The World Bank says poverty and inequality have grown much faster than it first thought in the decade since the end of communism.

In a new report presented in advance of the World Bank's annual meeting in Prague, the Bank says that poverty has increased from 2% to 21% in those countries that have been involved in the transition to a market economy, including the former Soviet Union and the countries of Eastern Europe.

The World Bank says that some costs were to be expected from the collapse of communism, but these lasted much longer and hit more deeply than anyone expected at the time.

There has been a sharp rise in inequality, especially in the former Soviet Union, where overall incomes have dropped by 50%. In some regions, such as the Caucasus and central Asia, over half the population now live in absolute poverty - defined as living on an income of $2 per day or less.

No other way

In Eastern Europe, in contrast, there is much less absolute poverty, and a better social safety net.

The bank says it made mistakes by underestimating the cost of transition, and should have focused more on helping design policies which mitigated some of the social costs.

It also admits that it has been surprised by the rapid spread of inequality, with one measure of inequality (the so-called Gini coefficient) doubling in Russia in the last ten years - an unprecedented change, it says.

But it rejects the belief that there was another way to transform these economies, and says that the countries that transformed themselves most quickly - especially the EU membership candidates Poland, Hungary and the Czech Republic - now have the least poverty.

The Cost of Corruption

The report also highlights the Bank's new concern about corruption, and says that one of its biggest mistakes was that it underestimated the need to build new institutions, like a fair legal system.

It also points out that in many of the countries most affected by inequality, the state has essentially been "captured" by special interests who have gained most from the transition.

The World Bank is hoping that the Russian government - where 60% of the region's poor live - may finally be willing to tackle this problem.

It says it will be prepared to renegotiate a new programme of loans with Russia - after giving out only $400m of the previous programme worth $1.6bn.

However, it was too early to say when any new negotiation might be concluded, although the Bank hoped it might be by the beginning of next year.

Russia is widely regarded as the biggest failure by the international institutions, and the new perspective shows why it was so hard for the Bank and the Fund to have any success there.

The challenge of the latest approach is even greater - mobilising the forces of change for political as well as economic reform.

But it is clear from the new and more radical analysis of the importance of corruption that the Bank now has little choice but to try.