Ukraine war pushed over 70 million people into poverty, but cash transfers can help: UNDP

A market in Madagascar. (Credit: Pixabay/Fifaliana Joy)

In countries affected by the cost of living crisis due to the war, cash transfers can help reduce poverty rates.

A whopping 71.1 million people in developing countries have sunk into poverty due to the raging war in the eastern periphery of Europe, according to a report released on Wednesday by the UN Development Programme (UNDP).

UNDP administrator Achim Steiner said that wealthier countries should step up with financial support and not step back. “Policy choices really matter if your focus is on helping the poor and vulnerable. They need to be not by default but by design put at the centre of attention right now,” he told reporters.

Calling the current cost of living crisis as the single largest crisis seen at least in a generation, Steiner said: “The impact on poverty rates is drastically faster than the actual shock of the Covid-19 pandemic.”

The continued havoc caused by the war in Ukraine has caused chain effects pushing up the prices of essential items like food and fuel. The study, which covered 159 countries, denoted that 71.1 million people have already fallen into poverty without a daily income of $5.50.

In countries like Ethiopia, Mali, Nigeria, Sierra Leone, Tanzania and Yemen, many people earned less than $1.90 a day, Similarly, in countries like Albania, Kyrgyz Republic, Moldova, Mongolia, Tajikistan and Ukraine, the war has pushed down people’s daily incomes to less than $5.50.

Cash transfers as the best remedy

The study analysed two options that most countries used to address such deficiencies: targeted cash transfers and energy subsidies. Cash transfers refer to the monetary assistance provided to certain households to cope with the increase in prices. Energy subsidies are the fiscal cushion provided to the people by the governments to deal with the fluctuations in global prices of crude oil. According to the findings, cash transfers work best.

The authors said that the reason behind developing countries resorting to subsidies is due to the urgency of the situation. Setting up strong social registries and payment systems to enable optimal targeting of benefits takes time. Therefore, developing countries often resort to shortcuts like price controls, tax cuts and increasing existing subsidies on energy consumption. These aids are provided by several developing economies to keep fuel prices stable for consumers regardless of fluctuations in the global market.

However, it is possible that countries face financial crunch when having to deal with the need to pump in more money into such short-term poverty-alleviation measures. “They may divert resources away from key sectors (e.g.,social protection, health and education), potentially hitting poorer groups harder;” the report stated.

“They may hurt the environment and delay energy transitions; and they may be difficult to reverse without fuelling social and political tensions.”

Targeted cash transfers, the study pointed out, completely mitigates global poverty at the levels of $1.90/day and $3.20/day. It further saves 75 per cent of the 71.1 million people who do not earn $5.50 per day, thus pulling them back from poverty. Meanwhile, universal energy subsidies would achieve less than 15 per cent of what can be achieved by effective cash transfers.

Wealthy countries stepping back

Acknowledging the role played by developed countries in mobilising aid during the war, Steiner said that there are also concerns that many countries are now starting to step back. “This is clearly the wrong response. We do not need countries to step back right now, we need them to step up,” he said.

The Covid-19 pandemic has already caused widespread inflation and recession patterns across the globe, with low and middle income countries experiencing the worst effects of it. Adding to the existing woes, developing countries also struggle to access money in capital markets due to prohibitive interest rates, making it tough to finance temporary relief schemes.

This raises the question of where the money for cash transfers would come from. “An enhanced moratoria on existing debt service payments for developing countries regardless of their GDP per capita. We also talk about the importance of repurposing energy subsidies back into cash transfers that can be targeted towards the poorest and the most vulnerable households,“ Dr George G Molina, chief economist and the author of the study, told Geneva Solutions.

Adding that many developing countries already have a system to offer energy subsidies in place, Dr Molina said that shifting to cash transfers involves extra work. While many countries have tried setting up a registry during the pandemic to provide support to the poor, it is essentially a competition between a system that’s been around for so many years (energy subsidies) and a system that’s relatively new.

“It [energy subsidies] is simple from an administrative point of view but it is very cost ineffective and wastes a lot of fiscal resources to do it that way rather than targeting cash transfers,” he said.