing the poverty groups has remained reduced, it must become a key issue how to implement poverty reduction programs from not only an organizational viewpoint but also a budgetary one. Social Policies The Government of Azerbaijan has been implementing social sector reforms, including education, health, social protection and the pension system, with assistances by multilateral donors including WB. Basically, the social sector reforms aim to break away from the unfunctional old Soviet systems and to establish new systems which are appropriate for the market economy and democracy. In terms of education, WB has supported an educational reform program including curriculum development, teacher training and pilot school projects. In addition, UNICEF has given assistance for pilot school projects in other areas. Although the reform program has not directly targeted the poverty groups, the program has been monitoring indicators such as enrollment ratio of children from low-income families and one of the pilot school projects has been covering a poor area. However, it has been difficult for children from poor families to have opportunities for education. It has been pointed out that the government should make more efforts to prevent children from poor families from working as child laborers and to support IDP children. The health reform program, including reinforcement of health administration and improvement of regional health centers, has been implemented with assistance of WB and UNICEF. The Government set forth a new funding policy for the health sector including introduction of a user charge in order to encourage financial independence of health institutions. In addition, the Parliament has already passed a bill for introduction of a new health insurance system requiring people to pay a certain amount of the cost. On the other hand, people who belong to 14 groups defined by the Ministry of Health are exempted from the user charge. A WB report estimated that 40 to 50% of the population fall into the 14 exempted groups. It is expected to implement not only ineffective relief measures including exemption from user charge but also a more effective health reform program. In order to introduce appropriate schemes for the market economy, the reform of the social protection system has been implemented with assistance of WB, Know-how fund and TACIS. In terms of the pension system, the Government set forth a new policy including personal pension funds and private pension funds. In the current social protection system, vulnerable groups such as refugees, IDPs and low-income groups are provided with benefits. However, both the benefits and pensions cannot be sufficient to provide the minimum requirement of life. It is of concern that the vulnerable groups would be forced to have more economic difficulty when user charges on social services increase since the social sector reforms. Policy Framework for Poverty Reduction and Equity With the requirements and assistance of WB and IMF, the Government of Azerbaijan has been preparing PRSP and has already released the Interim PRSP (I-PRSP) in May 2001. The poverty reduction strategy includes eight basic policies such as macroeconomic stability, 6
completion of transition to the market economy, improvement of public service provision for vulnerable people, revision of social protection and so forth. In terms of preparing specific programs and projects for poverty reduction, 15 working groups including those covering poverty monitoring, economic development, fiscal policy, social protection, education, health, refugees and IDPs, agriculture and so forth, have been set up. Both multilateral and bilateral donor agencies have expressed interest in participation in the working groups. In fact, it is believed that possible programs or projects cannot be feasible to implement without assistance of donor agencies. It is expected that the Government can prepare financially feasible and sustainable programs or projects. 2.3. Poverty Reduction Programs In Azerbaijan, programs targeting only poverty groups have not been implemented. The following programs, which have already been started, will be implemented as a part of the poverty reduction strategy. Agricultural Development Although the agricultural sector used to be one of the most important sectors for Azerbaijan, the traditional functions of agriculture in the country such as production, food supply, employment, land use, and so forth, have been decreased due to impoverished rural areas in the process of transition. Since I-PRSP attached importance to agricultural reform from the viewpoints of both poverty reduction and food security, the following objectives have been prioritized: expansion of agricultural production, an increase in agricultural productivity and promotion of employment. The agricultural development policy will be composed of the following items: development of distribution systems and sales markets, basic structure such as land market and agricultural financial market, establishment of agricultural information services, basic infrastructure including power and irrigation, and so forth. Social Protection During the FSU period, well-established social protection systems were provided the people. Those systems, however, have not been working due to the tight budget since independence. Thus, the Government of Azerbaijan has started social protection reform and has been preparing new programs with assistance of WB and EU. The root of the poverty issues in the country is the expansion of the vulnerable groups who have not been able to adopt the economic structural changes and will not be able to cover their minimum living expenses. It is necessary for the Government to create effective and well-targeted systems since only benefits like income support, which are not affordable for the low-income families, cannot solve the poverty issues. Employment Program Under the supervision of MLSP, state-owned companies and private firms have established employment funds and provided unemployed people with unemployment benefits and employment placement. When a job seeker cannot find a job, he or she can have a chance to acquire necessary skills at a vocational training center operated by the employment funds. The current system, however, cannot deal with a large number of unemployed. 7
