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

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  • Luttmer,Erzo F.P.

Abstract

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.

Suggested Citation

  • Luttmer,Erzo F.P., 2001. "Measuring poverty dynamics and inequality in transition economies - disentangling real events from noisy data," Policy Research Working Paper Series 2549, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2549
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Shorrocks, Anthony, 1978. "Income inequality and income mobility," Journal of Economic Theory, Elsevier, vol. 19(2), pages 376-393, December.
    4. Rutkowski, J.J., 1998. "Welfare and the Labor Market in Poland: Social Policy during Economic Transition," Papers 417, World Bank - Technical Papers.
    5. Ravallion, Martin & Lokshin, Michael, 1999. "Subjective economic welfare," Policy Research Working Paper Series 2106, The World Bank.
    6. Simon Commander & Andrei Tolstopiatenko & Ruslan Yemtsov, 1999. "Channels of redistribution: Inequality and poverty in the Russian transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 411-447, July.
    7. Shorrocks, A F, 1976. "Income Mobility and the Markov Assumption," Economic Journal, Royal Economic Society, vol. 86(343), pages 566-578, September.
    8. Jalan, Jyotsna & Ravallion, Martin, 1998. "Transient Poverty in Postreform Rural China," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 338-357, June.
    9. 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.
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    Citations

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    Cited by:

    1. Almas Heshmati, 2006. "Continental And Sub-Continental Income Inequality," The IUP Journal of Applied Economics, IUP Publications, vol. 0(1), pages 7-52, January.
    2. Ksenia Yudaeva, 2002. "Globalization and Inequality in CIS Countries: Role of Institutions," Working Papers w0025, Center for Economic and Financial Research (CEFIR).
    3. Patrick Webb, 2002. "The Dynamics of Food, Nutrition and Poverty in SE Asia," Working Papers in Food Policy and Nutrition 09, Friedman School of Nutrition Science and Policy.
    4. John Gibson & Bonggeun Kim, 2007. "Measurement Error in Long-term Retrospective Recall Surveys Of Earnings," Working Papers in Economics 07/03, University of Waikato.
    5. Olga Cantó & Coral del Río & Carlos Gradín, 2003. "La evolución de la pobreza estática y dinámica en España en el período 1985-1995," Hacienda Pública Española, IEF, vol. 167(4), pages 87-119, December.
    6. Heshmati, Almas, 2004. "Regional Income Inequality in Selected Large Countries," IZA Discussion Papers 1307, Institute for the Study of Labor (IZA).
    7. Olga Canto & Coral del Rio & Carlos Gradin, "undated". "What helps households with children in leaving poverty?: Evidence from Spain in contrast with other EU Counries," Studies on the Spanish Economy 137, FEDEA.
    8. Sonin, Konstantin, 2003. "Why the rich may favor poor protection of property rights," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 715-731, December.
    9. Ayal Kimhi, 2004. "Growth, Inequality and Labor Markets in LDCs: A Survey," CESifo Working Paper Series 1281, CESifo Group Munich.

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    Keywords

    Governance Indicators; Environmental Economics&Policies; Inequality; Economic Theory&Research; Poverty Diagnostics;

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