The Kyrgyz Republic Profile and Dynamics of Poverty and Inequality, 2009

The Kyrgyz Republic Profile and Dynamics of Poverty and Inequality, 29 October 3, 211 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Document of the World Bank

FISCAL YEAR January 1-December 31 Currency Kyrgyz Som Average for 29 Som 42.9 = US$ 1 Weights and Measures Metric System ABBREVIATION AND ACRONYMS CPI ECA FYR GDP GNI KIHS MDG MSB NSC PPP UMB UN Consumer Price Index Europe and Central Asia Former Yugoslav Republic Gross Domestic Product Gross National Income Kyrgyz Integrated Household Survey Millennium Development Goals Monthly Social Benefit National Statistical Committee of the Kyrgyz Republic Purchasing Power Parity Unified Monthly Benefit United Nations Vice President: Country Director: Sector Director Sector Manager: Country Manager Task Team Leader: Philippe H. Le Houerou Motoo Konishi Yvonne Tsikata Benu Bidani Alexander Kremer Sarosh Sattar

TABLE OF CONTENTS PROFILE AND DYNAMICS OF POVERTY AND INEQUALITY... 1 A. Introduction... 1 B. Macroeconomic Background... 3 C. Development Indicators... 3 D. Characteristics of the Poor... 7 Number and geographic distribution of the poor... 7 Inequality... 1 Living conditions... 12 Demographic characteristics... 13 Gender... 19 Internal migration... 2 Employment status... 21 Education... 24 Household income and consumption basket... 29 Poverty profile using regression model... 32 E. The Dynamics of Poverty and Inequality in 26 29... 35 The Trend in Poverty Levels... 35 Changes in Inequality, Consumption, and Income... 38 LIST OF FIGURES Figure 1: Comparison of GDP per Capita with Selected Regions... 4 Figure 2: International Poverty Rates for Selected Countries PPP US$2.5 per day, 28... 4 Figure 3: International Poverty Rates for Selected Countries, PPP US$5. per day, 28... 4 Figure 4: Maternal Mortality Ratio,... 6 Figure 5: Tuberculosis Prevalence and Incidence Rates, 199 28... 6 Figure 6: Primary School Enrollment Rate, 1999 29... 6 Figure 7: Absolute and Extreme Poverty in Rural and Urban Areas, 29... 7 Figure 8: Absolute and Extreme Poverty Gap and Severity... 9 Figure 9: Incidence and Distribution of Poverty, by Oblast... 9 Figure 1: Incidence and Poverty Distribution across Mountains and Plains... 1 Figure 11: Gini coefficient by sector and oblast, 29... 11 Figure 12: Mean Consumption by Quintile, 29... 11 Figure 13: Average Area of Dwelling per Capita... 12 Figure 14: Population s Access to Housing Amenities... 12 Figure 15: Annual Electricity Expenditures per Capita (in som)... 13 Figure 16: Annual Electricity Expenditures, per capita by Poverty Status (in som)... 13 Figure 17: Household Size, by Income and Location... 14 Figure 18: Relationship between Household Size and Absolute Poverty Incidence Rate... 14 Figure 19: Age Composition of Poor and Nonpoor Households... 15 Figure 2: Age Composition of Households, by Income Category and Location... 15 Figure 21: Distribution of Households by Number of Children and Poverty Status... 16

Figure 22: Distribution Households by Number of Children and Poverty Status, for Urban Rural Areas... 16 Figure 23: Average Dependency Ratio, by Poverty Status and Sector... 17 Figure 24: Poverty Incidence and Distribution by Household Head s Age... 17 Figure 25: Gender of the Household Head and Poverty... 19 Figure 26: Gender Status of the Household Head and Rural-Urban Poverty... 2 Figure 27: Internal Migration by Household Heads, by Quintiles of Per Capita Consumption... 21 Figure 28: Employment Status of Household Head and Absolute Poverty Distribution... 22 Figure 29: Employment Status of Household Head and Extreme Poverty Distribution... 22 Figure 3: Absolute and Extreme Poverty Rates by Employment Status... 23 Figure 31: Poverty Rates and Educational Attainment of Household Head... 25 Figure 32: Education of Household Head and Absolute Poverty Rates, by Location... 25 Figure 33: School-Age Children Who Attended School... 27 Figure 34: Expenditures on Education... 29 Figure 35: Average Annual Income per Capita... 29 Figure 36: Annual Income per Capita by Poverty Status... 3 Figure 37: Annual Per Capita Consumption, by Poverty Status... 32 Figure 38: Poverty Trends, 26 9... 35 Figure 39: Rural and Urban Poverty Trends, 26 9... 36 Figure 4: Absolute Poverty and Extreme Poverty Gaps, 26 8... 37 Figure 41: Absolute Poverty and Extreme Poverty Severity, 26 9... 38 Figure 42: Gini coefficient of Consumption per Capita, by Urban and Rural, 26 9... 39 Figure 43: Annual Per Capita Consumption Growth, by Quintiles, in Real Terms... 4 Figure 44: Income Structure of Households, 27 9... 41 Figure 45: Dynamics of GDP, Poverty, Remittances, and Consumption Growth Rates... 42 Figure 46: Growth Incidence Curve, 28 9... 43 Figure 47: Extreme Poverty Reduction, 28... 46 LIST OF TABLES Table 1: Kyrgyz Republic: Key Macroeconomic Indicators, 26 9... 2 Table 2: Selected Social Development Indicators: An International Comparison... 5 Table 3: Absolute Poverty Rates, Using Per Capita and Adult Equivalence Scales... 18 Table 4: Area of Employment of Household Heads... 23 Table 5: Type of Employment of Household Heads... 24 Table 6: Education Level of Household Head, by Gender and Consumption Quintiles... 26 Table 7: Education Level of Adults Aged 25 and Older, by Poverty Status and Gender... 27 Table 8: Children s School Attendance by Age Group, Poverty Status, and Gender... 28 Table 9: Structure of Income by Poverty Status... 3 Table 1: Share of Food Groups in Total Food Consumption, by Poverty Group... 33 Table 11: Results of Regression Model: Explaining Per Capita Consumption, 29... 34 Table 12: Poverty Trends, by Oblasts, 26 9... 36 Table 13: Gini coefficient (Per Capita Consumption) by Oblast, 27 9... 39 Table 14: Mean Consumption as Proportion of Poverty Line, by Quintiles, 27 9... 4 Table 15: Growth and Redistribution Decomposition of Poverty Changes... 42 Table 16: Distribution of Social Protection Benefits and Private Transfers Across Groups, 28... 44 Table 17: Benefit Adequacy: Share of Benefits in Total Household Consumption, 28... 45

