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

Posted: 11 Mar 2002

See all articles by Michael P. Keane

Michael P. Keane

Arizona State University (ASU) - Economics Department; University of Technology, Sydney (Visiting July 2006-Present)

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

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Abstract

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.

Keywords: Transition, income and earnings inequality, social transfers, redistribution, political economy of reforms

JEL Classification: D31, J31, 015

Suggested Citation

Keane, Michael P. and Prasad, Eswar S., Inequality, Transfers and Growth: New Evidence from the Economic Transition in Poland. Review of Economics and Statistics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=303399

Michael P. Keane (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

University of Technology, Sydney (Visiting July 2006-Present)

PO Box 123 Broadway
NSW 2007
Australia
480-965-1053 (Phone)
480-965-0748 (Fax)

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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