ARMENIA - World Bank Group

38 Pages·2011·0.82 MB·English

Report no.

ARMENIA
Social Assistance Programs and Work
Disincentives

March 2011

Human Development Sector Unit
Europe and Central Asia Region
The World Bank
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CURRENCY EQUIVALENTS
(Exchange Rate Effective as of March, 2011)
Currency Unit = AMD (Armenian Dram)
AMD 1.00 = 0.0027 US$
US$1.00 = 365 AMD

FISCAL YEAR
January 1 to December 31

ABBREVIATIONS AND ACRONYMS

AMD Armenian Dram
ECA Europe and Central Asia
FBP Family Benefit Program
GDP Gross Domestic Product
GOA Government of Armenia
ILCS Integrated Living Conditions Survey
IV Instrumental Variables
MLSI Ministry of Labor and Social Issues
NSS National Statistics Service
OECD Organization for Economic Co-operation and
Development

Regional Vice President: Philippe H. Le Houerou
Country Director: Asad Alam
Acting Sector Director: Mamta Murthi
Country Manager: Jean-Michel Happi
Sector Manager: Jesko Hentschel
Task Team Leaders: Lire Ersado / Victoria Levin

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Acknowledgement

The report is a product of the South Caucasus Regional Programmatic Poverty Assessment
work. The report is prepared in response to the request by the Office of the Prime Minister
and in part based on the findings of a World Bank mission that visited Armenia during
November 2010. The World Bank team is grateful to several stakeholders in the Government
of Armenia for their useful inputs and guidance. In particular, we would like to express our
appreciation to H.E. Prime Minister Tigran Sargsyan; Minister Arthur Grigoryan, Deputy
Minister Artem Asatryan, Deputy Minister Ara Petrosyan and Social Assistance Department
Head Ms. Astghik Minasyan, Ministry of Labor and Social Issues; President Stepan
Mnatsakanyan and Household Survey Department Head Ms. Diana Martirosova, National
Statistical Services of the Republic of Armenia; Deputy Minister Vardan Aramyan, Ministry
of Finance; Deputy Minister Mushegh Tumasyan, Ministry of Economy; Ms. Sona
Harutyunyan, Head of State Employment Services; Ms. Adrine Nikoyan, Head of Arabkir
Family Benefit and Social Services Center; and Mr. Zinavor Sargsyan, Head of Abovyan
Social Services Center.
The report is prepared by a team led by Lire Ersado. Victoria Levin is the main author of the
report, with contributions from Lire Ersado, Isil Oral, Basab Dasgupta, and Natsuko Kiso
Nozaki. The work was undertaken under the guidance of Asad Alam (Regional Director,
ECCU3), Mamta Murthi (Acting Sector Director, ECSHD), Jean-Michel Happi (Country
Manager, Armenia), and Jesko Hentschel (Sector Manager, ECSH4). Peer reviewers were
Aleksandra Posarac (HDNSP), Andrew Dabalen (AFTP3), and Nobuo Yoshida (PRMPR).
Anne Anglio, Sujani Eli, and Carmen Laurente provided able assistance with the production
of the report.

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Executive Summary

1. The objective of this note is to assess the extent of work disincentives of Armenia’s
Family Benefit Program (FBP). The Government of Armenia (GOA) has expressed
concerns over the potential work disincentives effects of its social assistance programs. The
most important of these programs is the FBP, which was established in 1999 after Armenia
consolidated several Soviet-era categorically targeted programs into a single cash-based
social safety net. To achieve this objective, the note looks at different aspects of the FBP.
First, it reviews the international evidence, from both developed and developing countries, on
work disincentives impacts of similarly designed social assistance programs. Second, it
analyzes the demographic and labor market profile of the beneficiaries to quantify the size of
beneficiary population that can participate in the labor force and compares their labor market
characteristics to non-beneficiary population. Third, it compares the size of the program
benefit in relation to consumption expenditures of beneficiary families and the opportunities
in the prevailing labor markets to ascertain if the FBP transfer is large enough to “live off”
the benefit and create strong disincentive to work. Fourth, it reviews the program with
respect to any implicit or explicit design features that may discourage participation in self-
reliant income-generating activities. Finally, the note employs rigorous empirical methods to
ascertain the existence of work disincentives that may have been created by the FBP and to
estimate their magnitude and significance.