BOX 1: Poverty Measures in the Kyrgyz Republic BOX 2: Sensitivity Analysis of Per Capita versus Adult Equivalence Scales Specification BOX 3: To What Extent Does the Existing Safety Net Protect the Poor? ANNEX 1: RESULTS OF THE STUDY: TO WHAT EXTENT DOES THE EXISTING SAFETY NET PROTECT THE POOR?

ACKNOWLEDGMENTS This report was made possible thanks to the cooperation of the National Statistical Committee (NSC) of the Kyrgyz Republic. Special appreciation goes to Orozmat Abdykalykov (chairman) and Galina Samohleb (head of the Household Survey Department). The report was prepared by the World Bank team led by Sarosh Sattar and included Aibek Baibagysh uulu (economist) and Yeva Gulnazaryan (data analyst). The team would like to acknowledge the helpful comments of peer reviewers Bob Rijkers and Andrew Dabalen. The report was prepared under the guidance of Benu Bidani (sector manager) and Alexander Kremer (country manager). Administrative support was provided by Helena Makarenko and Lilia Saetova.

EXECUTIVE SUMMARY The Kyrgyz Republic is a low-income country with high levels of poverty, using either international or national poverty lines. An international comparison of the Kyrgyz Republic s selected human development indicators shows that it is in a better position than other lowincome countries but lags behind other developing countries in the ECA region. It appears that the Kyrgyz Republic is on track to achieve the majority of the Millennium Development Goals (MDGs), with the exception of those for maternal mortality and tuberculosis. In addition, the data show that primary school enrollment rates gradually declined between 1999 and 29. The World Bank estimates that the headcount incidence of absolute poverty was 31.7 in 29, based on the national poverty line. 1 This translates to 1.7 million people in the country living below the poverty line. The extreme poverty rate was 3 in the same year. The poverty gap, which measures the depth of poverty, reached 6.1 and appears to be moderate. Poverty had a strong sectoral and regional dimension. As in other agriculturally based economies, rural poverty dominated. The proportion of the rural population living below the poverty line reached 37.1 versus 22. for the urban population. In regional terms, the oblasts with the highest poverty rates are Issyk-Kul, Naryn, and Osh. In absolute terms, the largest numbers of poor are in Osh, Jalal-Abad, and Issyk-Kul, reflecting the large population base in those oblasts. As expected, the risk of poverty increased with the altitude zone and was reflected in higher poverty rates in high mountainous areas. This report finds that household characteristics matter for poverty status. Poverty rates are high in larger households. Other demographic variables (age, dependency ratio, demographic and family composition, etc.) also play a significant role in defining the poor. By contrast, the correlation between the gender of the household head and poverty is unclear. It appears that for absolute poverty the incidence of male-headed households is higher while for extreme poverty, female-headed households predominate. Internal migration (mainly from rural to urban areas) seems to be one of the strategies households pursue to get out of poverty, many doing so in search of better job opportunities. Yet there are no significant differences between poor and nonpoor households in the distribution of the unemployed. Predictably, however, poverty is indeed higher for unemployed heads of households. The survey data show that lack of education continues to be an important factor explaining poverty: the headcount poverty rate is two times higher for illiterate household heads than for those with technical professional degrees. In general, the poor and the extreme poor stop schooling after 16 years of age. The high cost of education may be part of the reason: the poor spend seven times less than nonpoor on education in absolute terms. The importance of sources of income varies by group. The extreme poor are less reliant on income from employment and more reliant on pensions and social benefits than either the 1 The absolute poverty and extreme poverty lines are terms used by the NSC. They refer to the upper and lower poverty lines. i

poor or the nonpoor. This underlines the importance of the social benefit system for reducing poverty in the most destitute group as well as the need to further improve the effectiveness and targeting accuracy of the social safety net. In terms of poverty dynamics, the report shows that the reduction of poverty between 26 and 29 by 29.3 age points was associated with moderate growth rate in GDP, which averaged 5.7 in those years. In fact, the poverty rates to a large extent reflect changes in GDP, total consumption, and remittance growth rates. Thus, in 29, when the country suffered from the impact of the financial crisis, the poverty rate stagnated, marking the end of the long declining trend in poverty observed in previous years. For the period under analysis, however, the extreme poverty rate continued to decline, albeit at a slower pace, despite stagnation in the absolute poverty trend. The reduction in absolute poverty was experienced more in urban areas, whereas extreme poverty fell more quickly in rural areas. Similarly, the reduction in absolute poverty was experienced in all oblasts, whereas for the declining trend of extreme poverty there is one exception Bishkek city, where extreme poverty actually increased from.6 in 26 to 3 in 29. The reduction in poverty was different for different oblasts; however one region stands out in terms of the significant pace at which poverty has declined. Between 26 and 29, the Jalal-Abad oblast halved the absolute poverty rate and showed considerable reduction in the extreme poverty rate. The depth and severity of poverty followed the general poverty trends that is, rapidly declining in the earlier period of high economic growth but stagnating in the later period for reasons related to the impact of the financial crisis and economic slowdown. The most recent growth decomposition of poverty rates between 28 and 29 shows that the dynamics in poverty rates in 28 9 is to a large extent due to the distribution component rather than the impact of growth in consumption. The trend in inequality was consistent with the trend in poverty rates. The inequality measure stagnated over 28 and 29 was after having declined in the earlier period. Overall, the Gini coefficient fell from 31.3 in 26 to 25.5 in 29. That decline was driven mainly by the reduction in rural inequalities; the urban Gini coefficient showed a slower rate of reduction, especially in recent years. ii

