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Inequality, Transfers and Growth: New Evidence from the Economic Transition in Poland

  • Keane, M. P.
  • Prasad, E. S.

This paper challenges the conventional wisdom that inequality in Poland increased markedly during the economic transition that began in 1989-90. Using micro data from the Household Budget Surveys, we find that, after a brief spike in 1989, income and consumption inequality actually declined to below pre-transition levels during 1990-92 and then increased gradually, rising only moderately above pre-transition levels by 1997. In sharp contrast, inequality in labor earnings increased markedly and consistently throughout the 1990-97 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 cross-country 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 which suggests that redistribution that reduces inequality can enhance growth.

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File URL: http://econ.as.nyu.edu/docs/IO/9188/RR00-09.PDF
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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 00-09.

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Length: 55 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:cvs:starer:00-09
Contact details of provider: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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  1. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  2. Branko Milanovic, 1999. "Explaining the increase in inequality during transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 299-341, July.
  3. Torrey, Barbara Boyle & Smeeding, Timothy M & Bailey, Debra, 1999. "Income Transitions in Central European Households," Economic Development and Cultural Change, University of Chicago Press, vol. 47(2), pages 237-57, January.
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  5. Aghion, Philippe & Caroli, Eve & Garcia-Penalosa, Cecilia, 1999. "Inequality and economic growth: the perspective of the new growth theories," CEPREMAP Working Papers (Couverture Orange) 9908, CEPREMAP.
  6. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92 National Bureau of Economic Research, Inc.
  7. Svejnar, Jan, 1996. "Enterprises and Workers in the Transition: Econometric Evidence," American Economic Review, American Economic Association, vol. 86(2), pages 123-27, May.
  8. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  9. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
  10. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  11. Hartmut Lehmann & Jonathan Wadsworth, 2000. "Tenures that shook the world: Worker Turnover in Russia, Poland and Britain," LICOS Discussion Papers 9500, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  12. Keane, Michael & Prasad, Eswar, 1998. "Consumption and Income Inequality in Poland During the Economic Transition," Working Papers 98-38, C.V. Starr Center for Applied Economics, New York University.
  13. McClements, L. D., 1977. "Equivalence scales for children," Journal of Public Economics, Elsevier, vol. 8(2), pages 191-210, October.
  14. Brunon Gorecki, 1994. "Evidence of a New Shape of Income Distribution in Poland," Eastern European Economics, M.E. Sharpe, Inc., vol. 32(3), pages 32-51, June.
  15. Eswar Prasad & Michael P. Keane, 2002. "Changes in the Structure of Earnings During the Polish Transition," IMF Working Papers 02/135, International Monetary Fund.
  16. Thesia I. Garner & Katherine Terrell, 1998. "A Gini decomposition analysis of inequality in the Czech and Slovak Republics during the transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 6(1), pages 23-46, 05.
  17. Stanislaw Gomulka, 1998. "The Polish model of transformation and growth," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 6(1), pages 163-171, 05.
  18. Banerjee, Abhijit V & Duflo, Esther, 2003. " Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-99, September.
  19. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  20. Brainerd, Elizabeth, 1998. "Winners and Losers in Russia's Economic Transition," American Economic Review, American Economic Association, vol. 88(5), pages 1094-1116, December.
  21. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  22. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
  23. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
  24. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-85, November.
  25. de Melo, Martha & Denizer, Cevdet & Gelb, Alan & Tenev, Stoyan, 1997. "Circumstance and choice : the role of initial conditions and policies in transition economies," Policy Research Working Paper Series 1866, The World Bank.
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