percent in Russia (in 2004), reflecting inter alia a more sizeable adjustment in employment in Poland compared to Russia.

The second determinant of changes in inequality are **transfers** , pensions and other social benefits. The effect of transfers on inequality was not uniform, and changes were mostly driven by changes in the size and the distribution of pensions. In both countries changes in the distribution of pensions played a significant role as contributors to the _increase_ in inequality. But since their concentration coefficients were below those of market income sources, this expansion reduced inequality compared to potential _levels_ . Had there be no increase in transfers in Poland, inequality would have been fully 3 Gini points (or 10 percent) higher. The effects would indeed have been more progressive had there been no unequalizing change in the concentration coefficients of pensions.<sup>10</sup> Other social transfers, on the other hand, played a dramatically different role in Poland and Russia: thus, for example, the failure to target social benefits in Russia, as shown by a rapid increase in their concentration coefficient in early transition, is in sharp contrast to the situation in Poland.

The third broad driver of inequality is **private sector growth combined with increasing informality** . The latter is difficult to measure with precision since the data cover reported incomes, which are known to underestimate informal incomes significantly [Yemtsov (1999)]. In particular it is important to distinguish between survival type activities, new entrepreneurial incomes and incomes from property. Informal income in various guises features in different parts of the income spectrum: (i) in farm income, in the form of in-kind consumption from own land plots, (ii) in entrepreneurial income, as many businesses are not registered or in the form of “side” wages reported as a result of “free-lancing”, or (iii) in “other income”, especially in the CIS where this term is often used as a euphemism for not fully legal or untaxed income. In terms of sheer size its effects were large. It is also quite remarkable that in the post-1998 crisis period in Russia some income sources with a strong informal component, such as farming and other incomes, show a fall in their concentration coefficients.

To summarize these results briefly, the comparison of Poland and Russia from the late 1980s to early 2000s finds that there is no single determinant of inequality; indeed, different drivers, at times working in opposite directions, combined to create a complex patchwork which is rich enough to allow a wide variety of outcomes. The analysis now turns to a more in-depth examination of spatial and other group-based factors of inequality.

10 This increase might seem somewhat counterintuitive, as transfers are often regarded as factors mitigating against inequality increase (Keane and Prasad [2002a]). Paradoxically, it was largely a result of the increased pensions and greater reliance on pension payments by recipients. Before transition inadequate pension payments were often supplemented by individual work post-pension age, and their recipients were as likely to be in the bottom of the distribution as in the top. After the changes in pension policy and indexation most pensioners moved to the middle of the distribution, while having to forego additional earnings with tighter labor markets. This created a stronger positive correlation between income level and pensions and hence larger concentration coefficients. Gustaffson and Nororozhkina (2005) used a unique study of households in Taganrog in 1989 and a follow-up study in 2000 to arrive at the same conclusions: the main beneficiaries from expanding public transfers have been households in the middle of the income distribution, and that also positively contributed to the increase of income inequality in Russia.

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