A study by the International Labor Organization (ILO) and the European Bank for Reconstruction and Development (EBRD) wrongly concludes that the program of paying 100 euros to adult citizens had “astonishingly strong effects on reducing inequality and poverty” in Serbia, according to the Fiscal Council. According to him, this is a wrong conclusion, which arose as a consequence of “fundamental mistakes and omissions in the conducted analyzes”.
According to the Fiscal Council, the ILO and EBRD study exaggerates the real effects of the 100-euro payment measure on poverty reduction three and a half times.
“A correct analysis, on the contrary, shows that the payment of 100 euros to all adult citizens is a bad measure of social policy, which does not enable a permanent or significant reduction of inequality and poverty,” the Fiscal Council assessed.
The Council lists the basic mistakes in the ILO and EBRD study.
“First, it is not authoritative to measure the effect of a one-off measure on reducing inequality and poverty, because in this way no lasting improvement of these long-term social problems can be achieved. Moreover, the large indebtedness of the state, of over 600 million euros, in order to pay 100 euros to everyone, will reduce the budget possibilities for helping endangered citizens and thus potentially increase poverty in the future,” warned the Fiscal Council.
Second, as stated, in addition to the fact that the ILO and EBRD simulations are not methodologically meaningful, they are also mathematically miscalculated.
“Simulations exaggerate as much as three and a half times the one-time (temporary) effect of poverty reduction in 2020,” the Fiscal Council points out.
Third, contrary to good research practice, the ILO and EBRD study does not consider alternative options that the same, or smaller, budget funds could have a significantly greater effect on reducing inequality and poverty – provided they were targeted at crisis-stricken households, rather than which are indiscriminately distributed to all adult citizens.
Although the analysis of the ILO, the EBRD or the Fiscal Council may seem complicated to the general public, in fact it is a trivial calculation that analyzes the effects on reducing inequality and poverty, the Fiscal Council explains everything with a simplified example.
“If we take a simplified example where Marko earns 200 euros and Ivan 800 euros, the inequality of their income is 4: 1. After paying 100 euros to everyone, Marko’s total income will be 300 euros, and Ivan’s 900 euros, which temporarily reduces inequality to 3: 1. This simple example shows not only the triviality of the conclusion that the payment of 100 euros (temporarily) reduces inequality, but also imposes far more rational alternative policies to reduce inequality and poverty,” explains the Fiscal Council.
In the case of targeted payments only to vulnerable citizens, only Marko would receive 100 euros, the budget cost would be twice as low and the reduction in inequality would be higher and would be 2.7: 1 (Marko’s 300 euros compared to Ivan’s 800 euros).
“We will use the logic from this simplified example below to show the far more efficient and cheaper inequality and poverty reduction programs that were possible to implement,” the Council said.
The ILO and EBRD study miscalculates and overestimates the effects of paying 100 euros on reducing inequality.
ILO and EBRD researchers used data from the SILK survey of the Republic Statistical Office, which contains representative data on individuals and households in the Republic of Serbia.
The simulations were done by adding income of 100 euros to each adult individual, which further leads to a reduction in the Gini inequality coefficient from 35.6 to 34.2 – or 1.4 percentage points.
“Using the SILK survey for simulation purposes is an absolutely justified approach in this case, but ILO and EBRD researchers unjustifiably failed to make an adjustment for the time value of money – because the data from the SILK survey refer to 2017, and actual payments were made in 2020,” point out the experts of the Fiscal Council.
And they add: As economists, as well as citizens, know well – the same amount of money from 2017 is worth less in 2020.
“In fact, the average growth of citizens’ incomes from salaries, pensions and other incomes in the period from mid-2017 to mid-2020 was 18 percent. When this corrective factor is taken into account, we get that the real (one-time) reduction in inequality was 1.1 percentage points, and not 1.4 as stated in the study,” the Council explains.
The Fiscal Council concludes that the ILO and EBRD study exaggerates the real effects on poverty reduction three and a half times.
Under the notion of poverty, the so-called relative poverty, ie the percentage of citizens who receive less than 60 percent of the median income per household member.
“This is precisely why relatively high poverty rates can be seen in some developed EU countries – because the poverty line in those countries is set relatively high, in line with their incomes,” the Fiscal Council said.
The approach to measuring relative poverty is being followed by a study by the ILO and the EBRD.
“However, the concept of relative poverty by definition means that as the state develops and the incomes of citizens increase, so does the limit of relative poverty. However, the study of the ILO and the EBRD, with a trivial mistake, overlooks the fact that the payment of 100 euros to adult citizens increased the total income of citizens by about 600 million euros – that there has been an increase in media income and thus an increase in the relative poverty line. That is why the effect of the payment of 100 euros on poverty reduction is many times exaggerated – which actually amounts to 0.8 percentage points and not 2.8 percentage points as claimed in the study,” the Fiscal Council explains in detail in its analysis, Nova reports.
