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THE EVALUATION OF SOCIAL WELFARE AS A FACTOR OF ECONOMIC GROWTH OF UKRAINE
Zybareva O., DSc in Economy, Associate Professor;
Skyts'ko A., PhD. in Physical and Mathematical Science, Associate Professor; Petrashchak O., PhD in Economy
Bukovyna State University of Finance and Economics, Chernivtsi, Ukraine
ABSTRACT
The welfare has a direct impact on the consumption, the availability of tangible and intangible assets, the economy structure and other social and economic factors. The evaluation of the social welfare, its indexes and algorithms of calculation are in the focus of scientific investigations. The aim of the article is to evaluate the dynamics of the social welfare increase in Ukraine by the Zolotas model and its impact on economic growth. The dynamics of the social welfare increase by the Zolotas model shows the social welfare decrease despite of the country's economic growth. The living standard of the population was evaluated on the basis of such factors as a minimum wage indexed to the price index and per-capita GDP according to the last year price indexes. The dynamic of per-capita GDP change related to the minimum wage correlates with the theoretical issues of the Zolotas model in conditions of low income. The welfare worsening decreases the real income and reduces the purchasing power. Economic growth does not necessarily promote welfare increase. It implicates the inequality reduction and growth, poverty and production increase that does not always benefit social welfare. The considerable income reduction restricts the usage of savings as a factor of economic growth. The investments into innovations will increase the capital value and ensures economic growth.
Introduction. The evaluation of the social welfare in every country allows to analyze the situation and to consider the perspectives. The theory of the social welfare represents the statements on the basis of which the society high living standards are achieved and the criteria to define the quality of life are determined.
The low welfare rate has negative effect on economic growth that is shown on the irrational demand structure, the welfare reduction, the shadow economy increasing and the social optimism loss. The welfare analysis as a factor of the economic growth of the country facilitates the state social and economic policy increasing.
Discussion. The issue of the welfare and its relation to economic growth rate is widely discussed in native and foreign economic theory.
The founder of the political economy A. Smith (2007) considers that the welfare is based on the increase of the social welfare, i.e. the volume of the national income per capita.
The social development should base on the free competition that allows uniting the public and private interests.
According to V. D. Bazylevych (2005) the considerable contribution to the economic development belongs to A. Pigou who claims that the economic welfare should be the base for the social welfare relating to money measure. Developing his idea A. Pigou confirms that "economic factors do not affect the economic welfare of the country directly but by creating and using external benefits (Pigou, 2013)".
ARTICLE INFO
Received 06 October 2015 Accepted 18 October 2015 Published 30 October 2015
KEYWORDS
Economic growth, Social welfare rate, The Zolotas model, Production function, Solow model.
© 2015 The Authors.
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Well-known Greek economist X. Zolotas (1981) advances the idea that an increasing output did not facilitate human happiness growth.
Many Ukrainian scientists dedicated their works to the theoretical and empirical analysis of the features of the social welfare, problems and factors of its development. M. M. Ghuz' (2012) stresses on the index problem that can be used in the economic and public welfare calculations except GDP, he defines the approaches to indexes' measure and their calculation algorithm improvement. O. Kakhovsjka (2012) analyzes the level of economic socialization with the help of indicators that characterize the social welfare.
The problem of social welfare evaluation is still under discussion in spite of many scientific researches. The indexes that should be included in the calculations and the algorithms of indexes calculations are in the focus of investigation.
The aim of the article is the evaluation of the dynamic of the social welfare in Ukraine by the Zolotas model and its impacts on economic growth.
Investigation. Various indexes are used for the analysis and evaluation of the population standard of living such as GDP volume, national and real income per capita, volume of service per capita, average wage level, housing supplement, etc. Besides, the living standard of population is characterized by the average lifespan, birth and death rates. The concept "standard of living" includes three main aspects: welfare, human population growth and capital accumulation.
Let us analyze the dynamics of the social welfare increase after X. Zolotas using his model. The economist singles out two factors with different relative intensity that depend on the achieved level of social welfare. One factor is intensive, the other is extensive.
The level of the social product is marked as W and R - endpoint then the intensive factor will be A - W, and the extensive - kW (k > 0). According to X. Zolotas (1981) the dynamics of the social welfare level can be expressed as
dW
dW = kW(A - W) , (1)
Where Y = Y(t) income per capita.
Differential equation (1) is the Zolotas model (1981). The present differential equation is the equation with separated variables that can be presented as
A
W(Y) =-rr, (2)
1 + Be-cY
where c = kA, and the constant B is defined by initial conditions W(0).
The equation (2) defines the well-known logistic curve (Fig. 1, curve 1) that is used for investigation of the social and economic processes.
