2.4. Possible ways of relieving the social cost of transition. Conclusions and Recommendations

Poverty and Total Deprivation. The state of economy currently determines the level of development of the social sphere. However, this does not mean that one shall sit and wait for economic miracles to occur before getting down to the reformation of the social sphere.

Before the year 2001, it is possible to legislatively adopt the basic parameters of the MSB and use them as an efficient means of regulation of society's social life. These parameters enable the state to do the following:

· to establish minimal salaries and pensions with certain proportionality in relation to MSB,

· to calculate the index of consumer prices,

· to regulate, in a planned way, the improvement process of the standard of living of the population. Though it is hardly possible to win a full victory over poverty and impoverishment extreme depravation in this way, drastic changes are quite realistic.

Health. In order to preserve what is left from the inherited legacy in the medical sphere, a swift shift to medical service by the principle of insurance policy is of urgent necessity. There are many reasonable proposals about the level of participation in the insurance policy of various economic entities/participants (the state, the employers, the population), the inventory of medical services, included in the policy, the duration of using these services, etc. The implementation of these proposals, i.e., a serious reform of the health-care system, will re-open access for all strata of society, and first of all for the poor and the deprived to medical services.

Despite all objective difficulties, hindering an immediate transition to insurance medical service (the work is going on and will be completed in 1-2 years), in 1998 the government, nevertheless, by the initiative of the Ministry of Health, managed to carry out important measures allowing the population to use a wider range of medical services.

Urgent medical aid to children under 14 is included on the list of state- provided free medical services. The State has also undertaken the full burden of medical treatment of such contagious diseases as malaria and cholera, as well as tuberculosis. This is a rather responsible and expensive decision, especially that the deteriorated quality of drinking water has greatly contributed to the recurrence of infectious diseases which seemed to have long ago disappeared from Armenia.

All this will require approximately 6-7mln. USD worth of additional expenditures from the state budget, i.e. 15-17% more than the current amount spent on health care. Increasing access to first-aid services as well as enhancing the policy_designing role of the Ministry in the sphere of health care are seen as priorities for the near future.

Education. The RA "Law on Education" adopted in 1999 stipulates the right for free secondary education (until the 8^th grade instead of the 10^th grade as in the past), and certain social guarantees envisaged for young people, in case of acquiring a higher level of education. In addition, the Law envisages state funding for school textbooks in the primary school, however, it says nothing about the need to increase expenditures for education. The responsibility for such decisions is delegated to the government.

Times when equal opportunities were available for everyone to receive an education, particularly higher education, are apparently history in Armenia. However, some useful steps can be taken now, without spending a single Dram of the state budget. The system of providing all students studying free of charge with stipends has become obsolete. Stipends must be provided only to bright students who come from the poorest strata of population and are incapable of paying for education. A flexible corridor should be created between the paid and free education based on the results of examination sessions, so that students paying for their education can be transferred to the free form of education, and vice versa.

Housing Construction. Out of the new housing construction 90% has been carried out at the expense of 5% of the most well-off groups of the population. However, amongst the poor and impoverished there are people whose housing conditions and status can be changed with the help of such market economy mechanisms as mortgage banks and investment funds. Although the latter are independent, the State and the citizens have confidence in them. These institutions are useful since they enable the person who has paid a portion of the apartment's price (20-30%), to be become its owner on the condition that he/she will pay the remaining amount through taking a credit. The increase in housing construction scales at the expense of involving new groups of the population can have a booster effect on the growth of production on the whole. In addition, municipal, i.e., free of charge construction can be carried out, at the expense of additional taxes levied on those 5% of the population capable of erecting multi-storeyed mansions.

Pensions. The reform of the pension system must not only provide pensions, but also insurance, i.e. the dues to the future pension fund must be paid by the State, the employers and the employees. Second, there must be a clear distinction between the social and labor functions of pensions.

Urgent introduction of individual accounts would be an efficient means of increasing the payments into the social insurance fund, and, consequently, the rates of pensions, which will help to monitor personally the correctness of payments made by the employer.

