DP2422 | Government Cash Transfers, Household Consumption, And Poverty Alleviation - The Case Of Russia

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28/04/2000

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Abstract

The paper develops a new approach to measuring the impact of government cash transfers on poverty alleviation that takes into account endogenous reactions and consumption smoothing of households. We use the methodology to study the impact of changes in government cash benefits on poverty rates in Russia during 1994 to 1998. The methodological contribution is twofold. First, we estimate the propensity to consume from government cash transfers separately for each transfer type, and interpret the differences in the coefficients in the light of Friedman's permanent income hypothesis. The propensity to consume is higher from regular than from transitory income sources, and higher for pensions than for child benefits and other income. Second, we propose a new decomposition technique to disentangle the impact of changes in government transfers and changes in the expenditure distribution excluding cash transfers on movements in poverty rates. At least 30% of the rise in poverty between 1994 and 1998 was due to the changes in cash transfer policy. Keeping benefits at the level of 1994, poverty would have been lower by around 20% in 1998.