It is interesting to analyze the standard logistic curve (Fig. 1, curve 2). The considerable curve's maximum value in the part of low income Y can be seen due to the certain economic conditions (correlation of n, R, A), that affirms the social welfare worsening despite economic growth of the country.
Analyzing the equation (1) X. Zolotas defines three stages of social development:
I - «a society of privation», II - «a society of steady improvements», Ill - «a society of declining improvements».
The major index of social welfare evaluation is GDP. GDP deflator is used by all countries to calculate the economic and production growth rate. GDP per capita is used to characterize the social growth rate [7-9].
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Fig.1. Welfare function (1), standard welfare function (2) (by X. Zolotas (1981).
Let us analyze the living standard of population on the basis of such indexes as minimal wage indexed to the price index, GDP per capita according to the last year price indexes (table 1).
Table 1
The Dynamics of Economic Growth of Ukraine
Year GDP per capita (according to the last year price indexes) Minimum wage Minimum wage indexed to the price index
2002 4612 - - 185 156,51
2003 5363 751 16,28% 205 177,95
2004 6534 1171 21,83% 237 191,44
2005 7823 1289 19,73% 262 217,79
2006 10515 2692 34,41% 350 295,86
2007 13147 2632 25,03% 400 355,56
2008 16602 3455 26,28% 515 484,48
2009 18258 1656 9,97% 605 666,30
2010 21491 3233 17,71% 869 788,57
2011 25852 4361 20,29% 960 883,16
2012 29637 3785 14,64% 1147 1002,62
2013 32090 2453 8,28% 1218 1125,69
Source: data compiled by authors on the basis of references [7-9].
The dynamics of economic growth of Ukraine shows that the domestic economic growth occurs from 2002. During 2002-2013 the real GDP per capita in Ukraine increased on 2 453 hryvnias or by seven times. Average annual per-capita GDP growth rate in Ukraine during this period was 17,87%. The dynamics of GDP change of Ukraine is described by linear correlation and regressive model by M. Ghuz'(2012):
y = 11,416x - 22794,
where y - calculation of GDP deflator of Ukraine, x - year. Correlation coefficient is 0,841, coefficient of determination is 0,708.
The minimal wage rate in Ukraine grew during the mentioned period. During 20022013 the minimal wage rate increased by 6,6 times. Nevertheless, the consumer price index
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influences the social welfare as it decreases the real income and reduces the purchasing power.
Comparing the real per-capita GDP and minimum wage indexed to the price index we see the dynamics (Fig. 2).
Fig. 2. The dynamics of per-capita GDP change related to the minimum wage in 2002-2013 (data compiled by authors on the basis of references [7-9]).
As V. Heiets' (2010) says more than 50 percent of workers in Ukraine, according to the collective agreements, receive the minimum wages defined by legislatively set poverty guidelines. During economic growth of 2000-2008 the minimum wage level set by the government did not exceed the poverty line.
The dynamic of per-capita GDP change related to the minimum wage correlates with the theoretical issues of the Zolotas model in conditions of low income. Standard social welfare indexes show the positive dynamics of per-capita GDP growth, but according to these indexes the improvements in material welfare is doubtful. Fig. 2 demonstrates the decrease of living standard that reached its highest level in 2007, insignificant improvement during 20092010 and the social welfare worsened during following years.
It is fully analyzed in A. Granberg's (1985) studies on the dynamic of the national income [10]. Fig. 3 shows the dynamics of the national income Y(t) and the production accumulation U(t) in case of exponential consumption growth when the rate of consumption growth is higher than the rate of technological growth of national income.
The consumption growth showed by the line segment (0,t1) is followed by the end of the growth (the negative growth), the national income volume decreases and in some period of time t2 becomes equal to zero. Obviously, the real benefit in consumption rate can be reached only on the line segment (0,t1) followed by the economic decrease.
According to the Zolotas model in case of the high income rate of the population and equal allocation the welfare disturbance (Fig. 1, curve 2) is not so evident.
Macroeconomic indexes analysis proves that the main cause of the slow economic growth and low social welfare is the economic insufficiency.
Economic growth of Ukraine and personal development are impossible without the increasing of the living standard of the population. But without such increase the government loses qualified specialists and consumers.
The welfare creates the significant benefits for changes of the social economic behavior. Therefore it can be considered as one of the factors of economic growth. The described socioeconomic status of Ukraine allows to make some conclusions as to the usage of "neoclassical growth model" after Solow (1957).
Solow model shows how savings, the population change and the technological growth influence economic growth.
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The economics status in Solow's model is represented by following variables: Y represents total production, L - effective labor, K - aggregate production function, J -investment, C - depreciation.
