HEATMAP: bne IntelliNews Despair index

HEATMAP: bne IntelliNews Despair index
Many of the counties of New Europe have better despair index scores than the EU average
By bne IntelliNews January 16, 2019

This is the third in a series of articles featuring heatmaps of the main macroeconomic indicators that allow direct comparisons between the countries of New Europe. They are part of a package that includes bne IntelliNews' OUTLOOK 2019, detailed country reports looking at the prospects for 2019 in each of the countries we cover. See a complete list of the OUTLOOK reports here. In addition, bne IntelliNews publishes detailed monthly country reports on a selection of the most important countries in our patch. See the OUTLOOK country list page for more details.

 

As part of the series of heatmaps to compare the macro fundamentals of the countries in New Europe, bne IntelliNews has updated its despair index that brings together inflation, unemployment and poverty.

bne IntelliNews invented the despair index in a piece entitled “The poverty of nations” in 2011 as a way to better compare the pain of transition.

The problem is the classic “Misery Index” is simply the sum of inflation and unemployment. Economists use it as a shorthand to judge how painful a crisis or slowdown is for the lower half of the population. But this index doesn't fully capture the pain of the transition countries following the collapse of the socialist experiment in 1991.

In the first years after the collapse of the Soviet Union the poverty rate soared to as high as 60% of the population in some places. Since then it has recovered dramatically, but remains very unevenly distributed. One of the ironies of transition is that those countries that didn't make a shock change to capitalism and kept their unreformed Soviet institutions functioning, such as Belarus, have done much better at containing poverty than those that made a complete change like the Baltic states.

The battle against poverty recolours the politics of transformation. While the economic experts at the International Monetary Fund (IMF) and other western institutions talk about the need to put the economy on a market footing, what that did was throw an entire generation – those aged around 45 or older in 1991 – under the bus, as they were incapable of adapting to the new realities. And even if they were, no one in the new companies wanted to employ them. Far easier to train young people as everyone had to be retrained.

The despair index is the simple addition of the poverty rate, inflation and unemployment. In an ideal world the index number should be around 4% (0% poverty, 2% inflation and 2% unemployment).

What is unnerving is not even the richest and most developed countries have been able to eradicate poverty, which was 17.3% in the EU in 2018. The best any country in the EU has managed in the last decade was France, which got it down to 15%.

(Poverty numbers are actually hard to come by and the poverty line varies widely from country to country. This chart uses the latest available number taken from a variety of sources like Eurostat, the World Bank and various academic studies. The issue of different poverty lines is not taken into account here, but as poverty is a relative concept the conclusions are still generally valid.)

 

Eastern Europe

The EU is the base line and poverty was relatively high at 17% in 2018 as the continent is still recovering from the 2008 crisis when youth unemployment spiked at 50% in some countries and the prolonged austerity has still not worn off. At the same time EU inflation was a low 1.6% in November and unemployment was a modest 7.9%, giving the EU a despair index value of 26.8.

The surprise in Eastern Europe is that Belarus has an extraordinary despair value of only 8.3 – the lowest in the entire Soviet block – mainly because poverty is a very low 3.2%.

Belarus’ President Alexander Lukashenko is viewed as a slightly crazy autocrat from outside the country, but inside he retains a core popularity because of this low despair index number. Unlike Russia where life expectancy plunged, pensioners and middle aged employees in Belarus in 1991 continued to get much of the Soviet era support and kept their jobs while other countries crashed around them.

“Perhaps one of Lukashenka’s greatest achievements in Belarusian society has been his fight against poverty. In the worst years of the 1990s, half of the population of Belarus was languishing below the poverty line. This figure is now 10 times smaller,” the World Bank said in a report on poverty.

However, Belarusian statistics cannot be taken entirely at face value. The official unemployment rate is 0.5% but the World Bank estimates true unemployment is probably five times higher.

Poverty is a big issue in Russia too. Just under 20mn Russians are on or under the poverty line and President Vladimir Putin promised to halve the number as part of his May Decrees programme to “transform” the country.

However, the poverty rate in Russia was 13.2% in 2018 and together with post-Soviet record low unemployment and inflation Russia is in the top ten. Russia’s low despair index number of 20.6 is even ahead of the EU.

Like Lukashenko, Putin has earned a lot of credit with his people for bringing down the despair index since he took over in 2000. Under former president Boris Yeltsin poverty got up to 60% and hyperinflation topped 2,000% at its worst; Russia’s despair index was ten times higher than those in Central Europe during the nadir in the 90s.

