Globalization and Inequality in CIS Countries: Role of Institutions

The process of opening and integration into the world economy in the CIS countries has been part of a more complex process of transition from the planned to market economy. Over the last 10 years most of these countries have liberalized their trade regimes versus non-CIS countries, introduced their own currency, and to some extent liberalized flows of direct and portfolio investment. These and other reforms were accompanied by a pronounced output decline, an increase in poverty rates and inequality indexes. Of course, most of these changes in output and income inequality are attributable to the transition process. However, it is still interesting to know whether globalization and trade opening have enhanced or, on the contrary, decreased the negative effect of transition on incomes in transition countries. Comparison of outcomes in various countries suggests that trade policy per se was less important than the ability of governments to enforce it. Countries, where reforms were implemented slowly, but the government institutions did not collapse, experienced smaller overall output decline, and smaller increase in inequality. Countries with weak governments often performed as “passive globalizers”: the trade-to-GDP ratios in them were quite high, partly accounting for capital flight. In contrast to active globalizers, output in these countries declined, while poverty and inequality increased. However, the worst results were seen in countries cut off from international trade, because of being landlocked or at war or in bad economic relations with the neighboring countries.