In addition to income inequality, the persistence of poverty in Latvia, including in the recovery phase of the transitional period, is also partly explained by a significant drop in output and declining employment and wages following a succession of economic downturns and shocks that punctuated most of the early phase of the transitional period (World Bank [2000b]). These included the banking crisis in 1995, and the Russian economic and financial downturns, which are believed to have had negative spillover effects on Latvia and other Former Soviet Union Countries.<sup>3</sup> On average, the Latvian economy recorded a negative growth of –3.6% during the first part of the transition period between 1992-1995, and grew by 0.2% between 1992 and 1997. However, since 1999, more robust economic growth rates have been recorded, with the average over the period 1999-2002 at about 5 percent, reflecting the implementation of structural reforms (World Bank [2002], IMF [2003]).

With the resumption of economic growth in the absence of a distribution neutral assumption, and in a poverty-stricken context, assessing the welfare implications of growth, and in particular differentiating those who are benefiting from those who are not, is key to policymakers. This paper provides the most recent update of the Latvian Poverty Assessment using the 2000 Household Budget Survey (HBS). In particular, it analyzes the dynamics of poverty and income inequality between 1997 and 2000, and investigates the nature and scope of poverty determinants. The results show an increase in household per capita income and expenditures, especially in urban areas, resulting in a relative decline of the headcount index, an illustration of improved living standards in the late 1990s. At the national level, the headcount index fell by 28 percent; the number of poor with per capita income below the poverty line declined from 19.4 to less than 14%. However, the distribution of growth was not uniform, and its benefits were not equally felt across geographical regions and socioeconomic groups. In many areas and socioeconomic groups, poverty remains widespread. This is especially the case for the regions of Latgale and Vidzeme, and the most vulnerable socioeconomic groups whose main source of income is social benefits and assistance. These regions and socioeconomic groups were already identified to be among the poorest in the early phase of the transition and their continued poor ranking may illustrate the stability over time of the poverty map in the absence of a significant pro-poor distributional shift in the recovery phase of the transitional period.

Indeed, income inequality persisted and even increased in a number of regions and sectors of employment, contrasting with the declining trends in the mid-1990s. The Gini coefficient increased by 8%, from 34 to 37%. The relatively skewed nature of the growth process may partly explain the persistence of poverty, particularly in the most vulnerable socioeconomic groups and geographical regions. This paper also identifies a number of other correlates of poverty in Latvia, including spatial location of households correlated with socioeconomic groups, household dependency ratio, housing amenities, income and assets inequality, household ownership of real and financial assets, and the unemployment ratio. However, though poverty is positively correlated with unemployment ratio, the relationship is not linear; and the non linearity is more pronounced in urban areas.

The remainder of this paper is organized as follows. The next section focuses on the dynamics of income inequality, and the impact of social transfers on the scope and trend of

> 3 Indeed the economic crisis witnessed right in the aftermath of the post-socialism era was profound, and was characterized by a significant drop in output, with levels comparable to those recorded during the Great Depression in 1930s (World Bank [2000b]).

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