Putin’s administration saw income levels increase in the early 2000s and drove down the poverty rate from 29% in 2000 to 10.7% in 2012, its best result. Unfortunately, the income levels didn’t remain and the poverty rate has been growing slowly since to 13.5% in 2016, before starting to fall again last year. Moreover, if Russia’s inflation rises from last year’s low of 3.2% to the 6% that is expected for this year, the despite index would be pushed up to 23.6 and Russia’s ranking in the despair index will fall from its current seventh place to ninth. A rising despair index represents real pain for the population, but Russia would still rank on a par with or better than most Central European countries and ahead of the EU.

Perhaps unsurprisingly Ukraine’s despair index is a whopping 44 at the moment, ranking it 26th out a total of 33 countries in our survey. But what is surprising is that even 44 is a pretty low result given the extent of the economic collapse in 2015 when the economy contracted by 15%. In the depths of the 1998 crisis many countries had despair indices north of 60.

Poverty was 24.5% in 2017 – almost double Russia’s rate – but the number has been falling. Unemployment was a steady 9.5% in 2018, which is painful, but not a catastrophe. And inflation is a high 10% but that was also falling as a result of resolute action by the National Bank of Ukraine (NBU) to keep rates high. All said and done Ukraine is dealing fairly well with its crisis as far as despair is concerned.

Central Europe

Central Europe is doing a lot less well in terms of despair given the region has been on a three year long boom. The standout success in the region is Czechia, which has an extremely low despair index number of 15.1, mainly thanks to very low poverty and modest levels of inflation and unemployment, that ranks it in fourth place overall.

Poland is doing much less well due to relatively high poverty of 17.3% coupled with an uncomfortable 5.7% unemployment level to give it a despair score of 24.3. And part of Hungarian Prime Minister Viktor Orban’s enduring popularity with his base is connected to Hungary’s low despair number of 21.2 – better than the EU – thanks to its low poverty levels, modest inflation and low unemployment.

The surprise from Central Europe is the Baltic States which all score very badly as they all suffer from high levels of poverty (Estonia: 21.7%, Latvia: 21.8%, Lithuania: 21.9%) that has given them all poor despair index numbers of 29.9-32.7 and rank them in the middle of the table.

However, this poor showing is surely partly due to the differences in where the poverty line is set. In Central Asia the line is drawn at those that live on $1.90 a day or less. In Estonia in 2016 a person was considered to be living in relative poverty if his/her equalised monthly disposable income was below €468. In 2016, the income of the poorest and the richest quintile of the population differed 5.8 times.

For comparison, Russia’s average income in 2018 was €532 and the poverty line was set at €134 equivalent. However that does not take purchase price parity (PPP) into account, which would increase the minimum needed by 2.3 times. In PPP terms the Russian poverty line is about €310 – so not that far from the Estonian poverty line.

Factoring in all these adjustments the despair index in the Baltics is uncomfortably high but still acceptable at about 30.

Southeast Europe and Central Asia

The bottom half of the list is made up largely of the countries from the Balkans, the Caucuses and Central Asia – with a few outstanding exceptions. Amongst the top five countries with the lowest despair indices are Kazakhstan (ranked second after Belarus), Azerbaijan (third) and Moldova (fifth).

Perhaps it is no surprise that raw materials producing countries do well in the despair stakes as their leaders are careful to spread enough of their oil wealth about to placate the populace. Poverty in both Azerbaijan and Kazakhstan (and Russia) is extremely low.

At the same time these southern countries are also exhibiting the “Belarus effect” where governments failed to implement market reforms and kept many of the old Soviet institutions going that shore up support from their older base and keep them in power. Given that poverty in Uzbekistan Tajikistan is 12.3% and 32% respectively, a country’s oil wealth looks like it can shave some 10-20 points off the poverty rate. And also on this basis Uzbekistan looks like it was a well run dictatorship under the previous president Islam Karimov, who died last year, while Tajikistan looks to be extremely badly run under President Emomali Rahmon.

All the countries at the bottom of the list have despair scores on the order of 45-55 and poverty and unemployment are the blights they have to bear.

Iran ranks third from the bottom, but this is largely due to extremely high inflation that soared following the re-imposition of sanctions, so it should be able to recover. Turkey is second from the bottom and all three indicators are high following its currency crisis this year and will take a lot longer to recover. Kosovo is the only country to have a score over 60, which is a full blown crisis score and somewhere it has been for several years now.

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