PROFILE AND DYNAMICS OF POVERTY AND INEQUALITY A. Introduction 1. Poverty reduction is an important goal for governments of many developing countries. This goal is synonymous with economic development and achieving a higher quality of life for all population groups. Thus, monitoring the dynamics of poverty and inequality is implicit in the monitoring of progress in societal development. As the vast literature shows, development progress to a large extent depends on economic and social policies and economic growth. Thus, identifying the relationship between relevant economic variables and poverty and inequality indicators may provide policy guidance on what has furthered the country s progress. 2. The content of this report is based on data from the Kyrgyz Integrated Household Survey (KIHS) for 29, which was collected and made available to the World Bank by the National Statistical Committee (NSC) of the Kyrgyz Republic. This report follows a previous assessment of poverty in the Kyrgyz Republic and the most recent for 28, when the economy had not yet felt the full impact of the financial crisis. It represents the continuation of the efforts to monitor poverty, provide additional insights, and identify the main dimensions of poverty in the Kyrgyz Republic based on new analysis and the most recently available data. 3. The report consists of two main parts. The first part discusses poverty and inequality for 29 and, thus, from a static perceptive. So, the first section describes and discusses the main features and correlates of the poor. The goal is to provide a brief overview of poverty in the Kyrgyz Republic and describe the characteristics of households and the poor. This is achieved by considering the poverty incidence among households and individuals differentiated by such characteristics as age, household size, employment status, educational attainment, geographic location, gender of the household head, and internal migration status of the household head. This section also incorporates some insights on poverty from a recent study carried out in the Kyrgyz Republic related to the poverty and social impact analysis of selected reforms in the social protection sector. 4. The second section discusses the dynamics of poverty and inequality in the Kyrgyz Republic during 26 29. This section relates the trends of macro indicators (gross domestic product [GDP], growth in different sectors of the economy, the consumer price index [CPI], remittances, and social budget expenditures) to changes in micro indicators of interest (poverty and inequality). The objective is to integrate into one coherent picture the recent macro and micro developments. The period of 26 29 coincided with the food price volatility and financial crisis of 28 9. So the distinct feature of this report is that the impact of international instabilities is reflected in the assessment of poverty and inequality. The report uses two types of data: the macroeconomic, national accounts data as regularly reported by the NSC, Ministry of Finance, and National Bank of the Kyrgyz Republic, and microeconomic, primary data derived from the KIHS (also collected by the NSC). These two might not always be consistent with each other, but they do complement one another to provide useful policy insights. 5. The KIHS interviews 5,16 households annually and has collected information on about 19,6 people. The survey is conducted quarterly on a rolling basis. Households remain in the sample for a period of four years, on average. The sample size is sufficiently large to allow for robust estimates of poverty at the national, urban-rural, and oblast (province) levels. The survey collects information on household and individual characteristics, expenditures (food and nonfood), income, assets, living conditions, and labor market activities. 1

Table 1: Kyrgyz Republic: Key Macroeconomic Indicators, 26 9 26 27 28 29 Real Growth (in ) GDP 3.1 8.5 8.4 2.9 GDP, excluding gold 5.7 9. 6.5 3.4 Agriculture 1.7 1.6.9 6.7 Construction 19.1 32.3 1.8 22.1 Industry -1.9 6.3 14.8-8.1 Services 9. 12.6 11. 2.3 Exports of goods and services 7.7 25.8 9.1-1.1 Imports of goods and services 42.7 11. 13.6-19.4 Total consumption, etc. 15.4 2.2 9.7-11.9 General government consumption -6. 1.8 -.8 1.5 Private consumption, etc. 2. 2.3 11.8-14.4 Gross domestic investment 29.2 16.5 18.6-4.9 Net indirect taxes 3.1 8.5 8.4 2.9 US dollars million GDP 2,855 3,823 5,141 4,691 Exports fob 96 1,337 1,874 1,694 Imports cif 1,723 2,417 4,72 3,4 Workers remittances (inflow) 731 1,65 1,58 1,94 Current account balance -286-227 -71-16 Foreign direct investments (net) 182 28 377 19 Prices Inflation (% beginning to end of period, CPI) 5.1 2.1 2.. Wage, average (som per month) 3,27 3,97 5,378 6,161 Wage, average (US$ per month) 81 16 147 144 Exchange rate (som per US$, average of period) 4.2 37.3 36.6 42.9 General government budget (% of GDP) Revenues and grants 27 31 3 32 Grants 1 2 2 5 Tax 18 19 23 22 Social fund contributions 4 4 4 4 Nontax and capital 4 6 5 5 Expenditures 3 31 29 36 Current (other than interest) 24 23 24 28 Transfers and subsidies 9 9 3 3 Wages and salaries 6 7 7 7 Interest payments 1 1 1 1 Capital 4 7 5 5 of which foreign-financed public investment program 3 3 2 3 Net lending 1 Fiscal balance -3-4 Miscellaneous GNI per capita, Atlas methodology (US$) 5 62 79 86 Poverty headcount (% of population) 61 55 32 32 Extreme poverty headcount (% of population) 17 12 6 3 Unemployment rate (% of labor force) 8.3 8.2 8.2 8.4 Workers remittances (inflow, % to GDP) 26 28 29 23 Current account balance (annualized, % to GDP) -1-5.9-13.6-2.3 Sources: NSC, National Bank, and Ministry of Finance. 2

