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Measuring poverty dynammics and inequality in transition economies - disentangling real events from noisy data

  • Luttmer, Erzo F.P.

The author uses instrumental variable methods, and the decomposition of income into transitory and persistent components to distinguish underlying income inequality and changes in poverty from the effects attributable to measurement error or transitory shocks. He applies this methodology to household-level panel data for Russia and Poland in the mid-1990s. The author finds that: 1) Accounting for noise in the data reduces inequality (as measured by the Gini coefficient) by 10-45 percent. 2) Individuals in both countries face much economic insecurity. The median absolute annual change in income or spending is about fifty percent in Russia, and about 20 percent in Poland. But roughly half of these fluctuations reflect measurement error or transitory shocks, so underlying levels of income, and spending are much more stable than the data suggest. 3) The apparent high levels of economic mobility are driven largely by transitory events and noisy data. After transitory shocks are accounted for, about eighty percent of the poor in both Russia and Poland remain in poverty for at least one year. So there is a real risk of an entrenched underclass emerging in these transition economies.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2549.

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Date of creation: 28 Feb 2001
Date of revision:
Handle: RePEc:wbk:wbrwps:2549
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  1. Simon Commander & Andrei Tolstopiantenko & Ruslan Yemtsov, 1997. "Channels of Redistribution: Inequality and Poverty in the Russian Transition," William Davidson Institute Working Papers Series 42, William Davidson Institute at the University of Michigan.
  2. Okrasa,Wlodzimierz, 1999. "The dynamics of poverty and the effectiveness of Poland's safety net (1993-96)," Policy Research Working Paper Series 2221, The World Bank.
  3. Shorrocks, A F, 1976. "Income Mobility and the Markov Assumption," Economic Journal, Royal Economic Society, vol. 86(343), pages 566-78, September.
  4. Lipton, Michael & Ravallion, Martin, 1995. "Poverty and policy," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 41, pages 2551-2657 Elsevier.
  5. Shorrocks, Anthony, 1978. "Income inequality and income mobility," Journal of Economic Theory, Elsevier, vol. 19(2), pages 376-393, December.
  6. Jalan, Jyotsna & Ravallion, Martin, 1998. "Transient Poverty in Postreform Rural China," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 338-357, June.
  7. Bob Baulch & John Hoddinott, 2000. "Economic mobility and poverty dynamics in developing countries," Journal of Development Studies, Taylor & Francis Journals, vol. 36(6), pages 1-24.
  8. Ravallion, Martin & Lokshin, Michael, 1999. "Subjective economic welfare," Policy Research Working Paper Series 2106, The World Bank.
  9. Rutkowski, J.J., 1998. "Welfare and the Labor Market in Poland: Social Policy during Economic Transition," Papers 417, World Bank - Technical Papers.
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