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Explaining the increase in inequality during the transition

Author

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  • Milanovic, Branko

Abstract

The transition from planned to market economy has witnessed one of the biggest and fastest increases in inequality ever recorded. Onaverage, inequality in Eastern Europe and the former Soviet Union increased from a Gini coefficient of 25-28 (below the OECD [Organization of Economic Cooperation and Development]average) to 35-38 (above OECD average) in less than 10 years. In some countries, such as Bulgaria, Russia, and Ukraine, the increase in inequality has been even more dramatic, outpacing the yearly speed of Gini increase in the United Kingdom and the United States in the 1980s by three to four times. What are the factors pushing inequality up? The author constructs a simple model of transition defined as the removal of restriction on private sector development. As the private sector becomes free, it attracts workers who leave the shrinking state sector. Wage inequality in the private sector is greater than in the old, relatively egalitarian state sector. This is one of the forces pushing inequality up. The second is the growth of income from self-employment and property, both of which are fairly unequal sources of income both before the transition and now. In addition, some of the released state sector workers remain unemployed. Their incomes decline. Increased inequality is thus accompanied by the"hollowing out"of the middle class (where the middle class is defined as the former state sector workers). One part of state sector workers moves to higher incomes as workers in the private sector or entrepreneurs; another remains jobless. The model is contrasted with the actual developments in six transition economies: Bulgaria (over 1989-95), Hungary (1987-93), Latvia (1989-96), Poland (1987-95), Russia (1989-94), and Slovenia (1987-95). In all countries, wage inequality has increased (in some, like Russia, dramatically); income from self-employment has remained as unequal as before but its share in total income has risen, and the importance of social transfers in total income has increased, but its focus on the poor has not improved.

Suggested Citation

  • Milanovic, Branko, 1998. "Explaining the increase in inequality during the transition," Policy Research Working Paper Series 1935, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1935
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    References listed on IDEAS

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    1. Orazem, Peter F & Vodopivec, Milan, 1995. "Winners and Losers in Transition: Returns to Education, Experience, and Gender in Slovenia," World Bank Economic Review, World Bank Group, vol. 9(2), pages 201-230, May.
    2. Atkinson,Anthony Barnes & Micklewright,John, 1992. "Economic Transformation in Eastern Europe and the Distribution of Income," Cambridge Books, Cambridge University Press, number 9780521438827.
    3. Giovanni Andrea Cornia, 1994. "Income distribution, poverty and welfare in transitional economies: A comparison between Eastern Europe and China," Journal of International Development, John Wiley & Sons, Ltd., vol. 6(5), pages 569-607, September.
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    5. 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.
    6. Jan Rutkowski, 1996. "High skills pay off: the changing wage structure during economic transition in Poland," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 89-112, May.
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    Cited by:

    1. Andrei Shleifer & Daniel Treisman, 2003. "A Normal Country," NBER Working Papers 10057, National Bureau of Economic Research, Inc.
    2. Marek Dabrowski & Oleksandr Rohozynsky & Irina Sinitsina, 2004. "Post-Adaptation Growth Recovery in Poland and Russia - Similarities and Differences," CASE Network Studies and Analyses 0280, CASE-Center for Social and Economic Research.
    3. Branko Milanovic & Mark Gradstein & Yvonne Ying, 2003. "Democracy, Ideology And Income Inequality: An Empirical Analysis," Public Economics 0305002, EconWPA.
    4. Joanna Z. Mishtal, 2009. "Understanding low fertility in Poland," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 21(20), pages 599-626, October.
    5. Phillippe G. Leite & Terry McKinley & Rafael Guerreiro Osório, 2006. "The Post-Apartheid Evolution of Earnings Inequality in South Africa, 1995-2004," Working Papers 32, International Policy Centre for Inclusive Growth.
    6. World Bank, 2002. "Constructing Knowledge Societies : New Challenges for Tertiary Education," World Bank Publications, The World Bank, number 15224, April.
    7. Yemtsov, Ruslan, 2003. "Quo Vadis? Inequality and Poverty Dynamics across Russian Regions," WIDER Working Paper Series 067, World Institute for Development Economic Research (UNU-WIDER).
    8. Dagdeviren, Hulya & van der Hoeven, Rolph & Weeks, John, 2002. "Redistribution Does Matter Growth and Redistribution for Poverty Reduction," WIDER Working Paper Series 005, World Institute for Development Economic Research (UNU-WIDER).
    9. Claudia Biancotti, 2004. "A Polarization of Polarization? The Distribution of Inequality 1970-1996," Temi di discussione (Economic working papers) 487, Bank of Italy, Economic Research and International Relations Area.
    10. Adam McCarty, 2001. "The Social Impact of the Reform Process," Development and Comp Systems 0110004, EconWPA.
    11. Gradstein, Mark & Milanovic, Branko & Ying, Yvonne, 2001. "Democracy and income inequality : an empirical analysis," Policy Research Working Paper Series 2561, The World Bank.
    12. Mitra, Pradeep & Yemtsov, Ruslan, 2006. "Increasing inequality in transition economies : is there more to come?," Policy Research Working Paper Series 4007, The World Bank.

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