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Poverty and the economic transition : how do changes in economies of scale affect poverty rates for different households?

  • Lanjouw, Peter
  • Milanovic, Branko
  • Paternostro, Stefano

Much attention has been paid to the relative vulnerability of two well-defined household groups during the transition. Some observers argue that old-age pensioner households have been relatively protected because of a less steep decline in real pensions compared with wages in most transition economies. By contrast, households with young children are believed to have experienced a substantial decline in living standards under reform and show strikingly higher rates of measured poverty than pensioner households. But others argue that the elderly have suffered more than the young during the transition. Can these conflicting viewpoints about the relatively poverty of old and young households be arbitrated? The authors show that strong (though implicit) assumptions underpin certain poverty comparisons. Notably, using a per capita measure of individual welfare assume that there are no economies of scale in household consumption, in the sense that the per capita cost of reaching a specific level of welfare does not fall as household size increases. Relaxing that assumption could affect comparisons, showing higher poverty rates among the elderly because their households tend to be smaller than the households containing children. Even the nature of the transition has implications for economies of scale. The relative cost of housing and other goods and services with at least some public-good characteristics has risen rapidly. These relative price shifts hit small households particularly hard, because a greater share of their expenditures goes to public and quasi-public goods. But transition economies have also experienced big increases in the relative prices of goods and services consumed largely by children, such as kindergarten and other education services. These increases affect younger households more. Since there is no accepted way to establish the true extent of economies of scale in a given country, the question can't be answered exactly. But clearly a small departure from a per capita measure may be enough in some cases to overturn the conventional relative ranking of poverty headcounts: poverty among the elderly may then turn out to be worse than among children.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2009.

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Date of creation: 30 Nov 1998
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Handle: RePEc:wbk:wbrwps:2009
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  1. Pollak, Robert A & Wales, Terence J, 1979. "Welfare Comparisons and Equivalence Scales," American Economic Review, American Economic Association, vol. 69(2), pages 216-21, May.
  2. 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.
  3. Hagenaars, Aldi J M & van Praag, Bernard M S, 1985. "A Synthesis of Poverty Line Definitions," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 31(2), pages 139-54, June.
  4. Deaton, A. & Paxson, C., 1997. "Poverty Among Children and the Eldrely in Developing Countries," Papers 179, Princeton, Woodrow Wilson School - Development Studies.
  5. Robert K. Triest, 1998. "Has Poverty Gotten Worse?," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 97-114, Winter.
  6. Hagenaars, Aldi J M, 1987. "A Class of Poverty Indices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 583-607, October.
  7. Klugman, Jeni & Braithwaite, Jeanine, 1998. "Poverty in Russia during the Transition: An Overview," World Bank Research Observer, World Bank Group, vol. 13(1), pages 37-58, February.
  8. Lanjouw, Peter & Ravallion, Martin & DEC, 1994. "Poverty and household size," Policy Research Working Paper Series 1332, The World Bank.
  9. Giovanni Andrea Cornia, 1995. "Ugly Facts and Fancy Theories: Children and youth during the transition," Innocenti Occasional Papers, Economic Policy Series iopeps95/19, UNICEF Innocenti Research Centre.
  10. Lanjouw, Jean Olson & Lanjouw, Peter, 1997. "Poverty comparisons with non-compatible data: theory and illustrations," Policy Research Working Paper Series 1709, The World Bank.
  11. Pradhan, Menno & Ravallion, Martin, 1998. "Measuring poverty using qualitative perceptions of welfare," Policy Research Working Paper Series 2011, The World Bank.
  12. Angus Deaton & Christina Paxson, 1998. "Economies of Scale, Household Size, and the Demand for Food," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 897-930, October.
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