Main Findings
2. Overall Message. This evaluation suggests absence of any significant disincentives
from FBP on labor supply. However, as with any social assistance program, the effect of FBP
on labor disincentives should be closely monitored in the future, particularly if any changes
are made in the design of or the size of the transfer from the program. International
experience suggests several design features that can help to avert potential negative impacts
of social assistance on labor supply, such as reduction in marginal tax rates on earnings,
phased withdrawal of program benefits, and facilitated reapplication process for individuals
graduating from the program.

3. FBP families have fewer able-bodied working-age individuals and a higher
dependency ratio than a typical Armenian household. Most program beneficiary families
have children and, on average, have more disabled and elderly members than non-beneficiary
households. About 60 percent of FBP families have two or more children and 25 percent
have three or more children (Figure A). This far outweighs the share of families with
multiple children in the non-beneficiary population of Armenia. About 30 percent of FBP
families have at least one member with disability, almost twice the corresponding figure
among non-beneficiary families. As a result, FBP families have more dependents per able-
bodied working-age member than non-beneficiary households. In the absence of adequate
child care and long term care services for the elderly, it is not unreasonable to expect that
FBP families need at least one working-age able-bodied family member to stay at home as a
caretaker, which further reduces the number of beneficiaries who could be expected to
participate in the labor force.
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Figure A: FBP Households Have More Children and Disabled
No disabled in HH Disabled present in HH
No children 1 child 2 children 3 or more
FBP 71 29
FBP 26 14 36 25
Non-
Non 83 17
51 21 21 7 FBP
-FBP
0% 20% 40% 60% 80% 100%
0% 20% 40% 60% 80% 100%
Source: ILCS 2009 Source: ILCS 2009

4. Less than 18 percent of all members of FBP beneficiary families are able-bodied, of
working age, and could be expected to work. Out of the total of 372,612 FBP recipients,
only 127,339 individuals may be expected to participate in the labor force, after subtracting
the disabled, children, pensioners; individuals who belong to other non-working social
groups such as students on stipend, pregnant women, early pensioners; and those in school or
training. Further adjustments are needed to account for a stay-at-home caretaker in families
with children or disabled members, implying that some able-bodied working-age members
may have to stay out of the labor force to look after children or disabled family members. In
2009, after these series of deductions, we estimate that there were only 66,623 members of
FBP families who could work (Table A). In other words, the number of FBP beneficiaries
who can potentially work is less than 1 in 5 of all beneficiaries, or about 2 percent of the
Armenian population.

Table A: Members of FBP Beneficiary Families Who Could Work
Adjustments Remainder
Number %, FBP %, Armenia
beneficiaries population
Total FBP Beneficiaries 372,612 100 12.2
Accounting for non-working members:
- Non able-bodied / non- 219,610 153,002 41.1 5
working-age adults
- Those belonging to other 10,421 142,581 38.3 4.7
non-working social groups
- Those in school or training 15,242 127,339 34.2 4.2
Accounting for stay-at-home caretaker in families with children or disabled members:
- Able-bodied working-age 60,716 66,623 17.9 2.2
caretaker
Source: ILCS 2009

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5. The labor market characteristics of beneficiary family members who could work
are quite similar to those of identically defined non-beneficiaries. Both groups appear to
have similar rates of employment, unemployment, and inactivity. However, working-age
able-bodied members of FBP beneficiary families appear more likely to be working in part-
time and informal employment (Figure B). Working-age able-bodied members of FBP
families also have lower educational attainment than non-beneficiaries, with a median
beneficiary having completed secondary education, compared to post-secondary vocational
or technical degree for a similarly defined median non-beneficiary. Non-beneficiaries with
the same level of educational attainment as the median beneficiary have comparable
employability as the beneficiaries. Therefore, there are no significant differences between
similarly defined working-age able-bodied beneficiaries and non-beneficiaries in terms of
their labor force participation. Moreover, the size of the FBP transfer is not large enough to
discourage work.

