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

This paper analyzes the evolution of inequality in Polandduring the economic transition that began in 1989?1990. Using microdatafrom the Household Budget Surveys, we find that, after a brief spike in1989, income and consumption inequality actually declined to belowpretransition levels during 1990?1992 and then increased gradually, risingonly moderately above pretransition levels by 1997. In sharp contrast ,inequality in labor earnings increased markedly and consistently throughoutthe 1990?1997 period. We find that social transfer mechanisms,including pensions , played an important role in mitigating increases inboth overall inequality and poverty. We argue that, from a politicaleconomy perspective , transfer mechanisms were well designed to reducepolitical resistance to market-oriente d reforms in the early years oftransition , paving the way for rapid growth. Finally, we provide crosscountryevidence from the transition economies that is consistent with ourinterpretation of the Polish experience and is also consistent with recentwork in growth theory suggesting that redistribution that reduces inequalitycan enhance growth.