Figures and data in Modelling the Distributional Effects of the Cost-of-Living Crisis in Turkey and the South Caucasus: A Microsimulation Analysis

Abstract

This study analyzes the distributional effects of the cost-of-living crisis in Turkey and the South Caucasus by employing microsimulation techniques and household budget survey data. It investigates the changes in prices between December 2020 and 2022, highlighting the combined impact of the COVID-19 pandemic and the post-war price changes in Ukraine. By comparing welfare systems and price fluctuation patterns, the study sheds light on the differing impacts across neighbouring countries. The effects of inflation are closely related to specific price increases for various goods and the distribution of household budgets. In particular, lower-income countries and individuals allocate a higher share of their budgets to essential goods such as food, heating oil, and electricity. Notably, this is the first comparative analysis of its kind in the developing world, with previous studies limited to the European Union. We expanded the static incidence analysis across two dimensions. First, we looked at a way to measure welfare called comparative advantage. It shows how much money someone needs to keep their utility level the same when prices go up or down. It is worth noting that comparable levels of inflation regressivity are due to different interactions between the magnitude of price inflation and its disproportionate impact on the income distribution. We also applied the Atkinson social welfare function to analyse equally-distributed-equivalent income, decomposition changes in welfare into two components: the distributional effect and the size effect. Second, in all countries, the savings rate rises as income increases. Consequently, when prices increase faster than wage growth, lower-income groups cannot quickly absorb these rises. Therefore, they feel the impact of price increases more significantly.

This article contains 7 figures and 10 tables.

Figures

**Figure 1.** Annualised price inflation in Turkey, the South Caucasus and European Union neighbours.

**Figure 3.** Budget shares of expenditure components across equivalised disposable income quintiles

**Figure 4.** Budget and savings shares in household income across equivalised disposable income quintiles

**Figure 5.** Average Price Change by Price Change Decile

**Figure 6.** Distributional impact of inflation across equivalised disposable income quintiles

**Figure 7.** Welfare losses decomposition into price and behavioural adjustment

Tables

Table 1. Average annualised consumer prices index (1996-2023)

	1996-1999	2000-2004	2005-2009	2010-2014	2015-2020	2021-2023
Turkey	0.737	0.308	0.083	0.073	0.124	0.528
Armenia	0.056	0.031	0.039	0.038	0.007	0.056
Azerbaijan			0.118	0.037	0.062	0.058
Georgia			0.017	0.018	0.015	0.053
EU	0.016	0.021	0.023	0.019	0.013	0.073
Turkey Rank	1	1	2	1	1	1

Source: Eurostat, IMF.

Table 2. Budget and price elasticities

Expenditure Category	AR		GE		TR
	Budget	Price	Budget	Price	Budget	Price
Food and Non-alcoholic beverages	0.699	-0.799	0.941	-0.671	0.626	-0.455
Alcoholic Beverages	0.848	-0.873	1.798	-1.007	0.517	-0.309
Tobacco	0.451	-0.468	0.372	-0.263	0.098	-0.060
Clothing and Footwear	0.954	-0.983	0.365	-0.213	0.876	-0.530
Home fuels	1.573	-1.569	0.699	-0.398	1.521	-0.912
Electricity	1.008	-1.037	0.677	-0.346	0.880	-0.531
Rents	0.274	-0.289	1.154	-0.652	0.250	-0.162
Household services	1.580	-1.585	0.983	-0.558	1.611	-0.963
Health	1.182	-1.212	0.983	-0.592	1.015	-0.616
Private transport	1.514	-1.522	1.800	-1.009	1.367	-0.828
Public Transport	0.913	-0.942	0.941	-0.671	0.748	-0.455
Information & Communication	0.969	-0.998	1.798	-1.007	0.881	-0.535
Recreation and culture	1.369	-1.350	0.372	-0.263	1.270	-0.790
Education	1.126	-1.156	0.365	-0.213	0.962	-0.585
Restaurants and hotels	0.873	-0.903	0.699	-0.398	0.776	-0.484
Other goods and services	1.159	-1.167	0.590	-0.346	1.055	-0.677
Childcare costs	.	.	1.154	-0.652	.	.
Motor fuels	1.008	-1.037	0.983	-0.558	0.599	-0.363
Durables	0.858	-0.886	0.983	-0.592	1.208	-0.763

Table 3. Price changes from December 2020 to December 2022 (in %) (COICOP)