B. Macroeconomic Background 6. The growth rate of real GDP in the Kyrgyz Republic over 26 29 averaged 5.7 but was not stable. In the pre-crisis years, the growth rate of the economy accelerated to above 8, but in 29 the economy felt the impact of the international crisis and the GDP growth rate slowed to 2.9. If we exclude the direct contribution of the gold mining industry, which accounted for about 5 of GDP, the growth rate averaged 6.1. So the slower production in gold mining and generally negative growth in the industrial sector (which fell by 8 in 29) reduced the growth in overall GDP. Despite the recession in some sectors in the crisis year of 29, two sectors, construction and agriculture, witnessed high growth rates of 22.1 and 6.7, respectively. 7. On the expenditure side of GDP, growth rates in exports, imports, total consumption, and total investments were high and positive before 29 but turned negative in 29, reflecting the impact of the financial crisis and reduction in aggregate demand. The high growth rate through 28 was due to the growth in private consumption and gross fixed investment. The growth in investment, presumably, was driven by the push to complete the construction of the Kambarata 2 hydroelectric station. As the crisis erupted, the Kyrgyz government responded with higher public expenditures the only positive component of aggregate demand in 29, though they were also reflected in a higher fiscal deficit for 29. 8. In the pre-crisis years, high inflation was fueled by high growth rates of 9.7 in aggregate consumption as well as rising food prices. In 29, inflation eventually fell to zero as incomes, including remittances, stagnated and the economy cooled down. The average wage level measured in U.S. dollars fell and the unemployment rate increased marginally. 9. In the past decade, the inflow of remittances played a significant role in the economy as workers abroad sent home funds. As the host countries of the Russian Federation and Kazakhstan fell into recession, the flow of remittances to the Kyrgyz Republic declined in 29 to 23 of GDP. Coupled with a reduction in social transfers and wages, this affected domestic consumption, which eventually reduced imports and resulted in a fall in the current account deficit. C. Development Indicators 1. The Kyrgyz Republic is a low-income, mountainous, and predominantly agrarian country with more than 64 of its 5.4 million population residing in rural areas. The country is considered one of the poorest in Central Asia and the Europe and Central Asia region with a GDP per capita of US$ 86 (current US$) in 29 as seen in figure 1. 11. According to the World Bank s estimates of poverty based on international poverty lines at a purchasing power parity (PPP) of US$2.5 per day and US$5. per day, headcount poverty rates in the Kyrgyz Republic are relatively high compared with other countries in the Europe and Central Asian region (ECA) as seen in figures 2 and 3. 2 2 The World Bank s usage of Europe and Central Asia region refers to the countries in Central and Eastern Europe, the Western Balkans, and the Commonwealth of Independent States. 3

Georgia Kyrgyz Republic Armenia Moldova Albania Macedonia, FYR Romania Azerbaijan Kazakhstan Lithuania Serbia Russian Federation Georgia Armenia Kyrgyz Republic Moldova Albania Kazakhstan Azerbaijan Macedonia, FYR Romania Serbia Montenegro Poland Russian Federation Lithuania Figure 1: Comparison of GDP per Capita with Selected Regions current US$ 14, 13,31 12, 1, 8, 6,596 6,412 6, 4, 2,778 4,245 2, 86 - Kyrgyz Republic Central Asia CIS, Other Western Balkans ECA EU1 Sources: World Development Indicators database (29), World Ban k. http://data.worldbank.org/datacatalog/world-development-indicators. Notes: Values of country aggregates are averages. CA = Central Asia (Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan); CIS other (Commonwealth of Independent States, other) = includes Armenia, Azerbaijan, Belarus, Georgia, Moldova, Russian Federation, and Ukraine. ECA = average for all developing countries of Europe and Central Asia. EU1 = new member states of the European Union (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, and Slovenia). W B = western Balkans (Albania, Bosnia and Herzegovina, Croatia, the FYR Macedonia, Montenegro, and Serbia). Figure 2: International Poverty Rates for Selected Countries PPP US$2.5 per day, 28 (in ) Figure 3: International Poverty Rates for Selected Countries, PPP US$5. per day, 28 (in ) 6 5 4 3 2 1 9 8 7 6 5 4 3 2 1 Source: World Bank, ECAPOV database. 4

12. In terms of selected human development indicators, the Kyrgyz Republic is in a better position than low-income countries but lagging behind other countries in the Europe and Central Asia (ECA) Region. Yet, the persistence of low social indicators reflects continued economic problems in the country related to the prolonged period of transition and political instability. In addition, given that the country is land-locked and the economy is dependent on energy and trade, it is vulnerable to external conditions, which proved to be very volatile over recent years. This environment is not conducive to sustainable economic growth, which is essential for improving social indicators. Table 2: Selected Social Development Indicators: An International Comparison Kyrgyz Republic ECA Low Income Countries 199 99 2 9 199 99 2 9 199 99 Prevalence of undernourishment (% of population) 15 14 7 7 38 33 Poverty headcount ratio at PPP $1.25 a day (% of 25 19 4 4 population) School enrollment, primary (% net) 9 85 9 91 6 71 Share of women employed outside the agricultural sector (% 49 48 46 47 of total nonagricultural employment) Mortality rate, infant (per 1, live births) 58 36 42 23 14 81 Malnutrition prevalence, height for age (% of children under 33 18 46 5) Malnutrition prevalence, weight for age (% of children under 8 3 3 5) Maternal mortality ratio (modeled estimate, per 1, live births) 88 8 65 38 825 653 Mortality rate, under 5 (per 1,) 68 41 5 27 165 126 Prevalence of HIV, total (% of population ages 15 49).1.14.14.47 3.1 3. Incidence of tuberculosis (per 1, people) 144 157 9 95 252 38 CO 2 emissions (metric tons per capita) 1.4 1 8 6.8.5.3 Improved sanitation facilities (% of population with access) 93 93 87 89 26 34 Improved water source (% of population with access) 78 86 92 95 55 62 Internet users (per 1 people).1 11.1.3 14.4. 1.1 Mobile cellular subscriptions (per 1 people) 23 1 56 8 Telephone lines (per 1 people) 8 8 16 24 1 GNI per capita, Atlas method (current US$) 388 482 1946 3779 266 346 Gross capital formation (% of GDP) 18 19 24 22 18 21 Life expectancy at birth, total (years) 67 68 67 68 53 56 Trade (% of GDP) 82 15 57 65 4 55 Source: World Development Indicators (29 or latest available data), World Bank Notes: The table shows period averages. = not available. 2 9 13. Looking at the country s development progress through the lens of the Millennium Development Goals (MDGs) shows that the Kyrgyz Republic is partially on track to achieve the declared goals. 3 According to the National Progress Report and United Nations data, it appears that goals related to eradicating extreme poverty and hunger, ensuring environmental sustainability, promoting gender parity, reducing child mortality, and developing global partnership for development are well on track and assessed as likely to be achieved. In contrast, some indicators that relate to health and education goals are showing slow progress and require monitoring and policy efforts. 3 For the country table, see http://unstats.un.org/unsd/mdg/. 5

