bne's Despair Index paints a mixed picture during the corona storm

bne's Despair Index paints a mixed picture during the corona storm
bne's Despair Index measures the pain being felt by the bottom half of society, and so far despair has ticked up a little but not a lot in most countries in New Europe
By Ben Aris in Berlin June 9, 2020

We have updated bne IntelliNews Despair Index which better reflects what damage something like the coronacrisis does to the bottom half of society in the countries of New Europe, and the good news is that so far, the impact of the crisis has not been too painful.

The Despair Index is an extension of the better-known “Misery index”, which is simply the addition of the rate of unemployment and inflation. Rising unemployment in a crisis obviously first affects the working class, and rising prices also disproportionately hurt the poor in times of crisis.

However, developed markets have social security systems, which the bottom half of society can fall back on in times of crisis, so we added in the poverty rate to better reflect the impact of a crisis on an emerging market, as few emerging markets have functioning social security services, if they have one at all.

For example, in a functioning economy inflation should be around 2%, the residual unemployment about 4% and ideally poverty should be zero, but in practice a really good score is around 8%. That gives an ideal Despair Index score of 14%. But no one has ever scored that (although France came close with a score of 18% in the booming '90s).

And to give some context: in 1991 Russia inflation was running at 1,400%, poverty and unemployment were both over 60%, giving the newly born Russia a Despair Index of around 1,800%. The countries of the former Warsaw Pact did better but their Despair Index was also in the hundreds. Happily, a crash of that magnitude is a thing of the past. These days a score of around 20% is respectable, over 30% is painful and over 40% is the sign of a dysfunctional economy.

Before going further, it should be mentioned that getting up-to-date poverty rates is very hard and here we have relied on the last World Bank survey in 2018, which is largely gathered from census data. Few countries measure poverty systematically, other than as part of the census, although there are a lot of NGOs that track poverty for specific issues, but some, like Russia, do release estimates when poverty becomes a political issue.

Despair in May 2020

bne released its last Despair Index based on November 2018 numbers as countries across the region emerged from the after-effects of several years of recession that followed the oil price shock of 2014. Today we release another one based on the latest April 2019 numbers.

As the comparison shows, there has been a deterioration across the region of some 3-5% in the Despair Index scores for many countries, with a few doing even worse. And there are a few exceptions, like Iran, that were in a separate crisis at the end of 2018 have dealt with their specific crisis in the meantime; Iran was suffering from extremely high inflation in 2018 of over 34.9%, which it has brought down to 19.8% as of April, so its Despair Index score has improved from 55.1% to a still very painful 41.3% in the meantime.

However, the first thing to note before we drill into some details is that few of the Despair Index scores have increased dramatically. While unemployment has jumped in some countries – in Ukraine unemployment spiked from 8.7% in the fourth quarter of 2019 to 13% in March and is expected to rise further – to a large extent these problems have been offset by the small increase in inflation across the entire region.

While currencies have devalued in many countries – Turkey saw the lira drop to TRY7 to the dollar vs the TRY3 to the dollar it was trading at before its current bout of currency instability started about two years ago – on the whole that has not fed through to inflationary effects like it usually does, thanks to the pandemic lockdowns that crushed consumer demand and kept prices down. In most countries inflation has only increased by a few percentage points and in some, such as Estonia, Slovenia and North Macedonia, there has even been deflation, which is good news for the working poor.

Likewise, there has been no explosion of unemployment in most countries. Unemployment has ticked up as people, especially in the service and catering sectors, have lost their jobs. But as the lockdowns have only lasted two months and governments around the world have stepped in with subsidies to keep job places open, there have so far been no Great Depression-style layoffs. Indeed, in many countries with high unemployment, especially in the Balkans, it has actually fallen over the last two years, improving those countries' Despair Index score.

The short-term nature of the unemployment spike is well represented by the US, where unemployment numbers soared after 25mn people lost their jobs in the last two months. But the latest unemployment number of May registered 13.3%, which is painful, but not a disaster.

Going forward, inflation might rise in the coming months, but for countries in New Europe the trend so far is still one of falling inflation. The outlook for improvements in poverty and unemployment still depends on solving structural problems that most countries were already dealing with before the coronacrisis hit. The massive amounts of donor money from the International Monetary Fund (IMF) Rapid Financing Instrument (RFI) and others might help improve both poverty and unemployment as governments across the region are giving the cash to pay for large Keynesian investment projects to give their countries a shot in the arm.