COICOP Heading	Expenditure item	HCPI Price change (in %)
		AR	GE	TR
	All-items HICP	16.94	23.1	123.5
CP01	Food and non-alcoholic beverages	24.17	32.6	155.7
CP02	Alcoholic beverages and tobacco	18.88	15.1	98.2
CP03	Clothing and footwear	20.42	2.0	51.2
CP04	Housing, water, electricity, gas and other fuels	10.21	60.3	131.3
CP05	Furnishings, household equipment and routine maintenance of the house	21.25	23.2	143.9
CP06	Health	6.15	2.4	100.8
CP07	Transport	12.06	19.6	137.3
CP08	Communication	1.51	-1.0	44.2
CP09	Recreation and culture	22.78	7.9	88.1
CP10	Education	6.17	11.8	61.0
CP11	Restaurants and hotels	14.72	28.5	137.3
CP12	Miscellaneous goods and services	16.78	17.6	107.9

Table 4. Estimated inflation by main sub-components

	AR	GE	TR	AR	GE	TR
	Price Inflation			Share of Total Price inflation
Food	16.3	10.9	46.0	0.558	0.470	0.246
Motor Fuels	0.2	0.7	4.2	0.006	0.029	0.022
Heating and Electricity	0.8	3.3	15.5	0.028	0.141	0.083
Other Goods and Services	11.9	8.4	121.6	0.408	0.359	0.649
Total	29.2	23.3	187.3

Table 5. Decomposition on distributional impact into base and rate effects

	CI pre-change (X)	$C {I_{C}}_{i}$	$C {I_{X + C}}_{i}$	$R {S_{C}}_{i}$	${K_{C}}_{i}$	Avg. r.
	(1)	(2)	(3)	(4)	(5)	(6)
AR
Total Expenditure	0.139	0.133	0.138	-0.001	-0.005	0.292
Food		0.112	0.135	-0.004	-0.026	0.163
Motor Fuels		0.159	0.138	0.000	0.020	0.002
Heating and Electricity		0.180	0.139	0.000	0.041	0.008
Other Goods and Services		0.158	0.140	0.002	0.020	0.119
GE
Total Expenditure	0.212	0.202	0.211	-0.002	-0.010	0.229
Food		0.155	0.206	-0.005	-0.057	0.105
Motor Fuels		0.415	0.213	0.002	0.203	0.008
Heating and Electricity		0.188	0.211	-0.001	-0.024	0.000
Other Goods and Services		0.245	0.215	0.003	0.033	0.085
TR
Total Expenditure	0.170	0.171	0.175	0.001	0.001	1.873
Food		0.142	0.161	-0.009	-0.028	0.460
Motor Fuels		0.314	0.176	0.006	0.144	0.042
Heating and Electricity		0.155	0.169	-0.002	-0.015	0.155
Other Goods and Services		0.180	0.000	0.005	0.009	1.216

Note: X = initial expenditure; $C {I_{C}}_{i}$ = concentration index of the cost increase in item i, $C_{i}$ ; $C {I_{X + C}}_{i}$ = CI of the increase in total expenditure due to the cost increase in item i, $C_{i}$ ; $R {S_{C}}_{i}, {K_{C}}_{i}$ = Reynolds-Smolensky and Kakwani of $C_{i}$ ; r = average inflation rate; RS = (3)-(1); K =(2)-(1).

Table 6. Contributions of the commodity groups to the progressivity of inflation

Component	Formula	Relative contribution of each component in $K$ (%)
		AR: Regressive	GE: Regressive	TR: Progressive
Food	$\frac{r_{1}}{r} * K_{C_{1}}$	-0.063	-0.0150	-0.0237
Motor fuels	$\frac{r_{2}}{r} * K_{2}$	0.000	0.0070	-0.0005
Heating & Electricity	$\frac{r_{3}}{r} * K_{C_{3}}$	0.005	-0.0155	0.0104
Other goods and services	$\frac{r_{4}}{r} * K_{C_{4}}$	0.037	0.0049	0.0208
Total	$K$	-0.20	-0.0095	0.0071

Table 7. Welfare Changes as measured by

Y_{e d e}

	Atkinson Index (2)			Mean $Y_{e}$			$Y_{e d e}$
	Pre -change	Post -change	Relative change	Pre -change	Post -change	Relative change	Pre -change	Post -change	Relative change
AR	0.303	0.305	0.91%	91625	71217	-22.27%	63895	49467	-22.58%
GE	0.373	0.376	0.91%	735	598	-18.59%	461	373	-19.04%
TR	0.313	0.302	-3.35%	7676	2740	-64.31%	5274	1911	-63.76%

Table A1. Composition of change in price by decile of consumption.