Figure B: Labor Market Status of Individuals Who Could Be Expected to Work, by FBP Status

FBP Beneficiaries Non-Beneficiaries
Part-
time
formal
Part-time 2%
formal Full-time
Inactive 0% Inf1o7r%mal Inactive Full-time formal
13%
17% 38%
Full-time
Employed Full-time Employed
Informal
Unemployed 72% formal Part-time Unemployed 70% 16%
15% 17% informal 13% Part-time
38%
informal
14%
Source: ILCS 2009 Source: ILCS2009

6. Although receiving remittances has a negative effect on labor supply, the incidence
of remittances among FBP families is very low. While nearly 20 percent of Armenian
households reported receiving remittances in 2009, remittances reach only 13 percent of
individuals who could be expected to work and even a smaller share (about 10 percent) of
similarly defined FBP beneficiaries. In terms of labor market outcomes, receiving
remittances decreases the labor force participation and increases the probability of working
part time conditional on employment. Compared to non-beneficiaries who receive
remittances, FBP recipients who receive remittances are less likely to be employed but also
less likely to be inactive. Remittance-receiving FBP beneficiaries are twice as likely to be
unemployed (about 40 percent) than similarly-defined non-beneficiaries receiving
remittances. The part-time employment and informality rate among FBP families are roughly
the same as those for families receiving remittances.

7. Finally, empirical analysis using different impact evaluation tools overwhelmingly
supports and reinforces the findings of the descriptive results. The FBP does not create
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significant disincentives for participation in the labor force or for working in the formal
sector. There is some evidence of potential negative impact on hours worked, but it was only
for rural workers.
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I. Introduction

Rationale and Objective

1. The Government of Armenia (GOA) has expressed concerns over the potential
work disincentives effects of its social assistance programs. The most important of these
programs is the Family Benefit Program (FBP), which was established in 1999 after Armenia
consolidated several Soviet-era categorically targeted programs into a single cash-based and
targeted social safety net. The program accords priority to the poor and vulnerable social
groups such as the elderly, persons with disabilities, and families with children. While FBP
achieves a good targeting performance with about 72 percent of the program resources going
to the poor, it covers less than one-third of the poor and about 12 percent of the population.
The program is also used, along with pensions, as a vehicle for delivering additional income
support to its beneficiaries and to others who may suffer temporary economic shocks such as
the recent global recession, utility price hikes, and other hardships that overwhelm
households‟ own risk management and coping strategies. While the GOA considers
maintaining a robust social safety net crucial, it is important that the existence of such
programs does not discourage the search for self-reliant income-generating opportunities and
active participation in one‟s own and Armenia‟s growth and development.

2. This note’s objective is to respond to the GOA’s request and to assess the extent of
work disincentives from the FBP. The analysis herein is in part based on the findings of a
World Bank mission that visited Armenia on November 15-22, 2010. The note aims to
achieve its objective through the following main activities. First, it briefly reviews
international evidence, both from developed and developing countries, on work disincentive impacts
of targeted poverty alleviation programs. Second, it examines the demographic profile of FBP
beneficiaries compared to non-beneficiaries, identifying individuals who could be expected to
work and appraising their labor market opportunities and outcomes. Third, the note looks at
the size of the FBP transfer in relation to the prevailing minimum wage, average wage, poverty
line, and average consumption expenditures of Armenian households, thereby investigating whether
FBP beneficiaries can survive on the benefit alone, and whether one can substitute between wage
employment and FBP. Fourth, it looks at the FBP design features, the eligibility criteria, and
the targeting mechanism, with respect to their potential, if unintentional, negative impact on
work incentives. Finally, the note estimates the magnitude of work disincentives created by FBP
using rigorous empirical analysis.

