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Inequality, Fiscal Capacity and the Political Regime: Lessons from the Post-Communist Transition

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Author Info
Christopher Gerry
Tomasz Mickiewicz ()

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Abstract

Using panel data for twenty-seven post-communist economies between 1987-2003, we examine the nexus of relationships between inequality, fiscal capacity (defined as the ability to raise taxes efficiently) and the political regime. Investigating the impact of political reform we find that full political freedom is associated with lower levels of income inequality. Under more oligarchic (authoritarian) regimes, the level of inequality is conditioned by the state’s fiscal capacity. Specifically, oligarchic regimes with more developed fiscal systems are able to defend the prevailing vested interests at a lower cost in terms of social injustice. This empirical finding is consistent with the model developed by Acemoglu (2006). We also find that transition countries undertaking early macroeconomic stabilisation now enjoy lower levels of inequality; we confirm that education fosters equality and the suggestion of Commander et al (1999) that larger countries are prone to higher levels of inequality.

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number wp831.

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Date of creation: 01 Jul 2006
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Handle: RePEc:wdi:papers:2006-831

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Related research
Keywords: income inequality democracy oligarchy fiscal capacity economic reform transition

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
P35 - Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance

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  1. Augusto López-Claros & Sergei V. Alexashenko, 1998. "Fiscal Policy: Issues During the Transition in Russia," IMF Occasional Papers 155, International Monetary Fund.
  2. Stanley Fischer & Ratna Sahay, 2000. "The Transition Economies After Ten Years," IMF Working Papers 00/30, International Monetary Fund.
  3. John E. Anderson, 2005. "Fiscal Reform and its Firm-Level Effects in Eastern Europe and Central Asia," William Davidson Institute Working Papers Series wp800, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. R Jackman & R Layard & M Manacorda & B Petrolgolo, 1997. "European versus US Unemployment: Different Responses to Increased Demand for skill?," CEP Discussion Papers 0349, Centre for Economic Performance, LSE. [Downloadable!]
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  6. De Long, J Bradford & Shleifer, Andrei, 1993. "Princes and Merchants: European City Growth before the Industrial Revolution," Journal of Law & Economics, University of Chicago Press, vol. 36(2), pages 671-702, October.
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  7. Anthony B. Atkinson, 2000. "The Changing Distribution of Income: Evidence and Explanations," German Economic Review, Blackwell Publishing, vol. 1(1), pages 3-18, 02. [Downloadable!] (restricted)
  8. Stanley Fischer & Ratna Sahay, 2000. "The Transition Economies After Ten Years," NBER Working Papers 7664, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September. [Downloadable!] (restricted)
  10. Falcetti, Elisabetta & Raiser, Martin & Sanfey, Peter, 2002. "Defying the Odds: Initial Conditions, Reforms, and Growth in the First Decade of Transition," Journal of Comparative Economics, Elsevier, vol. 30(2), pages 229-250, June. [Downloadable!] (restricted)
  11. Mattias Lundberg & Lyn Squire, 2003. "The simultaneous evolution of growth and inequality," Economic Journal, Royal Economic Society, vol. 113(487), pages 326-344, 04. [Downloadable!] (restricted)
  12. Glaeser, Edward & Scheinkman, Jose & Shleifer, Andrei, 2003. "The injustice of inequality," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 199-222, January. [Downloadable!] (restricted)
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  13. Merlevede Bruno, 2003. "Reform reversals and output growth in transition economies," Working Papers 2003013, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
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  14. Simeon Djankov & Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "The Regulation Of Entry," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 1-37, February. [Downloadable!] (restricted)
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  15. Philippe Aghion & Simon Commander, 1999. "On the dynamics of inequality in the transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 275-298, July. [Downloadable!] (restricted)
  16. Mark Gradstein & Branko Milanovic, 2004. "Does Libertè = Egalité? A Survey of the Empirical Links between Democracy and Inequality with Some Evidence on the Transition Economies," Journal of Economic Surveys, Blackwell Publishing, vol. 18(4), pages 515-537, 09. [Downloadable!] (restricted)
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  17. Konstantin Sonin, 2003. "Why the Rich May Favor Poor Protection of Property Rights," Working Papers w0022, Center for Economic and Financial Research (CEFIR). [Downloadable!]
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  18. Anderson, Edward, 2005. "Openness and inequality in developing countries: A review of theory and recent evidence," World Development, Elsevier, vol. 33(7), pages 1045-1063, July. [Downloadable!] (restricted)
  19. Anthony B. Atkinson & Andrea Brandolini, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 771-799, September. [Downloadable!] (restricted)
  20. Mark E. Schaffer & Gerard Turley, 2000. "Effective versus Statutory Taxation: Measuring Effective Tax Administration in Transition Economies," William Davidson Institute Working Papers Series 347, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  21. Simon Johnson & John McMillan & Christopher Woodruff, 2000. "Entrepreneurs and the Ordering of Institutional Reform: Poland, Slovakia, Romania, Russia and Ukraine Compared," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 1-36, March. [Downloadable!] (restricted)
  22. Simon Commander & Andrei Tolstopiantenko & Ruslan Yemtsov, 1997. "Channels of Redistribution: Inequality and Poverty in the Russian Transition," William Davidson Institute Working Papers Series 42, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
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