technically speaking, the growth could be described as moderately pro-rich (higher growth at the higher quintiles), it brought significant benefits to the poor as well. During 1998-2002, the situation changed radically: only the highest decile managed to maintain its consumption level and the reduction was hardest for the poorest percentiles.

In addition to the discussed indicators, Ravallion and Chen (2003) derive an intuitive, straightforward index to measure pro-poor growth: it is equal to mean growth (change in Π( _h_ ) consumption) for the poor:<sup>10</sup> γ _p_ = ∫ _gic_ ( _p_ ) _dp_ Π( _h_ )<sup>where</sup> Π( _h_ ) is a percentile where 0 the poverty line is drawn (equal to the poverty headcount).

This index can then be compared with an average growth to infer whether the growth is pro-poor. Table 4 presents the comparison.

**Table 4:  Pro-poor Growth**

|**Growth**|**1995**|**1996**|**1997**|**1998**|**19999**|**2000**|**2001**|**2002**|
|---|---|---|---|---|---|---|---|---|
|**Average**|-0.7%|3.5%|2.1%|4.2%|-0.9%|-0.9%|-1.0%|-1.0%|
|**Pro-poor**|0.3%|3.2%|-0.9%|3.2%|-2.1%|-2.8%|-2.3%|-2.1%|

_Source:_ Staff calculations based on GUS data.

# **C. WHAT IS BEHIND THE INCREASE IN CONSUMPTION INEQUALITY?**

Changes in inequalities in consumption can be the result of a number of factors. Four important ones are: (i) changes in the distribution of original income; (ii) changes in the progressivity of the tax and benefit system; (iii) changes in the distribution of savings; and (iv) changes in relative prices of the basket of goods bought by households at different points along the income distribution. Unfortunately, the Polish HBS has very limited information on household savings. Thus, the analysis below focuses on the other three factors identified above.

# **Changes in the Distribution of Original Income and its Components.**

Original income refers to the income that the household has before paying taxes and receiving benefits (other than old-age pensions). As shown in Table 5, over the period 1994-2002 inequality in original income, as measured by the Gini coefficient, increased by around 7 percent, from 0.38 in 1994 to 0.41 in 2002. The increase was surprisingly moderate considering the degree of transformation the country had experienced, particularly since it occurred entirely after 1998 with inequality in original income fluctuating around a stable value in the high growth years of 199498.

Table 5 also shows the main sources of inequality and the main factors behind the increase. Inequalities in labor income were and remain, a major source of total income inequality. In addition their relative role in overall inequality has increased over time until 2001 (from 70.5 percent to 72.3 percent) although it appears to have declined back to 70 percent in 2002.<sup>11</sup> The combination of increased inequality and the growing size of the component attributable to labor

> 10 This index, as Ravallion and Chen (2003) note, has an additional desirable property of being based on an Π ( _h_ )

> “axiomatically appropriate” poverty measure, namely, the Watts index: _W_ = ∫ ln( _H_ / _c_ ( _p_ )) _dp_ . 0

> “axiomatically appropriate” poverty measure, namely, the Watts index: _W_

> 11 The nature of a decline in 2002 is not clear.

10