Inequality, Transfers, And Growth: New Evidence From The Economic Transition In Poland

This paper analyzes the evolution of inequality in Poland during the economic transition that began in 1989-1990. Using microdata from the Household Budget Surveys, we find that, after a brief spike in 1989, income and consumption inequality actually declined to below pretransition levels during 1990-1992 and then increased gradually, rising only moderately above pretransition levels by 1997. In sharp contrast, inequality in labor earnings increased markedly and consistently throughout the 1990-1997 period. We find that social transfer mechanisms, including pensions, played an important role in mitigating increases in both overall inequality and poverty. We argue that, from a political economy perspective, transfer mechanisms were well designed to reduce political resistance to market-oriented reforms in the early years of transition, paving the way for rapid growth. Finally, we provide crosscountry evidence from the transition economies that is consistent with our interpretation of the Polish experience and is also consistent with recent work in growth theory suggesting that redistribution that reduces inequality can enhance growth. © 2002 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology