Poverty and Consumption Smoothing in Russia

Abstract

This paper investigates to what extent Russian households have been able to protect their consumption against income shocks during the transition and whether the ability to smooth consumption is related to poverty. We use the cross-section and panel dimensions of the Russian Longitudinal Monitoring Survey (RLMS) from 1994 to 2004. Empirical analyses of such panels have often been based on differenced data in order to eliminate individual household effects. In this study household expenditures are modeled using an Error Correction Mechanism (ECM) which better exploits the information in the level data. The model makes an explicit distinction between short and long run dynamics of consumption. Generalized Method of Moment (GMM) estimates of the short run income elasticity are significantly positive and less than unity. In other words, we and that households can (only) partially protect themselves against income shocks. Furthermore, income shocks have smaller effects on food consumption than on non-food expenditures. We present some evidence that the population is not homogeneous in terms of consumption smoothing ability and that a low smoothing ability is not necessarily associated with a high poverty risk. For instance households with pensioners, who have a relatively low poverty risk, have a high smoothing ability; but rural households, who have a high poverty risk, also manage to smooth food expenditures quite well, most likely because of own food production opportunities. Nevertheless, the ability of households to smooth non-food expenditures tends to increase as their average expenditures rise above the poverty line. These exploratory results suggest that development and social protection policies not only play a role in terms of poverty reduction but also influence households' abilities to deal with income shocks.