Background

3. Armenia has a long record of social protection programs and institutional
arrangements, dating back to the Soviet era. The social protection programs, both
contributory and non-contributory, play an important role in helping individuals and families
cope with income shocks and in providing old-age security. The social protection schemes
are also used as vehicles for delivering additional support to the existing beneficiaries and to
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those who may suffer transient economic shocks such as during the recent global recession,
gas tariff increases, and other hardships that overwhelm individuals‟ and households‟ own
risk management and coping strategies. In Armenia, the contributory social insurance
benefits include pensions and unemployment insurance and are conditional on formal
employment and contribution compliance. Apart from the contributory pensions, the pension
system allows for the provision of several types of non-work-related pensions, such as
survivor‟s pension, civil and military disability pension, old-age social pension, pension for
special merits, social disability pension, and personal pension.

4. Cognizant of the importance of a well-functioning social safety net system to assist
the poor and vulnerable, Armenia also maintains an elaborate non-contributory social
assistance system. In the late 1990s, Armenia reformed its non-contributory social assistance
system in response to the need for a simple, affordable, and well-targeted social safety net.
Several Soviet-era categorically targeted programs were integrated, resulting in a single cash-
based social safety net system that accords priority to the very poor and the most vulnerable
social groups such as the elderly, persons with disabilities, and poor families with multiple
children. These changes resulted in the launching of Armenia‟s signature last-resort social
safety net program called Family Benefit Program (FBP). The FBP was introduced in 1999
to assist individuals and families who fell below a certain income level. The FBP is means-
tested on income and other proxies for poverty risk factors. Targeting of the FBP is done
using the so-called household poverty and vulnerability scoring formula (see Section IV).
The scoring formula ranks applicants in terms of their expected poverty and gives preference
to certain social groups, such as the disabled, single mothers, orphans, and families with
multiple children. Apart from the FBP, there are other small social assistance programs and
benefits, such as universal cash transfers to expectant mothers and working mothers with
infants below age 2, free access to healthcare for the poor, and social care services.

5. Armenia spent about 6.8 percent of its GDP on social protection programs in 2009.
That was a substantial increase from the level in 2007 (4.8 percent) and in 2008 (5.8 percent),
as the GOA took steps to mitigate the impact of the global economic crisis. Pension spending
rose from 3.1 percent to 5.6 percent of GDP from 2007 to 2009, driven primarily by a 60
percent increase in pension payments in 2008. In 2009, Armenia spent about 1.8 percent of
GDP on social assistance programs, including FBP, paid public works, unemployment
benefits, and social care. Armenia‟s spending on social assistance as a share of GDP is
slightly higher than the Europe and Central Asia (ECA) average of 1.7 percent, but smaller
than the 2.5 percent average for the Organization for Economic Co-operation and
Development (OECD) countries (Figure 1, left panel). Armenia‟s social protection programs
reach about 60 percent of all Armenians; among these programs, pensions have the highest
coverage (51 percent), while FBP reaches some 12 percent of Armenians.

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Figure 1: Public Spending on Social Assistance Programs and their Coverage of the
Population
Public Spending on Social Assistance Programs Coverage of the Social Protection Programs
(% of GDP) (% of population)

Source: National Statistical Services (NSS) data for Armenia, 2009; various World Bank Public Expenditure
Reviews and OECD Social Spending Database for other countries.

6. Armenia’s overall social protection programs’ coverage of the poor and the bottom
20 percent of the population is impressive. Overall, social protection programs covered 94
percent of the poorest 20 percent of the population and 79 percent of the poor in 2009, an
increase of 11 and 6 percentage points from the coverage rate of the respective groups in
2007 (Figure 1, right panel). Although not designed as an anti-poverty program, pension
benefits cover a significantly large share of the poor (70 percent) and most of the extremely
poor (91 percent), both significant improvements over the 2007 coverage rates. While FBP
achieves a good targeting performance, it covers a small share of Armenia‟s poor. In 2009,
about 72 percent of FB resources went to the poor, making it one of the well-targeted
programs in ECA (Figure 2, left panel). However, the certification process imposes a
significant burden on families in terms of time and effort to gather all the required
documents. Many poor households cannot, or feel they cannot, provide the required
documentation, and give up even applying, contributing to FBP‟s fairly low (and
deteriorating) coverage of the poor (Figure 2, right panel).

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