William Davidson Institute Working Papers Series

Among the many popular images of the Russian transition, none cast a more dramatic shadow than the apparently rapid transformation of an entire system from one characterised by low inequality and largely absent poverty to one marked by extremes of deprivation and prosperity. Once hailed as a salutary contrast to the extremes of well-being so characteristic of many economies at comparable levels of income, Russia now exhibits the tell-tale inequities that mark, for example, many Latin American economies. How accurate is this representation, both in its depiction of the situation pre-transition, let alone the consequences of recent changes? This paper is an attempt to answer these questions in as precise a manner as possible. The paper is organised as follows. Section 1 gives a brief description of the datasets — primarily the six rounds of a large household survey, the Russian Longitudinal Monitoring Survey (RLMS) - that we use in this paper. Section 2 sets out the initial conditions that obtained in the Former Soviet Union and Russia and the picture that emerges from use of official statistics. These are shown to be seriously misleading in a number of key respects. Section 3 deals with the channels of redistribution that are likely to be present in the transition and surveys the evidence available from both aggregate data and firm-level information. In Section 4 the key channels are formalised in a two sector model of transition in which the reallocation of labour and capital across state and private sectors is seen as the determining feature of transition. The model is primarily concerned with labour allocation and hence can provide the paths of inequality and poverty over the transition primarily associated with labour income. Some simulations are presented which provide a set of simple benchmarks for understanding the size of likely effects from both within-sector inequality as also through restructuring and closure probabilities for state firms and the relative productivity of both state and private sectors. Section 5 turns to the empirical findings that emerge from a detailed look at the household surveys, including the factors driving the changes in inequality. Section 6 looks at how stable the transitions over the income distribution have been and, in particular, takes a closer look at groups of stable winners and losers. Section 7 turns to the measurement of poverty and the results that emerge from the household survey regarding both expenditure and income measured poverty. We also look at the characteristics of the poor. Section 8 concludes.