Y
Y(0)
t, t
a)
U
U(0)
b)
Fig. 3. The dynamics of the national income (a) and production growth (b) relating to exponential consumption growth (after A. Granberg (1985).
All variables are time series facts and time is continuous. Annual output is counted by the Cobb-Douglas production function:
Y = AKaL1-a, A > 0, 0 <a< 1.
(3)
The product output is used for the consumption and investments
Y = N + J. (4)
Consider o=const as savings output used for the investments and we get
J= oY, 0< o<1. (5)
Consider labor growth as proportional to actual labor resources and we get the equation for function L(t)
- = vL, (6)
dt
and obtain L+L0evt, where L(0) = L0.
Let us now look at the dynamics of the production funds change. The capital depends on the investments and capital outflow.
Let us set up the equation for production funds K(t) on the assumption of the sinking fund with constant coefficient p, 0 < p < 1 and the initial condition K(0)= K0 we obtain
dK dt
Substitute J for gY, Y for AKaL1-a, L for L0evt and we obtain Bernoulli differential equation
= J -pK.
(7)
dK dt
+ pK = aALI0a ev(1-a)tKa.
(8)
Using the standard methods of solving a first order linear equation we obtain the
solution
t
t
0
0
t
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K(t) = ev
Ce
-(1-a)( v+|)
+ ■
gäl1;
(1 - a)(v +1)
1-a
Ci = K0-a-
gä
1-a
(1 - a)(v +1)
(9)
1
0
Equation (9) describes the capital increase on the base of the correlation between investment volume and the amortization rate. The correlation between investment volume and the amortization rate is the index of the economy of the country.
The savings ratio is the key to economic growth. If the savings ratio is increased the economy will have more investments, higher capital increase and the production growth.
Conclusion. The analysis of the Zolotas model shows that economic growth does not necessarily promote welfare increase. Economic growth implicates the inequality reduction and growth, poverty and production increase that does not always benefit social welfare.
The welfare rate defines economic growth rate by its impact on the economic behavior of the population. Analyzing the social welfare of Ukraine we can state that the considerable income reduction restricts the usage of savings as a factor of economic growth for a long time. So the savings ration should be the separate object of the state social and economic policy.
The Solow model shows that the effect of population growth on economic growth is ambiguous. The increase in staff in stable economy can impact the total output. As there is a demographic reduction in Ukraine the population growth will not be the factor for economic growth in the nearest future.
The investments can improve the situation but implementing of the sound economic policy in Ukraine aimed at structural economic changes is necessary. Besides according to Solow model the investments into innovations will increase the capital value and ensures economic growth. The income increase by fair wage rates and de-shadowing of the economy provide more adequate benefits to a broad working population. And, as a result, the immaterial aspect can cause the increase of the capital stock of the country.
References
1. Smith A. (2007), An Inquiry into the Nature and Causes of the Wealth of Nations [Electronic resource]. - Online access: http://www.ibiblio.org/ml/libri/s/SmithA_ WealthNations_p.pdf. - Title from title screen (viewed on March 15, 2015).
2. Bazylevych, V. (2005), Istorija ekonomichnykh uchenj [History of economic doctrines], Znannja, Kyiv, Ukraine, 412-432.
3. Pigou, A. (2013), The Economics of Welfare, Macmillan, London, 11.
4. Zolotas X. (1981). Economic Growth and Declining Social Welfare, New York University Press, New York, USA, 112-125.
5. Ghuz', M. (2012), «Analysis of indicators of economic and public welfare of the population», Problemy iperspektyvy rozvytku bankivsjkoji systemy Ukrajiny, 36, 66-74.
6. Kakhovsjka, O. (2012) «Evaluation of the Level socialization of the economy through indicators that characterize welfare of the population», Ekonomika. Finansy. Pravo., 12, 17-21.
7. Gross domestic product of Ukraine [Electronic resource]. - Online access: http: // www.index.minfin.com.ua/index/gdp. - Title from title screen (viewed on March 31, 2015).
8. State Statistics Service of Ukraine [Electronic resource]. - Online access: http: //www.ukrstat.gov.ua. - Title from title screen (viewed on April 20, 2015).
9. Gross domestic product of Ukraine [Electronic resource]. - Online access: be5.biz/makroekonomika/gdp/gdp_ukraine.html. - Title from title screen (viewed on April 18, 2015).
10. Heiets' V. (2010), «The formation and development of the financial crisis of 2008-2009 in Ukraine», Ekonomika Ukrajiny, 4, 5-15.
11. Granberg, A. (1985), Dinamicheskie modeli narodnogo xozyajstva [The dynamic model of the economy], Nauka, Moskva, Rosiya, 113-119.
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