3 September 2011

The effects of the IMF era on Greece - by Manos Matsaganis and Chrysa Leventi

Greek financial crisis has alarming effect on poverty levels

21 August 2011


New research from members of ISER’s EUROMOD project shows that levels of poverty among the Greek population have risen alarmingly since the financial crisis hit last year. The research concludes that policies to reduce Greece’s deficit need to be redesigned and stresses the importance of fighting tax evasion.

The research by Manos Matsaganis and Chrysa Leventi from the Athens University of Economics and Businessshows that as a result of the austerity measures and the wider recession in Greece, relative poverty (as measured conventionally, by reference to a poverty threshold of 60% of median incomes) has increased from 20.1% in 2009 to 20.9% to 2010. Extreme poverty (measured by reference to a threshold of 40% of median incomes) has followed a similar pattern, rising from 7.3% to 8.0%.

The researchers say that while these figures may appear unimpressive, poverty was shown to have risen to 25.5% if anchored in pre-crisis terms (measured by reference to a threshold of 60% of median incomes in 2009, adjusted for inflation). They argue that the latter indicator is better suited to periods of rapid change in living standards, better approximating the experience of impoverishment when nominal incomes fall and prices rise (as was the case in Greece in 2010 relative to 2009).

Particularly alarming, the researchers say, is the situation of households headed by unemployed workers. On the one hand, because of the sharp rise in unemployment among primary earners, the relative weight of such households in the population has increased considerably. On the other hand, the risk of poverty within this group has risen further: of all individuals living in a household whose head was unemployed, 38.5% had an income of less than 40% of median, while the proportion of those with income below 60% of median was 60.1%.

Manos Matsaganis commented:
“Taking into account that the maximum duration of unemployment insurance benefit is 12 months, that unemployment assistance benefit has narrow eligibility conditions and suffers from massive non take up, while the rate of unemployment (and of long- term unemployment) is expected to remain high in the immediate future, poverty among the unemployed is certain to become the new social question par excellence.”

The research, which makes use of EUROMOD, a tax-benefit microsimulation model for the European Union (EU), showed that changes in inequality were less pronounced, while their general direction was rather indeterminate: on the basis of available evidence, the team was unable to say with any degree of safety whether the income distribution in Greece became more or less compressed as a result of the crisis. In terms of relative income share, although the richest decile appeared to have lost ground, so did the two poorest deciles.

Income losses were far greater for the rich than for the poor in absolute terms (i.e. in euros). However, in relative terms (i.e. as a proportion of their income), lower income groups suffered a significant loss of income. For instance, households in the bottom quintile (i.e. the poorest 20% of the population) lost an estimated 9% of their income, compared to an income loss of 11% for households in the top quintile.

Some of the government’s austerity measures seem to have had a progressive effect: either because special care was taken to make a particular policy “fair” by design (e.g. changes in income tax, introduction of pensioners’ solidarity contribution), or because those most affected were located towards the top of the income distribution (e.g. public sector pay cuts). However, this was partly offset by the regressive effect (albeit weak) of pension benefits cuts. Taking into account VAT rate increases would tilt the balance decisively in the latter direction: as a proportion of their income, the poor have contributed more than the rich to the government’s fiscal consolidation effort.

Manos added:
“Our findings show that, in order to share the burden of austerity more equitably and to minimise losses for lower income groups, policies to reduce Greece’s deficit need to be redesigned. In particular, the importance of fighting tax evasion cannot be overstated: it is crucial from a fiscal point of view (improving tax collection would help reduce budget deficits), as well as from a political point of view (restoring distributional justice would go a long way towards making austerity measures more acceptable).

“Quite apart from the effects of the austerity, the wider recession (and, in particular, the sharp rise in unemployment) has raised the demand for social benefits. So far, the Greek government’s response has been inadequate. Even though the number of unemployed workers rose by 45.1% in December 2010 compared to the same month a year earlier, the number of unemployment benefit recipients over the same period went up by only 9.6%. Rather perversely, housing benefit was suspended in 2010, partly because the crisis slowed the flow of social contributions into the relevant scheme. The frantic search for fiscal savings has not spared social services, some of which suffered significantly. On the whole, the supply of social benefits seems to have been reduced rather than increased. And yet, to prevent the economic crisis from turning into a social catastrophe, a concerted effort is needed to tighten the social safety net and to compensate the weakest groups from its adverse effects.”


The active link for the article is: http://www.iser.essex.ac.uk/2011/08/21/greek-financial-crisis-has-alarming-effect-on-poverty-levels