Wednesday, 18 October 2017 11:51

Index of Current Economic Capacity

Written by

In recent years, high attention has been paid to study (qualitative and quantitative) the quality of life, wellfare, psychological well-being, as well as the appropriate formation of indices and ranking of territories and countries. In addition to international methods for indices estimations, investigations are being paid to the development of national systems for assessing the current state and prospects of countries’ development.

In Ukraine, certain generalized indicators are also under consideration, an index that would show the dynamics of purchasing power of Ukrainians based on selected sets of goods, for example: socially significant foods; a borsch set or an "Index of Ukrainian borsch"; a "medicine basket", etc. However, these studies are crippled by their narrow focus and do not give a general defining characteristic to the quality of life.

The proposed concept of economic capacity for Ukraine covers not only the traditionally considered purchasing power of the population, but also economic stability features – the ability of an "average" household to survive (in the case that current income sources are lost for a certain period of time). It is economic stability that is one of the most important conditions to have a sense of security in life and confidence in future – hence, the ability to build long-term life strategies, including strategies for economic behavior, and a general condition for positive social (and psychological) well-being.

Social economic capacity is the basis for achieving a significant part of other characteristics of quality of life (especially those requiring substantial public or private expenditures, such as quality food, access to clean drinking water, quality education, decent work and leisure, etc.).

Index of Current Economic Capacity delves in (integrates) various aspects of current purchasing power, access to monetary and financial resources, as well as citizens’ financial sustainability (first of all, in terms of savings) and can serve as an indicator of an overall socio-economic environment in Ukraine.

The whole idea of the Index of Current Economic Capacity (Index) is in a regular (monthly) monitoring of statistical data, tracking current trends in national social and economic policies that promote/hinder the increase in the level of economic capacity of society, its movement towards socio-economic European standards and norms; initiating wide-ranging expert and public discussions on actual socio-economic issues, as well as raising public awareness and bringing the information to respective decision-makers, and developing appropriate proposals.

To calculate the Index the official statistics, as objective indicators, are used, which are systematically (monthly) provided by the State Statistics Committee, the National Bank of Ukraine, and relevant ministries and departments. Subjective indicators are obtained through monitoring public opinion and social well-being of Ukrainian society, regularly carried out by the Sociological Service of the Razumkov Centre.

In terms of impact on the current solvency several aspects are distinguished: the average nominal wage (respectively, the minimum wage, living wage, wage arrears); consumer prices (consumer price index, real wages); tariffs for housing and utility services (level of payment, coverage with subsidies for payment); presence/absence of nationally regulated prices for socially significant goods (first of all, food). As regards the impact on economic sustainability: commercial banks’ interest rates (affecting on banks’ deposits and loans); national currency exchange rate (devaluation/depreciation); the volume of lending to the households; deposits in banking institutions; level of employment/unemployment; overall number of the population.

December 2013 was selected for a basic analysis. It is assumed that, at that time, macroeconomic indicators were characterized by a relative stability and were under relatively insignificant influence of external competitive factors.

The nominal average wage is chosen as the basic component for evaluating the level of economic capacity, against which a number of other indicators are determined. This focus on nominal wages is primarily due to the fact that wages are the largest component in the structure of incomes of Ukrainian households, and therefore a dominant component of their welfare.

To build the Index, 16 indicators (sub-indices) were selected, which are grouped into four categories: wages and minimum social standards, income and debt imbalances, savings and availability of financial resources, demography and employment. Establishing the values of sub-indices, as well as their weighting coefficients, allows us to determine the dynamics of a generalized Index of Current Economic Capacity.

The socio-economic situation in Ukraine, reflected in the values of the Index in 2014-2017, presented by the following dynamics (see page 37). The Chart (through a steady decline of the index) attests to the long-term deterioration of the socio-economic situation during the three years (from the beginning of 2014 till the end of 2016). Besides, there is a marked increase in the Index value in 2017. Among features of such improvement (based on the analysis of sub-indices), it is necessary to specify:
- strengthening of macroeconomic stabilisation processes, including avoiding a significant devaluation of the hryvnia, as well as lowering the consumer price index (inflation). A significant consequence was a sufficient increase in the average nominal and real wages (including by doubling the minimum wage, as well as the fact that nominal wage growth rate significantly exceeded the inflation rate);
- raising the average wage also contributed to a certain improvement in the situation with arrears of wage payments, as well as payment for housing and utility services (including through subsidy system);
- easing and even reducing regional and sectoral imbalances (wage growth rates in relatively "poor" oblasts (regions) have exceeded those in relatively "rich" ones, as well as accelerated wage increases in the humanitarian sectors as compared with the industry ones);
- improving the employment situation (increase of labour supply and reduction of the pressure on vacant positions).

However, at the same time, indicators related to savings and lending to the households (reduction of lending, maintaining high credit rates) remain unsatisfactory. Of particular concern are a decline in the population size and its structure in Ukraine.

In near-term propects, if taking into account the expected worsening of the economic situation in autumn-winter (in particular, growing currency devaluation and inflation, increasing costs for housing and utility services, reduction in seasonal employment), the Index of current economic capacity should be expected to decline.

To sum it up, it should be noted that the proposed Index (focusing on economic components) is only the first step towards the constructing a truly comprehensive indicator that takes into account a wide range of statistical indicators and public opinion surveys and will correctly reflect changes in the country's development, and contribute to implementation of a more active and targeted social policy of the state.

read full pdf in ukrainian

Vasyl Yurchyshyn

Director, Economic programmes

Click for details

Born in 1955 in Kamyanets-Podilskyi.

Education: T. Shevchenko Kyiv State University, Department of Cybernetics (1977). Institute of Public Administration and Local Government at the Cabinet of Ministers of Ukraine (1994). Professor in Public Administration. Author of nearly 100 scientific works.

Employment:

In 1977–1993, worked at the Kyiv University as an engineer, research fellow and senior research fellow;
1994–1999 — head economic researcher at the International Centre for Policy Studies, Fund for Banking and Finance Development;
1999–2004 — Assistant Professor, Department of Economic Policy of the Ukrainian (currently, National) Academy of Public Administration, office of the President of Ukraine;
1999–2004 — Research Director at the Agency of Humanitarian Technologies, later — Agency for Social Analysis;
2002–2003 — advisor to the Minister of Economy of Ukraine;
since April, 2004 — Professor, Department of Economic Policy of the National Academy of Public Administration, office of the President of Ukraine;
since June, 2005 — Economic Programmes Director at Razumkov Centre.

Telephone: (+380-44) 201-11-90
E-mail: yurchyshyn@razumkov.org.ua