Winners?

Looking at the list in a little more detail reveals some surprises. The very top of the list with a Despair Index score of only 6.1% (thanks largely to an employment rate of only 0.3%) is Belarus. It is followed by Kazakhstan (12.9%) and Azerbaijan (15.8%), before we get to the first geopolitically important country, Germany (15.9%). Turkmenistan is also up there at number six with a remarkable score of 20.1%.

Of course all three of the “leaders” are Eurasian dictatorships and Belarus’ unemployment figures in particular are suspect: independent estimates put unemployment numbers at closer to 10%. However, it should be acknowledged the country has made enormous strides in reducing poverty, which has fallen rapidly from 75% of the population in 1998 to only 5.3% in 2008 and then again to under 1% in 2013. Poverty reduction and stability has been the focus of the Lukashenko government, not wealth creation and prosperity – and a large segment of the population love him for it.

At the same time, there is a serious point here, as this crisis has also shown that the more authoritarian countries have been better equipped to deal with the public health crisis as they are able to shut down their cities on a whim thanks their total control of the media, transport and security forces.

Kazakhstan’s numbers maybe massaged, but the real numbers are also probably not too far from what has been reported. Kazakhstan's poverty rate for 2017 was 8.60%, a 3.6% decline from 2016, but that was a 4% increase on 2015, when poverty was 8.1%, according to the World Bank.

Real winners

Germany is the clear winner in the crisis and German Chancellor Angela Merkel has covered herself in glory for her handling of the emergency. The Despair Index score of an impressive 15.9% is very close to the ideal score as any developed market is likely to achieve, and the long-term impact on the German economy is likely to be minimal.

Germany’s poverty ratio was 11.8% in 2018, which was down again for the fourth year in a row. And this was after the government increased the poverty threshold from €736 per month in 2005 to €999 in 2017. The poverty line for families with two children also rose constantly from 2005 to 2017.

Next on the list is Czechia, which emerges as by far the best performer from New Europe with an equally impressive score of 18.8%. The Czech economy has been booming for about five years and it is well stocked with fiscal resources, and despite the soap-opera lives of its senior politicians, is proving to be a very well run country.

But many of Czechia’s peers from New Europe are also ranked high on the list, including: Slovenia (8th place, Despair Index score of 25%); Slovakia (9th, 25%); Hungary (12th, 25.8%), and Estonia (15th, 28.6%) – all of which come in ahead of the EU average Despair Index score of 31.2% in 17th place.

Judged on the basis of their Despair Index scores alone, these countries have fully emerged from transition and should not be thought of as emerging markets.

And several of these countries come in higher than France (10th, 25.4%), USA (11th, 25.4%) and the UK (14th, 26.7%).

France has always performed well on the Despair Index, but it has slipped since November 2018, with its index score falling from an extremely good 17.1% to 24.5% now, which is almost entirely due to a jump in its poverty rate from 6.8% in 2016 to 17.4% in 2019, according to the latest data. The UK has suffered from exactly the same trend, with poverty rising from 10.4% to 22% – one of its highest results in the last 20 years, according to a Joseph Rowntree Foundation survey.

The US results are more complicated. The US has reported a sharp decline in poverty in the last two years from 17.5% to 11.8% (and it even touched 19.5% under Barak Obama). Likewise, the US jobless reports from May have been a lot less wild than first feared: there were reports that unemployment would reach 25%, which would have given the US an emerging market’s Despair Index score of 37.1%, but the actually number was 13.3%. And like many other markets, inflation has fallen to a reliable 0.3% in May from 1.5% two years ago.

However, like the basket-case countries, both the poverty and unemployment numbers are open to interpretation. The income of the middle class has declined by some 25% since the 1970s and there are an estimated 50mn “working poor”, or about 15% of the population, who have jobs but don't earn enough to sustain themselves. Likewise, the poverty in the US is also probably understated thanks to manipulation of the numbers. The poverty line for a family with two children is $25,700 but a total of 5.3% of the population live in “deep poverty” and earn half of this amount, which would make them poor by Russian standards. There is another 29.9% of the population that live “close to” poverty with incomes less than two times the poverty line, according to the 2018 Census data. The highest poverty rate by race is found among Native Americans (25.4%), with Blacks (20.8%) having the second-highest poverty rate, and Hispanics (of any race) having the third-highest poverty rate (17.6%). Whites had a poverty rate of 10.1%, while Asians had a poverty rate at 10.1%, the Census data shows.

