Income Inequality, Welfare, and Poverty: An Illustration Using Ukrainian Data

Abstract

The standard of living in Ukraine increased significantly in the 1980s, and income inequality declined. But in 1991-92 income inequality and poverty increased again, partly because government benefits went more to richer families than to those in need.

Ukraine is now faced with economic crisis on an unprecedented scale. The government has to follow rigorous demand management policies, which entail lowering the population's standard of living. To design policies that protect the poorest and most vulnerable groups in the society, it is important to understand the nature of poverty and income inequality.

Kakwani addresses the following questions: What is the extent of income inequality and is it increasing? How can observed changes in inequality be explained? Is the burden of income tax evenly distributed across the population?

The Ukrainian data base is far from satisfactory, so Kakwani's findings are only tentative. Among them: - The standard of living increased significantly in the late 1980s, then fell in the 1990s. Real per capita family income grew by an average 7 percent in 1989-90, then fell about 24 percent in 1991-92. Per capita income for families dependent on government transfers fell by more than one-half. - Income inequality declined in the 1980s, to rise again in 1991-92. In particular, the family incomes of state and collective farm workers - relative to industrial workers - improved between 1980 and 1991. The increase in inequality that occurred in 1991-92 came about, among other reasons, because government benefits tended to be redistributed to richer families, not those in need.

Poverty in Ukraine declined over the period 1980-91, from 38 percent of the population to 9 percent. But in 1992, 30 percent of the population was poor again, an alarming increase attributable both to a decline in real per capita income and an increase in income inequality. Still, income inequality was lower in Ukraine than in most other former republics of the Soviet Union.

This paper - a product of the Transition Economics Division, Policy Research Department - is part of a research project on income distribution and poverty during transition.