Kyrgyz Republic is an interesting caseto study welfare disparities because of pronounced and longexisted differences across various regions, rural, and urbanareas of the country in spite of economic growth and overallpoverty reduction (World Bank 2011). For instance urbanpoverty stood at 31 percent versus 40 percent in rural areasin 2011 (national statistical committee). The welfaredisparities are particularly striking between the growingcapital Bishkek and the other regions. Thus, for example,the poverty in the Naryn region is 50 percent versus 18percent in the capital. The main goal of this paper is toanalyze regional disparities in the Kyrgyz Republic byquantifying and separating the gap in welfare disparities in2011 into two parts: the first part associated withobservable characteristics of households and the second partassociated with differences in marginal returns to thesecharacteristics (potentially related to geographic factors).Welfare disparities are analyzed between and within theregions. In addition, the role of returns andcharacteristics in explaining welfare disparities both atthe mean and across the distribution using oaxaca-blinderdecomposition and its extensions is quantified. The proposedresearch is an important source of empirical evidencetesting the propositions from the new economic geography.This is also the first empirical paper aimed at explainingregional welfare disparities in a country from the CentralAsian region where the urban rural gap is an importantcomponent of inequality. The paper is structured as follows:it starts from the background information describing welfaredisparities, economic growth and structural differencesacross different areas. The third section briefly discussesthe methodology. The results of the decomposition arepresented and discussed in the fourth section. The fifthsection concludes.
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