	AR	AR	AR	AR	AZ	AZ	AZ	AZ	GE	GE	GE	GE	TR	TR	TR	TR
	Food	H&E	Transport	Other	Food	H&E	Transport	Other	Food	H&E	Transport	Other	Food	H&E	Transport	Other
1	0.208	0.070	0.007	0.715	0.827	0.063	0.013	0.097	0.425	0.131	0.054	3.213	0.205	0.033	0.017	0.745
2	0.403	0.034	0.009	0.554	0.797	0.072	0.014	0.117	0.469	0.106	0.058	3.747	0.229	0.043	0.020	0.707
3	0.483	0.029	0.008	0.480	0.781	0.077	0.016	0.127	0.485	0.101	0.065	3.786	0.252	0.046	0.023	0.680
4	0.539	0.025	0.007	0.429	0.763	0.085	0.016	0.136	0.497	0.098	0.066	3.805	0.258	0.055	0.022	0.664
5	0.590	0.022	0.006	0.382	0.750	0.090	0.017	0.142	0.510	0.101	0.066	3.517	0.276	0.056	0.024	0.643
6	0.632	0.019	0.006	0.342	0.734	0.094	0.018	0.153	0.504	0.102	0.067	3.540	0.282	0.062	0.023	0.632
7	0.676	0.016	0.005	0.303	0.719	0.101	0.020	0.160	0.509	0.101	0.066	3.525	0.270	0.065	0.026	0.640
8	0.716	0.015	0.004	0.265	0.701	0.108	0.021	0.169	0.489	0.129	0.064	2.718	0.277	0.070	0.026	0.627
9	0.766	0.012	0.004	0.218	0.669	0.126	0.022	0.183	0.452	0.182	0.061	1.866	0.271	0.079	0.027	0.623
10	0.851	0.008	0.002	0.138	0.594	0.158	0.028	0.219	0.338	0.356	0.047	0.816	0.182	0.206	0.018	0.594

Note: H&E - Heating and Electricity

Table A2. Average change in price by decile of consumption.

	AR	AZ	GE	TR
1	0.318	0.222	0.230	1.618
2	0.308	0.210	0.235	1.724
3	0.307	0.203	0.235	1.774
4	0.302	0.195	0.236	1.815
5	0.300	0.189	0.237	1.845
6	0.299	0.183	0.241	1.873
7	0.297	0.177	0.236	1.903
8	0.296	0.170	0.235	1.936
9	0.294	0.162	0.234	1.979
10	0.283	0.144	0.226	2.124
Total	0.301	0.186	0.235	1.873
Labour Cost Growth	0.240	0.187	0.210	1.240

Table A3. Distributional impact of value of price changes relative to (before behavioural response).

Denominator	Disposable income					Expenditure
Quintile	Food	Motor Fuels	Heating and Electricity	Other Goods and Services	Total	Food	Motor Fuels	Heating and Electricity	Other Goods and Services	Total
Armenia
1	105.4	0.8	2.9	51.5	160.5	17.8	0.2	0.7	11.1	29.8
2	18.5	0.2	0.7	11.3	30.7	17.6	0.2	0.7	11.1	29.6
3	14.1	0.2	0.8	10.6	25.6	15.7	0.2	0.9	12.2	29.0
4	10.8	0.1	0.6	8.2	19.7	15.6	0.2	0.9	12.3	28.9
5	7.8	0.1	0.4	6.0	14.3	15.8	0.2	0.9	12.2	29.0
Georgia
1	31.0	1.2	10.1	21.0	63.3	12.4	0.4	3.5	7.7	24.0
2	14.3	0.4	4.4	9.2	28.3	11.9	0.4	3.5	7.8	23.6
3	12.1	0.5	3.8	8.3	24.7	11.4	0.6	3.4	8.0	23.4
4	9.9	0.6	3.1	7.6	21.3	10.9	0.7	3.1	8.4	23.1
5	7.5	0.7	2.4	6.6	17.2	9.7	1.0	3.1	9.0	22.9
Turkey
1	293.7	17.2	109.5	690.5	1110.8	47.9	2.3	16.3	119.9	186.4
2	62.5	4.4	21.7	157.7	246.4	48.6	3.2	15.5	118.6	185.9
3	44.4	3.8	15.7	113.5	177.4	48.2	3.8	16.2	120.0	188.3
4	31.2	3.2	10.2	83.5	128.0	47.0	4.4	14.8	121.8	188.0
5	19.3	2.6	7.2	57.4	86.5	41.7	5.6	15.1	124.8	187.2

[2] The categorization of countries is based on the World Bank’s classification by per capita income. Hereinafter, the countries with high income are referred as developed countries, while the countries with upper- and lower-middle income are referred as developing countries.