Poland experienced a sudden economic transformation in late 1989 and early 1990 that has become known as the “big bang.” The noncommunist government that took power in 1989 ended food price controls in August 1989 and ended price controls on most other products in January 1990. This led to substantial inflation and changes in relative prices. Other aspects of the reforms, including reductions in state orders for manufactured goods and restraints on credit for state-owned enterprises, along with external shocks such as increased import competition and the collapse of the Council for Mutual Economic Assistance (CMEA) trade bloc, also contributed to large declines in real GDP (of 11.4 percent in 1990 and 7.0 percent in 1991 according to IMF estimates).1
The conventional wisdom is that the process of transition to a market economy has been accompanied by great increases in income inequality, both in Poland and in most of the other formerly centrally planned economies of Eastern Europe. For instance, in a cross-country study, Milanovic (1998) reports that, between 1987–88 and 1993–95, the Gini coefficient for household per capita income rose in 17 of 18 Eastern bloc countries. He notes that the average Gini increased from 0.24, a level similar to that in the Scandinavian and Benelux countries, to 0.33, a level similar to that in Canada and the United Kingdom. To put such an increase in historical perspective, it is roughly three times as great as the increase reported for the United States in the 1980s by Atkinson, Rainwater, and Smeeding (1995). For Poland, the Organization for Economic Cooperation and Development (OECD, 1997) reports that the Gini increased from 0.249 in 1989 to 0.290 in 1993, after which it stayed relatively flat through 1996.2
In this paper, we provide new evidence on changes in inequality in Poland during the transition. The main difference between our work and that of previous authors (reviewed in Section I) is that we have obtained for the first time direct access to the detailed microdata of the Polish Household Budget Survey (HBS) conducted by the Polish Central Statistical Office (CSO)3 for the years 1985–92.4 Prior work on inequality in transition economies has been based primarily on aggregate data about income distributions that are published by the statistical bureaus of the various countries. But, as we discuss in Section II, the published aggregate income data for Poland and other transition economies do not correspond to conventional economic measures of household income. However, at least for Poland, meaningful income measures can be constructed using the household level microdata.
Using the HBS microdata, we find no evidence that income inequality increased in Poland in the first three years following the big bang. For instance, we find that Gini coefficients actually declined from 1989 to 1992. Interestingly, while our Ginis for 1992 are quite similar to those reported by the CSO and OECD, we obtain much higher Ginis for the pre-1990 period. We conclude that the published aggregate statistics seriously understate the degree of inequality that existed before the big bang. As a result, most of the post-big bang increase in inequality that is present in the aggregate statistics appears to be spurious.
In the HBS microdata we are able to distinguish between pre- and post-transfer income. We find that inequality in pre-transfer income did in fact increase substantially in the transition. Thus, it appears that transfer programs were quite successful in mitigating any increases in inequality. We find that these programs are well targeted in the sense that most transfers go to those at the low end of the income distribution. This is true even though transfer programs in Poland, as in other transition economies, tend to be based on class rather than income.
Another important difference between our work and that of previous authors is that we examine consumption inequality as well as income inequality. To the extent that households can smooth consumption over time, consumption inequality is certainly a more interesting measure. It is again our access to the detailed microdata that allows us to examine consumption inequality in a meaningful way. As we discuss in Section II, the aggregate consumption figures that were published by the Polish CSO, as well as by other former communist countries, did not correspond to conventional economic measures of consumption. After constructing reasonable consumption measures from the microdata of the HBS, we again find no evidence of increased inequality during the transition.
One reason for the interest in the changes in inequality that may be occurring in transition economies is that, to the extent that inequality has been increasing, it may create social unrest and political pressures that could stall the transition process. Our results suggest that, at least in Poland, such concerns may have been exaggerated. The existing social safety net appears to have done an adequate job of limiting the impact of transition on inequality.
Although we find no evidence of increases in overall inequality, our access to the HBS microdata enables us to examine whether certain socioeconomic groups have been relative winners or losers in the transition. We find that the transition did have significant distributional impacts across broadly defined socioeconomic groups. Some groups also experienced large increases in within-group inequality. For instance, among households for which labor income is the primary source of income, income differentials by education level of household head increased rapidly after the big bang. Gorecki (1994) previously noted such a pattern in the aggregate data released by the CSO. Before the transition, the wage structure in Poland was highly compacted, with wages of college-educated white collar workers little different from those of manual workers. Soon after the big bang, those with a college degree became much more concentrated in the upper quantiles of the income distribution, while those with only primary education became much more concentrated in the lower quantiles. Such a widening of across-group income differentials is to an extent desirable, as it implies an enhanced incentive for human capital investment. But it also raises concerns that dissatisfaction and social unrest may be a problem among those groups that have fared poorly.
In the next section, we describe the prior research on income inequality in Poland during the transition in more detail. Then, in Section II, we describe the HBS data. As we explain there, the Polish HBS is of higher quality and was collected according to a more consistent methodology over the transition period than the microdata for any of the other former communist countries. Thus, while the Polish case is interesting for its own sake, an analysis of the HBS data also provides the best hope for arriving at conclusions about the effects of transition on consumption and income distributions that may be generalizable.
In comparing the relative welfare of households with different levels of income or consumption, an important consideration is that an adjustment needs to be made for household size and, more generally, for the demographic composition of households. Most previous studies on inequality in transition economies have used per capita measures or equivalence scales constructed using industrial country data. An additional contribution of this paper is the construction of a full set of equivalence scales for Poland, which differ in some important respects from those based on industrial country data.
Section III describes our procedure for constructing equivalence scales. Section IV presents our main empirical results on the evolution of inequality. Section V analyzes income and consumption mobility. Section VI concludes.