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Increasing inequality in transition economies : is there more to come?

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  • Mitra, Pradeep
  • Yemtsov, Ruslan

Abstract

This paper decomposes changes in inequality, which has in general been increasing in the transition economies of Eastern Europe and the former Soviet Union, both by income source and socio-economic group, with a view to understanding the determinants of inequality and assessing how it might evolve in the future. The empirical analysis relies on a set of inequality statistics that, unlike"official data", are consistent and comparable across countries and are based on primary records from household surveys recently put together for the World Bank study"Growth, Poverty and Inequality in Eastern Europe and the Former Soviet Union: 1998-2003"[World Bank (2005b)]. The increase in inequality in transition, as predicted by a number of theoretical models, in practice differed substantially across countries, with the size and speed of its evolution depending on the relative importance of its key determinants, viz., changes in the wage distribution, employment, entrepreneurial incomes and social safety nets. Its evolution was also influenced by policy. This diversity of outcomes is exemplified on the one hand for Central Europe by Poland, where the increase in inequality has been steady but gradual and reflects, inter alia, larger changes in employment and compensating adjustments in social safety nets and, on the other for the Commonwealth of Independent States by Russia, where an explosive overshooting of inequality peaked in the mid-1990s before being moderated through the extinguishing of wage arrears during its post-1998 recovery. The paper argues that the process of transition to a market economy is not complete and that further evolution of inequality will depend both on (i) transition-related factors, such as the evolution of the education premium, a bias in the investment climate against new private sector firms which are important vehicles of job creation and regional impediments to mobility of goods and labor, as well as increasingly (ii) other factors, such as technological change and globalization. The paper also contrasts key features of inequality in Russia in the context of other transition economies with trends in inequality observed in China where rapid economic growth has been accompanied by a steep increase in inequality. It argues that the latter's experience is, to a large extent, a developmental, rather than a transition-related phenomenonderiving from the rural-urban divide and is, therefore, of limited relevance for predicting changes in inequality in Russia.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4007.

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Date of creation: 01 Sep 2006
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Handle: RePEc:wbk:wbrwps:4007

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Keywords: Poverty Impact Evaluation; Inequality; Services&Transfers to Poor; Economic Theory&Research; Equity and Development;

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References

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  1. Bénabou, Roland, 1996. "Inequality and Growth," CEPR Discussion Papers 1450, C.E.P.R. Discussion Papers.
  2. Fleisher, Belton M. & Sabirianova, Klara & Wang, Xiaojun, 2005. "Returns to skills and the speed of reforms: Evidence from Central and Eastern Europe, China, and Russia," Journal of Comparative Economics, Elsevier, vol. 33(2), pages 351-370, June.
  3. Ravallion, Martin, 2003. "Inequality convergence," Economics Letters, Elsevier, vol. 80(3), pages 351-356, September.
  4. World Bank, 2005. "Russia : Reducing Poverty through Growth and Social Policy Reform," World Bank Other Operational Studies 8523, The World Bank.
  5. Yemtsov, Ruslan, 2003. "Quo Vadis? Inequality and Poverty Dynamics across Russian Regions," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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  8. Frank Cowell, 1998. "Measurement of inequality," LSE Research Online Documents on Economics 2084, London School of Economics and Political Science, LSE Library.
  9. Simon Commander & Andrei Tolstopiatenko & Ruslan Yemtsov, 1999. "Channels of redistribution: Inequality and poverty in the Russian transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 411-447, July.
  10. Wu, Ximing & Perloff, Jeffrey M., 2004. "China's Income Distribution Over Time: Reasons for Rising Inequality," Institute for Research on Labor and Employment, Working Paper Series qt9jw2v939, Institute of Industrial Relations, UC Berkeley.
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  13. Lehmann, Hartmut & Wadsworth, Jonathan, 2001. "Wage Arrears and the Distribution of Earnings in Russia," IZA Discussion Papers 410, Institute for the Study of Labor (IZA).
  14. Krüger, Dirk & Perri, Fabrizio, 2002. "Does Income Inequality Lead to Consumption Inequality?," CEPR Discussion Papers 3583, C.E.P.R. Discussion Papers.
  15. Milanovic, Branko, 1998. "Explaining the increase in inequality during the transition," Policy Research Working Paper Series 1935, The World Bank.
  16. Cowell, Frank A & Jenkins, Stephen P, 1995. "How Much Inequality Can We Explain? A Methodology and an Application to the United States," Economic Journal, Royal Economic Society, vol. 105(429), pages 421-30, March.
  17. Kanbur, Ravi & Zhang, Xiaobo, 2001. "Fifty Years Of Regional Inequality In China: A Journey Through Revolution, Reform And Openness," Working Papers 7236, Cornell University, Department of Applied Economics and Management.
  18. Theo S Eicher & Cecilia Garcia Penalosa, . "Inequality and Growth," Working Papers 0083, University of Washington, Department of Economics.
  19. Kanbur, Ravi & Tuomala, Matti, 2002. "Understanding The Evolution Of Inequality During Transition: The Optimal Income Taxation," Working Papers 7240, Cornell University, Department of Applied Economics and Management.
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  21. Shorrocks, A F, 1980. "The Class of Additively Decomposable Inequality Measures," Econometrica, Econometric Society, vol. 48(3), pages 613-25, April.
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