3. AID FOR POVERTY REDUCTION AND EQUITY 3.1. The Outlook of Donors Activities in Azerbaijan Total Amount of Aid and Main Donors Since the cease-fire between Azerbaijan and Armenia in 1995, international cooperation towards Azerbaijan has become comprehensive covering not only emergency and humanitarian aid but also infrastructure, agriculture, health and other social sectors. Except for 1998, when IMF released a structural adjustment loan, Azerbaijan has been receiving an average of around US$ 100 million from the international donor community every year. In the breakdown of US$ 100 million, about 50% of the aid to Azerbaijan is provided from the World Bank and European Union. WB provides support in several sectors such as infrastructure development, emergency environmental assistance, agriculture, and public sector reform. EU is supporting agriculture and social sectors using the TACIS program as a vehicle to extend technical assistance to Azerbaijan. Other multilateral donors such as UNICEF, UNHCR and WFP deliver humanitarian and emergency aid to refugees and IDPs. Although the proportion of the aid amount from bilateral donors is smaller than multilateral donors, they also play important roles in the assistance of Azerbaijan. The United States provides humanitarian assistance through local and international NGOs. Germany is strengthening its position through the support of Azerbaijan s transition process. It became the third largest donor in 1999. Priority Sectors and Donor Coordination in Azerbaijan According to the OECD s bilateral commitment data on Azerbaijan, the economic infrastructure, especially the energy sector, makes up about 75% of total commitment. This apparently indicates heavy emphasis given to the development Azerbaijan s oil industry. Considering the proportion to the total commitment, other important sectors are education, health and food programs. Assistance to these sectors from each donor are relatively well-allocated since each donor has its priority area and the number of major donors is small. In the near future, PRSP is expected to become a directing center to coordinate the activities of donors for poverty reduction. 3.2. Aid for Poverty Reduction and Equity Multilateral Aid IMF: IMF is working closely with the World Bank to support the PRSP preparation activities of the Azerbaijan government. IMF now uses the Poverty Reduction Growth Facility to support PRSP related programs. World Bank: WB has Country Assistance Strategy for Azerbaijan aiming at the establishment of good governance and poverty reduction through equitable economic growth. Achieving this CAS target, WB implements (i) private sector development 8
(especially in the non-oil sector), (ii) investment in social development and poverty reduction, and (iii) public sector reform programs combining ESW, TA and lending services. EU: Using TACIS and other aid programs for Caucasus countries, EU provides technical assistance and infrastructure development services for Azerbaijan. EU s priority areas are (i) public sector reform, (ii) private sector development and economic growth, and (iii) development of infrastructure network. EBRD: The main agenda of EBRD for the development of Azerbaijan is the promotion of the private sector. Although EBRD s programs are not directly targeting poverty reduction, its contribution to the infrastructure such as rehabilitation of water supply system, energy system and private sector development has indirect effects on the reduction of poverty. Bilateral Aid USAID: USAID extends its humanitarian and emergency aid support to Azerbaijan through local and international NGOs. The main issues USAID is dealing with are community development and income generation through micro-finance facilities. GTZ: The important components of GTZ s program in Azerbaijan are (i) project-sector development, (ii) privatization, (iii) agriculture and (iv) comprehensive food security. Combining these four components, GTZ aims to contribute to poverty reduction in Azerbaijan. Especially, GTZ is playing a prominent role in the support of private small farms by providing technical assistance in such areas as productivity improvement, marketing and micro-finance. NGO Activities for Poverty Reduction and Equity To provide assistance to refugees, IDPs and other socially vulnerable groups, international and local NGOs are working closely with multilateral and bilateral donors. Their contributions are highly visible in the humanitarian and emergency support for refugees and IDPs. NGOs have accumulated experience in micro-finance, emergency aid and social development. Using these important experiences, NGOs are expected to play an important role in the preparation period of PRSP. 9