Developing a safety net for Ukraine

by Rohozynsky, Oleksandr.

This dissertation explores issues of development of social safety nets in countries in transition, Ukraine in particular. The dissertation explores whether reducing social security expenditures to stimulate economic growth policy is an effective way to combat poverty in a transition country based on the case of Ukraine. The dissertation provides overview of the current development of social safety nets in the Eastern Europe and CIS countries, and discusses in great detail social safety net in Ukraine. The dissertation develops a sequence of increasingly sophisticated forecasting models to explore fiscal and economic implications of recent increases in social welfare spending in Ukraine: a simple (naïve) model macroeconomic model; a macroeconomic model with GDP feedback; and a microsimulation model. The analysis based on the models suggests that the naïve macroeconomic model may significantly underestimate costs of SSN in Ukraine. More sophisticated models with GDP feedback of social expenditures estimate significantly higher costs of SSN as percent of GDP. The model is based on the parameters, estimated over the sample of developed countries. Because developing countries may be more responsive to the changes in the size of expenditures than developed countries, the size of the effect of reduction in social expenditures may be smaller than the actual effect. However, the model with GDP feedback provides better conservative estimate of the costs of SSN reforms than simple model. In order to study micro-level effects of the social safety net reforms, the dissertation creates several microsimulation models for Ukraine. Simple micro-level model suggests that it is possible to establish budget-neutral minimal income guaranty policy in Ukraine that significantly reduces number of people living in extreme poverty compare to current policy. However, the budget-neutral policy can not guaranty income at the levels currently established by Ukrainian policy makers. The dissertation demonstrates that there is sufficient data in Ukraine to create static microsimulation models similar to TRIM model in the United States. This microsimulation model extends simple micro-level model by incorporating behavioral response to increase in social benefits. The model predicts higher costs of SSN reform than the macroeconomic models. Policy analysis based on the microsimulation model suggests that a policy of increasing social benefits in the current social safety net system would be the least optimal policy within the scope of evaluated policies to reduce number of people in poverty while sustaining economic growth. The dissertation concludes that available SSN financial resources would be more effective in reducing poverty if current social safety net programs were substituted by a minimal subsistence level income guarantee program. The minimal income guaranteed by the program should be substantially iii lower than the current minimal subsistence level in Ukraine. The economic growth in the country induced by this policy is estimated to have better long-term poverty-reduction effect than current social safety net. iv