maternal deaths per 1 live births cases per 1 population 14. Two health indictors are a cause for concern: the maternal mortality ratio and the tuberculosis incidence rate. Both indicators show an upward trend since 2. The health sector in the country is undergoing sectorwide reforms to address the critical issues that must be tackled in order to improve health outcomes. These are issues of state financing of the sector, low salaries, insufficient payment incentives, ineffective arrangement of service delivery, lack of an integrated approach to sector management, and insufficient resources such as personnel, equipment, and drug management. Figure 4: Maternal Mortality Ratio, 199 28 Figure 5: Tuberculosis Prevalence and Incidence Rates, 199 28 Tuberculosis prevalence rate per 1, population (mid-point) 12 1 8 6 4 77 98 81 78 81 Tuberculosis incidence rate per year per 1, population (mid-point) 3 25 2 15 1 281 252 195 228 236 143 143 151 158 159 2 5 199 1995 2 25 28 199 1995 2 25 29 Sources: UN Interagency estimates for maternal mortality and UN for tuberculosis. 15. The World Bank data show that the net primary school enrollment rate in the Kyrgyz Republic has been gradually declining in 1999-29. This indicates that not all boys and girls are entering school and, thus, will not be able to complete the full course of primary schooling or even perhaps achieve basic literacy. Figure 6: Primary School Enrollment Rate, 1999 29, net 9 88 86 84 82 8 78 76 74 72 7 1999 2 21 22 23 24 25 26 27 28 29 Source: World Development Indicators, World Bank 6

D. Characteristics of the Poor 16. This section focuses on trying to answer three questions: who are the poor, where do they live, and why are they poor. The elaboration of these answers provides a profile of the poor which can be useful to policy makers, government officials at the central and local levels, socially oriented civil organizations, and donors. This information can help with the design of programs to not only ameliorate the circumstances of the poor but also raise the living standards of the population Number and geographic distribution of the poor 17. According to World Bank estimates based on the KIHS and using the upper national poverty line, the total headcount absolute poverty rate registered at 31.7 in 29 (see Box 1). This means that 1.72 million people in the country were considered to be poor and were unable to meet basic food and nonfood needs. The extreme poverty rate, which measures the incidence of food poverty, leveled at 3 in 29, which implies that 162, people were not able to meet their basic food needs. 18. The incidence of rural poverty is significantly higher than that of urban poverty, 37.1 versus 22., respectively. Similarly, the incidence of extreme poverty in rural and urban areas is 3.1 and 2.7, respectively. Because over 64 of the population lives in rural areas, the number of the poor in rural areas is three times higher than in urban areas 1,297, versus 422,, respectively. Thus, the majority of the poor, 75.4, reside in rural areas. These numbers point to a continued poverty divide between rural and urban areas. What may be behind this is the greater extent of economic activity and job opportunities in urban areas. Another distinct feature of rural areas is their dependence on agricultural activities, which generally do not provide particularly good income and employment prospects, thus leading to the persistence of poverty in rural areas. Figure 7: Absolute and Extreme Poverty in Rural and Urban Areas, 29 Poverty Headcount, in of population Poverty Distribution, in of poor 4. 35. 3. 25. 31.7 22. 37.1 8. 7. 6. 5. 75.4 67.7 2. 15. 4. 3. 24.6 32.3 1. 5. 3. 2.7 3.1 2. 1. - - National Urban Rural Absolute Extreme Absolute Extreme Urban Rural 7

BOX 1: Poverty Line in the Kyrgyz Republic In this report, the estimation of the absolute poverty line is based on the standard cost of basic needs approach. This involves specifying a consumption bundle with food including home-produced food and nonfood components. The nonfood expenditures include nondurables and the imputed use value of durables, but they exclude housing costs (both rent as well as the use value of housing). To ensure that the poverty line reflects the consumption patterns of lower-income households, the reference food consumption patterns are derived from households in the third, fourth, and fifth consumption deciles. The extreme or food poverty line is established at the level of expenditures on food needed to consume 2,1 calories per day. The nonfood expenditure component of the poverty line is computed based on those households whose food consumption reaches 2,1 calories. The sum of these two components yields the absolute or overall poverty line. This methodology provides reasonable estimates of the minimum food and nonfood expenditures needed in a particular country to achieve adequate nutrition while consuming other nonfood items considered absolutely essential. It should be noted that a poverty line does not reflect what society may think households should consume, nor does it even include all essentials of a dignified life (such as expenditures for school uniforms or health care). The NSC established the extreme and absolute poverty lines in 23 and subsequently has adjusted them for inflation on an annual basis. In 28, it updated the poverty lines because of the dramatic relative price changes and ensuing shifts in the consumption patterns of households. Though this change adversely affected the consistency in the measurement of poverty over time, leaving it unchanged would have yielded a biased picture of poverty in the country. However, to discuss the trend in poverty over the last half decade in this report, the poverty rates before and after 28 were reestimated for comparison purposes. Based on these absolute and extreme poverty lines, poverty can be measured. The three most commonly used poverty indicators are head count index, the poverty gap, and poverty severity. These are all Foster, Greer, and Thorbecke type of poverty measures. An individual is considered poor if his or her per capita consumption is less than the poverty line. The headcount index is the age of the population whose per capita consumption is less than the poverty line 19. The poverty gap measures the depth of poverty. In 29, it was 6.1. On a related note, the measure of poverty severity the squared poverty gap, which takes into account distribution among the poor is also quite low at 1.8. Mirroring the fact that poverty in the Kyrgyz Republic is mostly a rural phenomenon, the poverty gap and the severity of poverty are also higher in rural areas than in urban areas, 7.2 versus 4.2 for the poverty gap and 2.1 versus 1.3 for the severity of poverty, respectively. 8

