# **I. Introduction**

The last World Bank Poverty Assessment in Latvia, published in 2000, focused on income inequality and distribution of welfare across geographical regions, socioeconomic groups and age profile. That report suggested a declining trend in income inequality across most transition economies throughout the second half of the 1990s (World Bank [2000a]). For instance, in the Russia Federation, where the highest increase was recorded, the Gini coefficient, a standard measure of income inequality, increased by about 85%, from 26 to 48% between 1990 and 1995, before declining to 47% in the late 1990s. This consistent and declining trend in income inequality across most transition economies represented a significant shift and reversal from the earlier phase of the transitional period, when income inequality increased dramatically. In the case of Latvia, however, income inequality rose from 24 to 31% between 1990 and 1995 (representing a 31% increase) and then stabilized at about 32% between 1995 and 1997, suggesting a tapering off rather a than a reversal trend. With this leveling off, the magnitude of income inequality remains significantly above the levels recorded in the pre-transition era, suggesting a persistence of income disparities in Latvia.

The Poverty Assessment identified unequal distribution of assets, leakages and bias in the allocation of social transfers as possible determinants of the resilience of income inequality in Latvia (World Bank [2000a]). It also singled out income inequality and leakages in public spending allocation to explain the high level of poverty incidence, established at about 20% in 1997. During that period, significant differences were also observed across geographical regions and socioeconomic groups. However, despite the rapid surge of urban poverty, partly associated with relatively high rates of unemployment in the post-transition period, the urban-rural poverty gap remains large. While less than 11% of urban households were classified as poor, poverty incidence rates exceeding 30% were common in rural areas. Moreover, significant differences existed across geographical regions, with Latgale being the poorest region (Gassmann [1998], World Bank [2000a]). These differences were even more pronounced across socioeconomic groups, with poverty incidence gaps of more than 20 percentage points between the “wage earners” and the “other social benefits” group, the poorest socioeconomic groups.

With the persistence and continued high rates of poverty incidence, a reflection of a relatively low per capita income, Latvian authorities made the reduction of poverty one of the key objectives and strategic priorities of their medium-term development plan spanning 20032005.<sup>2</sup> This development plan identified the pursuit of macroeconomic stability, the implementation of more balanced and sustainable growth and development, the promotion of employment creation, and improvement in the delivery of social services, particularly to the poor and most vulnerable segments of the population, as cornerstones for increasing per capita income and living standards and rapidly achieving poverty reduction objectives (World Bank [2002], IMF [2003]).

> 2 Indeed, at about US$3260 per capita income in 2001, Latvia remained well below the graduation threshold required for its accession to the European Union in 2004. For further details on other criteria and requirements for Latvia’s accession to the European Union (Zile and Steinbuka [2001], Republic of Latvia [2003]).

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