Minimal pension rates provided by the state budget must perform a social function; the payments made by the employers and, on voluntary-compulsory basis, by the employees, must perform the labor function. In this case, not only a rather high rate of an average pension will be achieved (60-65% of the average salary) but also a broad differentiation, depending on the contribution of each worker into the process of public division of labor.

Deposits and Savings of the Population. The deposits and savings of the population at present have dwindled to an insignificant 2-3% of the total amount of consumer expenditures of the family, although once upon a time they amounted to 15-20%. The problem is the following: how to compensate the 5-6 billion USD worth of savings to the population, which were on the accounts of the USSR Savings Bank (at that time it was the only bank entitled to open deposit accounts for physical persons). In the long run this problem can be solved in principle (15-25 years). It would suffice to issue state securities, which can circulate as investment cheques (certificates), as bonds, and as bonds to cover the cost of housing construction.

State capacities in the sphere of social protection of the population. The state with its budget is the main and ultimate guarantor of the individual's social rights. However, one of the most shocking outcomes of the transition period was the awareness that prior to making these expenditures, someone must first pay for them, i.e., state budget expenditures must be compensated, covered with certain income. Sources for such income are various taxes, tariffs, excises, customs duties, etc. In countries with liberal economies (USA, UK) 25-30% of GDP is accumulated in the consolidated state budget at the latter's expense. In countries with strong social emphasis (Germany, France, Sweden) this indicator amounts to 40-45%.

The problem of the transition period is that in Armenia, at best 12-14% of GDP can be forwarded to the budget. There is only one reasonable explanation.
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The tax collection domain has shrunk many-fold, first of all because of industrial recession and the reduction of final incomes of the population; secondly, and due to the shifting of more than half of the economy into the sphere of the shadow economy. In these conditions, to demand large commitments from the State for the protection of the social sphere is to demand the impossible. The status of the state-provided social sphere is what it should be, since its problems are solved after defense, state establishment, law and order, foreign policy have been solved (and that is how it must be). For that reason, the projects of enhancement of the role of the State in the solution of social programs will not achieve any goal (especially, the establishment of family allowances for poor families).

Demographic sphere. Taking into account that the demographic situation in Armenia has drastically deteriorated, it is necessary to work out a special demographic policy aimed at the promotion of the population's reproduction, particularly, in border-line districts, remote areas and in villages, by providing young families with a number benefits, such as low interest rate credits for house construction, priority in employment and professional promotion.

Population's employment sphere. Regulation of employment implies working out a long-term and short-term holistic program for the labor market regulation and new job creation, based on the implementation of an active policy in the labor market. It is necessary to promote the creation of new jobs by means of state leverage in taxation and crediting. For enterprises which create new jobs in priority branches for the RA economy (mining, including, natural construction materials, light industry, precision machine building and machine-tool building, food and agricultural produce processing) certain tax privileges (reduction of the VAT and profit tax) introduced along with stopping permanent tax "intervention". It is important to reduce the compulsory social insurance rates for the employers creating jobs.

Given a higher refugee unemployment rate as compared with the average national unemployment rate (more that 45% of working-age refugees are jobless) and a large of number of refugees (14,000 families) who up to date have not been provided with apartments because of lack of necessary funding, special programs must be worked out to provide them with apartments, by means of creating favorable conditions for their economic activity.

The establishment of small processing plants in agriculture will help to eliminate seasonal unemployment. Long-term low interest credits to farmers will help create material and technical conditions for the development of agricultural production.

Labor legislation sphere. The relations between the employees, employers and the unemployed are still regulated within the framework of the old labor legislation. Labor protection, salaries and most of other issues concerning the employees involved in the private sector have not been regulated. The adoption of the new RA Labor Code will promote the regulation of labor relations and the reduction of unemployment. The elimination of child labor exploitation, the legal regulation of labor protection of women and young mothers is necessary, as well as the increase of the role of trade unions in the protection of labor and workers.

It is necessary to increase the motivating role of the salary, particularly, by increasing the minimal and average salary rate, mainly using tax leverage and redistribution of incomes. At the same time, some components of income policy must be applied to regulate labor productivity and average salary, to restore the normative correlation of their growth, as well as to deepen wage differentiation in the budget sector of economy depending on the working contribution of the employees.