Bishkek Issykul Jalal-Abad Naryn Batken Osh Talas Chui Bishkek Issykul Jalal-Abad Naryn Batken Osh Talas Chui Figure 8: Absolute and Extreme Poverty Gap and Severity Absolute Poverty 8. 7.2.7 7. 6.1.6 6..5 5. 4.2.4 4..3 3. 1.8 2.1 2..2 1.3 1..1 - - National Urban Rural Extreme Poverty.6.5.5.2.2.1 National Urban Rural Poverty Gap Poverty Severity Poverty Gap Poverty Severity 2. The regional distribution of poverty is also related to the rural-urban characterization of the poor. The oblasts that are predominantly agricultural and remote have higher rates of poverty. For example, Issyk-Kul, Naryn, and Osh have the highest rates of headcount poverty 46.1, 44.1, and 38.3, respectively. In contrast, more urbanized and industrialized areas, like Chui oblast and Bishkek city, have the lowest poverty rates 21.2 and 13.2, respectively. Taking into account oblast population levels, the majority of the poor reside in Osh and Jalal-Abad, where the absolute numbers of the poor reach 52, and 383,, respectively. These numbers imply that half of all the poor 52 are located in these two most populous oblasts. Although Bishkek city is the third largest region in terms of population, the absolute number of the poor there is the second lowest (116,), just above Talas oblast, with an estimated 75,. These two regions account for just 11 of all the poor in the country. So, geographic location is a very important factor explaining the divergences in poverty risks within the country. Figure 9: Incidence and Distribution of Poverty, by Oblast a. Share of Oblast s Population in Poverty b. Distribution of Poor across Oblasts 5 45 4 35 3 25 2 15 1 5 14 3 46 7 37 1 44 1 31 6 38 33 21 2 3 2 35 3 25 2 15 1 5 7 17 18 12 22 3 16 16 7 8 3 14 4 4 12 1 Absolute Extreme Absolute Extreme 9

21. The probability of being poor in the Kyrgyz Republic increases with the altitude at which the household resides. If one considers that the high-altitude zones are not only difficult to access but also remote areas with poor infrastructure and harsh climatic conditions, then it is not surprising to observe that in high mountainous areas the poverty incidence is relatively higher than in the plain zones, 48 versus 26, respectively. Similarly, in terms of extreme poverty, the high-altitude zones have extreme poverty rates that are three times higher than in the plains, 6 versus 2. Relative numbers, however, mask that in absolute terms the number of the poor in the plain zones is much higher than in the high-altitude zones, because the plain zones have a larger population base. Thus, the overwhelming majority, 62 of all the poor and 61 of all the extreme poor, reside in plain zones. Figure 1: Incidence and Poverty Distribution across Mountains and Plains 6 5 4 3 2 1 a. Incidence b. Distribution 48 46 6 High mountainous Semi mountainous 26 3 2 Plain 7 6 5 4 3 2 1 25 19 2 14 High mountainous Semi mountainous 62 61 Plain Absolute Extreme Absolute Extreme 22. Location is thus a significant factor defining the poverty status of a household. People living in rural and especially high-altitude remote zones in Issyk-Kul or Osh oblasts are especially vulnerable to poverty in geographic terms. The question is then, what is behind these geographic factors? Given the heterogeneity that one observes in each geographic area, it is difficult to discern the specific factors. Nevertheless, the fact that geography plays an important role points to the notion that one needs to look at the degree of access to markets, transaction costs, and infrastructure to explain the poverty levels in more detail. Inequality 23. In 29, the Gini coefficient of per capita consumption, a measure of inequality, was 25.5. It was higher for urban areas than for rural areas. Across oblasts, the Gini coefficient varies, with the lowest inequality in Jalal-Abad and the highest in Chui (19.7 and 25.6, respectively). Interestingly, Issyk-Kul and Osh oblasts have higher Gini coefficients than Bishkek, which is the most urbanized city in the country. 1

Figure 11: Gini coefficient by sector and oblast, 29 a: By Rural-Urban Location b: By Oblast Rural 24.1 3. 25. 2. 24.7 25.2 19.7 24.4 23.4 25.1 23.4 25.6 Urban National 25.8 25.5 23. 24. 25. 26. 15. 1. 5.. 24. The estimation of mean consumption as a share of the poverty line and the highest quintile s mean consumption show the extent of inequality. It appears that households in the first quintile have just 7 of the value of the poverty line, whereas those in the fifth quintile enjoy consumption at 2.6 times the value of the poverty line. Similarly, the shares of mean consumption as a proportion of the fifth quintile s mean consumption show that there is large gap between the poor and the wealthy. The poor s consumption accounts for only 3 and 4 of the mean consumption of the most affluent. Another implication of this statistic is that households in the third quintile seem to be vulnerable to poverty, because their mean consumption is barely above the poverty level. Viewed from this perspective, the third quintile can be considered the near poor and any large negative shocks to the mean consumption of this quintile would induce a large increase in poverty. Figure 12: Mean Consumption by Quintile, 29 a. As % of Poverty Line b. As % of Top Quintile s Mean Consumption 3. 2.5 2.6 1.2 1. 1. 2. 1.5 1..7 1. 1.2 1.6.8.6.4.3.4.5.6.5.2-1 2 3 4 5-1 2 3 4 5 Quintile by Consumption per capita Quintile by Consumption per capita Source: Staff computations based on KIHS 29 11

