Surprisingly, the dramatic increase of poverty among the most vulnerable groups is paralleled with rising social spending. Public assistance in the form of social expenditure and transfers to households increased from 12.5% to 19.3% of GDP between 1992 and 1999. To the extent that this rising pattern of social spending is not paralleled by improved welfare in the target groups and intended beneficiaries, the persistently high depth of poverty among households receiving social benefits and assistance raises the issues of efficiency and targeting of public spending. With aggregate social spending at already high levels, increasing efficiency in public spending allocation and targeting mechanisms may become even more important, especially with Latvia acceding to EU membership, where adherence to the Maastrich treaty, the anchor for macroeconomic stability and growth, is mandatory.<sup>49</sup> Alternative means for poverty alleviation should be explored, including improved targeting and reduction of leakages in social spending and transfers to the poor, especially in the Latvian context where social transfers are inequality-reducing and welfare-enhancing. Greater emphasis should also be put on increased employment and income generating activities, particularly in rural areas where unemployment appears as one of the most significant determinants of poverty, with the probability of a given household being poor increasing rapidly with the rising unemployment ratio. Other key determinants of poverty include the household dependency ratio, household geographical location, ownership of assets and housing amenities. The latter is particularly significant in rural areas, where rising ownership of housing amenities is inversely related with the probability of being poor.

In spite of the relatively strong level of association between poverty and its identified determinants (the association is partly illustrated by the significance of the probit coefficients, and the smoothness of the estimated probability curves), the latter do not establish causality to poverty. A dual relationship may even exist between poverty and some of these identified determinants. In particular, poor asset endowment, a characteristic of initial conditions and a residual of the pre-socialism era, may be a constraint to income growth and further accumulation, as well as hedging against risks and uncertainty during economic downturns. Similarly, though unemployment appears to be strongly associated with poverty, high poverty rates may continue to exist, even in a context of low unemployment rates. Depending on the wage structure, extremely low wages may simply be considered as disguised unemployment. In that respect, Latvian authorities have been adjusting their minimum wage to account for increased costs of living over time. A possible future research agenda in the areas of growth, labor market and poverty could focus on assessing the causality between unemployment and poverty, particularly investigating the possible causes of the observed non linear pattern. It could also focus on improving the understanding of some of the key characteristics of the poor and constraints to escaping from poverty in the midst of growth, drawing possibly on a combination of household budget and labor force survey data provided by the Latvian Central Statistics Bureau.

> 49 Under that treaty which is the prevailing framework in the EU and the jurisprudence of the Stability and Growth Pact (SGP), fiscal deficit should not exceed 3 percent of GDP. Together with the goal of a balanced budget in the medium-term, especially against the background of the exchange rate peg of the Lats to the SDR, that stringent ceiling may limit the prospects for continued increase of social transfers for poverty alleviation.

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