# **1. Introduction**

**Moldova, in line with trends in many European and Central Asian countries, has experienced a significant decline in economic poverty and inequality in the past decade** . Although it remains one of the poorest countries in the Europe and Central Asia region, it has achieved remarkable improvements in living standards for its population. This paper looks at economic mobility patterns in Moldova to uncover movements in and out of poverty masked by traditionally observed net poverty changes; in other words, it focuses on the underlying contemporaneous movements in and out of poverty (i.e. churning) in the country, providing additional insights into the dynamics of poverty and vulnerability. Furthermore, findings from this paper identify factors associated with upward economic mobility, but also linked to pockets of poverty, which can inform policy makers in their efforts to reduce poverty and promote a more sustainable and inclusive growth process.

**The empirical analysis makes use of data from the Household Budget Survey in Moldova and focuses on two different time periods** : first, rapid economic growth between 1999 and 2004 and second, a more volatile economic environment before and during the global financial crisis between 2006 and 2011. Using a synthetic panel methodology developed by Dang et al. (2014), results show that economic mobility was largely upward in Moldova in the 2000s: very few people and households experienced movements down. Following the crisis, which hit the country hard, movements upward continued but overall mobility slightly declined.

**This paper also identifies correlates of upward economic mobility to understand differences between households that were able to move out of poverty and into higher socioeconomic groups, and those that did not** . Results suggest that household demographics and individual characteristics such as education and labor market status had a systematic impact on economic mobility. Larger households are associated with a lower probability of upward economic mobility; furthermore, higher dependency rates, particularly of adults over 65 years, are related to a lower probability of moving up. Higher levels of education are strongly associated with upward economic mobility and labor market outcomes at the household level also matter for mobility. A higher household employment rate in the services and manufacturing sectors correlates with increased upward mobility. In addition public and private transfers played a substantial role in lifting people out of economic poverty. Here, receiving pensions and remittances at the beginning of the second period (2006) is more closely associated with mobility.

**This paper is organized as follows** . Section 2 discusses the broader macroeconomic environment behind the development progress in Moldova and highlights stylized facts of poverty reduction during the early and late 2000s. In section 3 we present a general framework to analyze issues of economic mobility and introduce methods used for the data analysis. Section 4 introduces data from the Household Budget Survey in Moldova and presents individual and household characteristics for different groups, including the poor. Section 5 concentrates on patterns of economic mobility in Moldova. Section 6 explores determinants for different transitions on the household and individual level and identifies key factors which influence movements in and out of poverty but also into the middle class. Finally section 7 summarizes key findings and presents broad policy areas to further promote economic mobility in Moldova and continue reducing poverty.

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