Living conditions 25. Disparities in dwelling conditions are large between the poor and the nonpoor. The poor live in more crowded spaces compared with both the nonpoor and average national levels. Both the total area of dwelling and the living area of dwelling per capita are significantly smaller for the poor. In addition, the poor have problems accessing basic housing amenities such as cold and hot water, gas, and heating. Although even on the national level, the availability of these services is low, the poor have a lower share of access to these utilities, which reflects the gap in living conditions between the poor and the nonpoor. Figure 13: Average Area of Dwelling per Capita square meters 25 2 19 2 15 14 15 11 15 1 5 National Poor Non poor Total area of dwelling per capita (m2) Living area of dwelling per capita (m2) Note: m2 refers to square meters. Figure 14: Population s Access to Housing Amenities 1..9.8.7.6.5.4.3.2.1. Central heating Individual heating system Water supply Sewage system Hot water supply Central gas supply Bath or shower Telephone National Poor Non poor 12

26. One of the positive legacies of the Soviet era is that power supply coverage is universal (1 ), both in rural and urban areas and among the poor and nonpoor. Another legacy is that because the power supply is heavily subsidized from the budget, fiscal constraints mean that the infrastructure in the energy sector is gradually deteriorating. Electricity tariffs are quite low in absolute terms at som.7 per kilowatt, but despite this there are clear differences in electricity consumption between the poor and the nonpoor and between consumption quintiles. Figure 15: Annual Electricity Expenditures per Capita (in som) 9 8 7 6 5 4 3 2 1 335 394 472 588 798 1 2 3 4 5 Quintile by Consumption per capita Figure 16: Annual Electricity Expenditures, per capita by Poverty Status (in som) 7 6 5 4 3 2 1 265 Extreme Poor 359 Poor 591 Nonpoor Demographic characteristics 27. The incidence of poverty is higher in larger households.. The relationship between household size and poverty headcount rate is positive and monotonic: the risk of poverty is more than two times higher for a family of five than for a family of three. Thus, the average size of the poor household is 5. persons, whereas in nonpoor households the average is only 3.5 family members, and a national average of 3.8 persons. The positive relationship between household size and extreme poverty rates holds as well: the size of the household for the extreme poor is 5.3 people. A similar relationship holds in urban and rural areas. The average size of a poor rural household is 5.2 people whereas the nonpoor household includes just 3.8 members. Similarly, in urban areas the average poor family consists of 4.5 persons, whereas the size of the average nonpoor family is 3.1 members. 13

Poverty Rate number of household members Figure 17: Household Size, by Income and Location 6. 5. 4. 3. 5. 3.5 3.8 4.5 3.1 3.3 5.2 3.8 4.2 2. 1.. Poor Non poor All Poor Non poor All Poor Non poor All National Urban Rural Figure 18: Relationship between Household Size and Absolute Poverty Incidence Rate 6 56.1 5 4 36. 44.3 3 27.1 2 1 15.1 6.1 3.3 1 2 3 4 5 6 7 or more household size in number of persons 28. It appears that behind the positive relationship between household size and poverty status is the demographic composition of the household. On the national level, the numbers of both children and adults are higher in poor households than in nonpoor households (except for the age group of 45 64 years). Given that the number of elderly in both poor and nonpoor households is relatively equal.2 and.23, respectively it appears that poor households are associated with a higher number of children in the family. This is true regardless of the regional rural-urban divide: poor families are associated with higher numbers of children and working-age adults. 14

Figure 19: Age Composition of Poor and Nonpoor Households Average number of persons 1.6 1.4 1.2 1..8.6.4.2..6.4.3 Figure 2: Age Composition of Households, by Income Category and Location Average number of persons 1.3 a: Urban b: Rural.7.8 Poor Nonpoor All 1.2 1..9 1..7.8.7.6.7.2.2.2 under 5 5 to 14 15 to 29 3 to 44 45 to 64 65 and older age group Urban Poor Urban Nonpoor Rural Poor Rural Nonpoor 1.4 1.2 1..8.6.4.2.5.2 1..6 1.2.8 1..6.7.6.2.2 1.6 1.4 1.2 1..8.6.4.2.7.3 1.5.8 1.2 1. 1..7.8.7.3.2. under 5 5 to 14 15 to 3 to 29 44 age group 45 to 64 65 and older. under 5 5 to 14 15 to 3 to 29 44 age group 45 to 64 65 and older 29. Further decomposing the households by number of children reveals that poor families are predominate in the categories of households with two to three children and those with more than three children, whereas in the categories of households with no children and with one child, nonpoor families are proportionately more common. In short, adding a child to a family with one child increases the risk of poverty. This correlation is also reflected in rural and urban areas. In both cases, poor households have more children. 15

