Ofelya Gyozalyan

University of Cambridge
Faculty of Economics
MPhil in Economic Research
Huys Scholar 2019

PROJECT NAME: Measuring Multidimensional Poverty Index (MPI) for Armenia and Designing an Incentive-Based, Effective Social Benefit (նպաստ) Program 

PROJECT CATEGORY: Research paper with specific policy implications

PROBLEM: The Armenian government has a social benefit program, which is aimed at reducing the poverty rate in the country through helping those in need. The government identifies poor people and gives them financial support. The program has two significant issues. First, the way of identification gives people wrong incentives. In order to qualify for the program, people should be unemployed, have low income, not possess valuable assets and livestock, and/or have many children. Therefore, those, who are not poor, are willing to make the necessary arrangements and those, who are already eligible for the program, are not willing to improve their financial standing. Even if there is a job opportunity, which can provide twice as much as the social benefit, some people still prefer not to work and receive “free money.” Being from Tavush region, I have noticed my countrymen involved in such kinds of practices. The second problem is that some people find ways of appearing poor in the official records even though they are not. This becomes possible through hiding income and faking documents. Therefore, even at the structural level the program shows signs of ineffectiveness. During my research experience at the American University of Armenia, along with the professors we have statistically proved that the social protection program was not effective in reducing poverty. It is also worth noting that in case of the absence of this program, some of the recipients would enjoy better living conditions as they would rely on themselves. 

So we are facing two interrelated issues: first, we are unable to correctly identify poor people, second, we are unable to make such program which supports poor people at the same time giving them incentives to improve their financial standing, as a result reducing the poverty rate. 

MY CREDENTIALS: I have been working as a Research assistant at the American University of Armenia starting from November of 2017. Since then I have conducted literature reviews, gathered and analyzed data with statistical programs, such as STATA, R, and Python. I have had the chance to work closely on various papers from development economics, related to poverty, migration, inequality, and microfinance institutions. Many of the papers have concentrated on issues present in Armenia and thus, I have been able to view them from the perspective of economics and also come up with solutions. In 2018, I have been offered to co-author research papers and currently I am working on three papers. These papers concentrate on poverty and migration issues of Armenia through the estimation of multidimensional poverty index. To avoid confusion, I would like to mention that in my Huys project I will estimate multidimensional poverty index (explained below), however, unlike my AUA papers, where we use data from Armenian Statistical Service, in my Huys project I will collect first hand data. This will help me to get more reliable data, as well as all the needed variables.

It is worth stressing that despite all the practical knowledge, I still lack formal education in economics, which is necessary for conducting individual, high quality research. The education at the MPhil in Economic Research program of Cambridge will help me to fill these gaps and equip me with various tools to make the research process more productive. Now I know that the issue I am raising can be solved through game theory, at Cambridge, I will learn the exact models that I can use. I will be able to generate even more solution methods that I am currently thinking about and choose the most appropriate one. Moreover, due to the quantitative nature of the course, I will not only master the classic economic models, but also learn about formula derivations and mathematical logic. This is really crucial for those who are thinking about both using the existing theories and modeling real problems. I should also state that after the MPhil program is sufficient for those who wish to join industry and conduct research rather than teach. 

SOLUTION: The research paper will address two issues. First, we need to effectively identify poor people using multiple dimensions of poverty (Alkire-Foster method). The essence of multidimensional poverty is the following: when classifying people, we take into account not only income measure, but also living conditions, state of health, level of education and other factors. So it is possible that a person earns a good salary but has poor living conditions and is still classified as poor. If we are able to come up with an effective measure, we will be able to find those who really need financial support from the government. 

The second part will concentrate on giving people incentives to create value by themselves rather than sit and wait for the government to provide the benefit. This is a classic problem that game theory and mechanism design can solve. We should reward a good action (when people work/create value) rather that reward laziness, which is currently taking place. The logic of the program will be like this: the government gives say two cows to a family and says: “I expect you to have three cows next year, if you can do this, your support will increase by X% if not your support will decrease by the same amount.” This kind of program will ensure that our benefit program does reduce poverty rate of the country. After five to seven years, poor people will improve their conditions so much that the government can exclude them from the benefit program. This stage will be more preferable than the initial one with the benefit, since the change will be significant. Therefore, everyone will be better-off. 

In the short-run, the government will have a new social benefit program, and all poor people will receive support to reduce their financial burden. In the long-run, Armenia will enjoy a lower and lower poverty rate, since the incentive-based scheme will ensure that poor people improve their living conditions each year.

IMPLEMENTATION: The First stage of the program is the research paper, which will take approximately 1.5 years to collect data, write and publish (publishing a paper will ensure that the models are realistic and mathematically correct). The data collection (household-level data related to living conditions, health and other relevant variables of the citizens of Armenia) will be carried out with the help of Armenian Statistical Service. They now collect household-level data; however, for our paper we need more variables not present in their records. 

The Second stage includes identifying poor people with new standards and providing the benefits, as well as explaining and signing contracts. To complete this stage, I need to receive support from the government and Armenian Statistical Service. Therefore, the completion also depends on their efforts. I estimate the process to take approximately 6 months. 

The duration of the project is 2 years. However, please note that the provision of the new social benefit program will be an ongoing project and corresponding people should be assigned for the continuation.

I am aware that Huys Foundation is granting the scholarship to me with the anticipation of my good faith pursuit and implementation of the projects and undertakings described in this letter, to which I hereby commit.