# **1. Introduction**

# **1.1. Motivation and objectives of the study**

The economic crisis in East and Central Europe (ECA) over the past decade, and the associated increase in poverty, have been well documented. ( _Transition_<sup>_1_</sup> _)_ The rise in income or expenditure poverty has resulted from the loss of enterprise jobs, the decline of agriculture, and cutbacks in public sector employment. Many elements of the safety net, such as housing and public services provided by government and formerly provided by state enterprises have sharply deteriorated, resulting also in deprivation in terms of the nonincome aspects of well-being. The effects of these phenomena on the urban population have been particularly stark—resulting in more dramatic rates of urban poverty in ECA than in other low or middleincome countries—an outcome that has been less well researched.

The aim of this study is to contribute to a better understanding of the extent and nature of poverty in urban areas of this region, giving particular attention to the disparities within urban areas between capital cities and secondary cities (drawing comparisons with rural areas where this is useful), and focusing on dimensions of poverty related to provision of network infrastructure and energy services in cities.<sup>2</sup> The paper is intended to fill gaps in knowledge about access of the poor to infrastructure and energy services, and about urban poverty across the region, by systematically using available survey data to develop a regional profile of these dimensions of poverty. The study was prepared as an input into ECSIE strategy and ECA poverty work and, as such, was intended to be of use to Bank staff in their work.

# **1.2. The context of urban poverty in ECA: the socialist legacy**

Urban poverty in ECA reflects a particular history and character of the urban context, rooted in the socialist legacy of these countries. ( _Commissars_<sup>3</sup> ) Relative to their GDP per capita, the transition countries are overurbanized—with a higher share of urban population than is typical for their income level, because of the planned drive towards industrialization under socialism (Figure 1.1). While central planning dictated the establishment and location of industrial firms, many of the normal developments that would accompany market-based urban growth and respond to household demands were suppressed. In particular, urban land was more heavily tied up in industrial use than is typical in market-based cities. Where privately owned, housing became a relatively illiquid asset because of regulations and other factors suppressing a housing market, but residents of state- or enterprise-owned housing also had little residential mobility.

While access to urban infrastructure of water and sanitation, electricity, and district heating was provided to a fairly high share (with almost universal coverage in some cases) of the urban population in most of the region at the time of transition, urban infrastructure was heavily subsidized and few systems were commercially viable as state subsidies were reduced. Shares of household expenditures on housing and utilities in the transition countries have risen several-fold since the transition, yet remain very low compared to OECD averages. Maintenance of the infrastructure facilities and services (as well as maintenance of (formerly) state-owned housing) has deteriorated to the point where reliability and even access are becoming significant welfare issues. Because most of the ECA economies were so heavily industrialized, with liberalization the inherited rigidities hampered the supply response in creation of jobs, housing, land and

> 1 World Bank, _Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia_ .  Washington, D.C. 2000.  (hereafter Transition)

> 2 Even in developed countries, network infrastructure is not necessarily available in rural areas.  However, this does not necessarily mean rural residents lack adequate sources of heating, water and sanitation since viable solutions for rural areas may differ from those for urban areas.

> 3 World Bank, _From Commissars to Mayors: Poverty and Cities in Transition Economies_ .  Long version draft.  2000. (hereafter Commissars).