Figure 21: Distribution of Households by Number of Children and Poverty Status 6 5 4 3 2 1 Poor 52 Nonpoor 42 38 All 31 25 27 24 18 18 11 4 1 2-3 4+ number of children in household 8 Figure 22: Distribution Households by Number of Children and Poverty Status, for Urban Rural Areas 6 5 4 3 2 1 15 38 Urban 29 26 49 33 Poor 1 2-3 4+ number of children in household Nonpoor 8 3 Rural 3. Another aspect of the relationship between demographic composition and poverty can be seen by looking at the poverty incidence by dependency ratio. 4 It could be assumed that the higher the number of children in the household, the more difficult it is to maintain adequate consumption expenditures above the poverty line. If, however, the larger household size also implies more adults who might work, then one would not see a difference in dependency ratio. The estimated dependency ratio shows that there are indeed large differences in this indicator between poor and nonpoor households as seen in figure 23. At the national level, the dependency ratio for the nonpoor is.57, whereas for the poor the ratio is.98 (that is, for every adult there is a child to support). This 6 5 4 3 2 1 1 Poor Nonpoor 27 28 15 53 41 22 1 2-3 4+ number of children in household 4 4 Dependency ratio = (sum of persons over age 64 and under age 15) / (number of persons age 15 64). 16

relationship holds for both rural and urban areas but is more pronounced in rural areas, where the dependency ratio in poor households is significantly higher than in nonpoor households. Figure 23: Average Dependency Ratio, by Poverty Status and Sector 1.2 1..8.6.8 1.1 1..5.6.6 Urban Rural National.6.8.7.4.2 - Poor Nonpoor All 31. In terms of age, the incidence of poverty is highest among households whose heads are 3 34 years and 35 39 years of age 46 and 36, respectively. However, given the larger population base of the 65 and above category, this category has the largest share among the poor (16 ), This observation points to the fact that the risk of falling into poverty varies with the age of the household head; it initially rises, reaching a peak at 3 34 years, and then again rises beginning at the age of 6 years. Figure 24: Poverty Incidence and Distribution by Household Head s Age 5 45 46 Poverty Rate Distribution of the Poor 4 35 3 27 31 36 28 29 29 29 32 33 25 2 15 12 14 13 15 14 16 1 5 8 5 5 3.2.2 15-19 2-24 25-29 3-34 35-39 4-44 45-49 5-54 55-59 6-64 65+ Household head's age in years 17

BOX 2: Sensitivity Analysis of Per Capita versus Adult Equivalence Scales Specification The issue that frequently arises in poverty analysis is whether to use per capita or adult equivalence scales in measuring consumption. This is because of the recognition that demographics might be behind the different needs of household members: children, adults, and the elderly. In addition, larger families might benefit from economies of scale in consumption. These might eventually introduce bias in estimates of poverty rates and lead to erroneous conclusions, especially relating to demographics and poverty. Good practice is to test the sensitivity of the results of poverty rates using per capita and adult equivalence scales. We have used the following adult equivalence weights to reestimate poverty incidence among households with different demographic composition: (N a +.67N c ).8, where N a = number of adults, N c = number of children. The table displays the results of the sensitivity analysis. Table 3: Absolute Poverty Rates, Using Per Capita and Adult Equivalence Scales Number of adults (1) Number of children (2) Poverty rate, per capita, (%) (3) Poverty rate, adult equivalence, (%) (4) Difference (4)-(3) 1 3.3 1.8 7.4 1 1 8.8 22.3 13.5 1 2 39.4 39.4. 1 3 28.2 28.2. 1 4 51.3 14.4-36.9 1 5 1. 1.. 1 6 1. 1.. 2 5.6 17.4 11.9 2 1 14.6 25.6 11. 2 2 3.2 3.2. 2 3 47.4 37.7-9.6 2 4 67.7 45.7-22. 2 5 71.5 57. -14.5 2 6 1. 97.8-2.2 3 9.4 15.8 6.4 3 1 25.5 32.4 7. 3 2 3.1 29.6 -.5 3 3 42.6 33.4-9.2 3 4 51. 49.4-1.5 3 5 71.1 37.6-33.5 3 6 1. 1.. 4 24. 33.4 9.4 4 1 29.6 33.3 3.8 4 2 38.3 37.2-1.1 4 3 51. 42.5-8.5 4 4 85.1 33.6-51.5 4 Total 5 Total 89.2 31.7 89.2 31.8..1 It appears that, in total, the rates are virtually unchanged when we compare the per capita and adult equivalence poverty rates, 31.7 present versus 31.8. However, household composition has a significant impact on the difference between the two methods. The results show that for smaller household size, using the adult equivalence method renders higher poverty than using the per capita estimation. In contrast but as expected, for larger families with many children, adult equivalence weights show lower poverty relative to the per capita method. The results of this analysis should be kept in mind when interpreting data, but in this report the case for using adult equivalence is not compelling because the choice of parameters (weights) is arbitrary, which introduces subjectivity. In the end, the use of the equivalence scale provides a similar ranking of different households to the ranking obtained when applying the per capita method, which allows us to continue using the per capita method. 18

32. So, it appears that an additional important dimension of poverty is the demographic structure of the family. It is useful to think about this relationship from the perspective of causality: whether poverty creates the larger households or larger households are more prone to poverty. It is quite a complex issue and it is not be possible to resolve it within the framework of this report. Nevertheless, it seems that current policy measures to focus the social safety net toward households with children is warranted and supported by the micro data. Gender 33. Interestingly, the poverty rate is higher for male-headed households. 5 According to the data, the poverty incidence in male-headed households is 33.3, compared with 28. in female-headed households. This relationship is more pronounced in rural areas, where male-headed households dominate the poor by 7 over female-headed households. In urban areas, it is the opposite: households with female heads have higher rates of poverty. For the incidence of extreme poverty, male-headed households have a rate of 2.9, marginally lower than for female-headed households, at 3.3. Figure 25: Gender of the Household Head and Poverty a: Absolute Poverty b: Extreme Poverty Male headed HH Female headed HH Male headed HH Female headed HH 8. 7. 74.5 8. 7. 68.2 6. 6. 5. 5. 4. 3. 33.3 28. 25.5 4. 3. 31.8 2. 2. 1. 1. 2.9 3.3.. Absolute Poverty Rate Distribution of the Poor Extreme Poverty Rate Distribution of the Poor 5 Head of household is defined as the person whom all members of the household regard as the head and who is responsible for running the household (regardless of the presence of a partner). 19