This paper analyzes the evolution of inequality in Poland during the economic transition that began in 1989-1990. Using microdata from the Household Budget Surveys, we find that, after a brief spike in 1989, income and consumption inequality actually declined to below pretransition levels during 1990-1992 and then increased gradually, rising only moderately above pretransition levels by 1997. In sharp contrast, inequality in labor earnings increased markedly and consistently throughout the 1990-1997 period. We find that social transfer mechanisms, including pensions, played an important role in mitigating increases in both overall inequality and poverty. We argue that, from a political economy perspective, transfer mechanisms were well designed to reduce political resistance to market-oriented reforms in the early years of transition, paving the way for rapid growth. Finally, we provide cross-country evidence from the transition economies that is consistent with our interpretation of the Polish experience and is also consistent with recent work in growth theory suggesting that redistribution that reduces inequality can enhance growth.

Using confidential firm-level panel data from the Bureau of Economic Analysis, we examine how the bilateral trade flows of U.S. multinational corporations (MNCs) and their Canadian affiliates responded to U.S.-Canadian tariff reductions from 1983 to 1992. We find that Canadian affiliate sales to the United States are negatively correlated with Canadian tariffs, but U.S. parent sales to Canadian affiliates have little association with Canadian tariffs. These results contradict the notion that Canadian tariff reductions would lead to a ‘hollowing out’ of Canadian manufacturing. We also find substantial heterogeneity in MNC responses to tariff changes within narrowly defined manufacturing industries. Overall, bilateral trade liberalization is trade-creating, as U.S. MNCs integrated their North American production such that Canadian affiliates increased sales to the United States and reduced domestic sales.