It is the deep-set inequality that has grown in the US since the 1970s that is partly responsible for the country-wide riots we are witnessing at the moment.

Finally, maybe the most surprising of name on the winners list is Russia in seventh place with a score of 21.8%. Russia has a problem with poverty, but not a very bad one. The current score of 12.9%, according to the World Bank, is on a par with most EU countries and better than France (17.4%) and the UK (22%). And that number is down from over 14% a few years ago.

Russia’s unemployment has ticked up in the last month from a post-Soviet low of 4.3% last August to 5.8% in May, but while uncomfortable, that is not a disaster. But maybe most important is that inflation has failed to materialise and was only 3.1% in April. Indeed, until the 2014 shock when the Central Bank of Russia had to impose an emergency 17% rate hike to stop a currency meltdown, this time round the CBR was able to cut rates by an aggressive 50bp to boost growth. Inflationary pressures are so low the CBR is widely expected to shave rates by another 50bp at its next policy meeting later this month.

This is a revolutionary change in mindset at Russia’s central bank and completes its transition from emerging market to an (almost) normal economy, at least as far as macroeconomic management is concerned. Having spent the last five years preparing for the severe economic shock that new harsh US sanctions would mean, Putin’s “fiscal fortress” is well equipped to cope with the impact of the coronacrisis: hence Russia's very respectable Despair Index score of 21.8%.

Also ran

Looking at a few also-rans, then Turkey stands out as having a poor Despair Index score of 34%, which is still an improvement on the 55.7% it scored last time. The improvement is almost entirely due to the reduction in poverty from 22.5% in 2016 to 9.2% in 2018 that has been part of an ongoing fall from over 40% two decades ago – a trend that is the basis of Turkish President Recep Tayyip Erdogan’s popularity.

Persistent poverty remains the bugbear of many of the countries in Southeast Europe and the Balkans, which also suffer from high levels of unemployment. Romania and Bulgaria would both have reasonable Despair Index scores if it were not for the 30%-plus levels of poverty, mainly concentrated in their rural areas.

In Central Europe Poland and Lithuania stand out as doing especially badly with Despair Index scores of 37.7% and 40.5% respectively. Poland’s poor showing is almost entirely due to an almost tripling of unemployment from 5.7% to 15.4% over the period, whereas in Lithuania it was a seven-point increase in poverty that wrecked its result.

In Eastern Europe, Ukraine can expect it Despair Index score to erode. With its weak economy and thin resources, the economy is likely take a very painful hit from the coronacrisis. The poverty rate in Ukraine is predicted to increase significantly in 2020 due to the economic downturn caused by the coronavirus (COVID-19) pandemic, with 6.3mn more people falling into poverty from a total population of 43mn, of whom 1.4mn will be children, according to the conservative scenario prepared by the Cabinet of Ministers of Ukraine. That will push the poverty rate up from 27% to 44% and its Despair Index score from the already bad 42.1% to a catastrophic 59.1% – worse than most countries in the Balkans or Central Asia. However, this scenario can be avoided by labour migrating back to western and central Europe as they have in recent years, but clearly Ukraine is going to have a very difficult few years ahead of it.

In Central Asia Turkmenistan is one of the best performing countries, but no one believes the official statistics. Its neighbour Tajikistan is also run by an autocratic throwback to the Soviet system, but the country has made a lot of progress in reducing poverty, which fell from 83% in 2000 to 27.4% in 2018. However, the rate of job creation has not kept pace with the growing population, leaving the economy vulnerable to external shocks.

And the countries at the very bottom of the list such as Albania, Bosnia and Kosovo all have scores in the 40s or above. In poor countries such as Kosovo the issue remains predominately a mix of the deep structural problems of unemployment and poverty. The wins against inflation in these countries make little difference and they already had poor despair scores before the coronacrisis hit.

It's a long slow climb. Uzbekistan is going through a radical transformation, but like its peer group it is still weighed down with big poverty and unemployment issues and its Despair Index score of 35.9% is slightly worse than in the previous survey. The current crisis is bad news, but for most of these countries it is only yet another problem to deal with.

 

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