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

  • Mitra, Pradeep
  • Yemtsov, Ruslan

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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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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  1. Flemming, J.S. & Micklewright, John, 2000. "Income distribution, economic systems and transition," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 14, pages 843-918 Elsevier.
  2. Ravallion, Martin, 2003. "Inequality convergence," Economics Letters, Elsevier, vol. 80(3), pages 351-356, September.
  3. Newell, Andrew T., 2001. "The Distribution of Wages in Transition Countries," IZA Discussion Papers 267, Institute for the Study of Labor (IZA).
  4. 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.
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  6. World Bank, 2005. "Russia : Reducing Poverty through Growth and Social Policy Reform," World Bank Other Operational Studies 8523, The World Bank.
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  8. 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.
  9. Theo S Eicher & Cecilia Garcia Penalosa, . "Inequality and Growth," Discussion Papers in Economics at the University of Washington 0083, Department of Economics at the University of Washington.
  10. Shorrocks, A F, 1980. "The Class of Additively Decomposable Inequality Measures," Econometrica, Econometric Society, vol. 48(3), pages 613-25, April.
  11. Kanbur, Ravi & Zhang, Xiaobo, 2001. "Fifty Years of Regional Inequality in China: A Journey through Revolution, Reform and Openness," CEPR Discussion Papers 2887, C.E.P.R. Discussion Papers.
  12. Hartmut Lehmann & Jonathan Wadsworth, 2001. "Wage Arrears and the Distribution of Earnings in Russia," William Davidson Institute Working Papers Series 421, William Davidson Institute at the University of Michigan.
  13. 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.
  14. Gustafsson, Bjorn & Shi, Li, 2001. "The Anatomy of Rising Earnings Inequality in Urban China," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 118-135, March.
  15. Krueger, Dirk & Perri, Fabrizio, 2002. "Does Income Inequality Lead to Consumption Inequality?," CEPR Discussion Papers 3583, C.E.P.R. Discussion Papers.
  16. Wu, Ximing & Perloff, Jeffrey M, 2004. "China's income distribution over time: reasons for rising inequality," CUDARE Working Paper Series 0977, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  17. Gustafsson, Bjorn & Nivorozhkina, Ludmila, 2005. "How and why transition made income inequality increase in urban Russia: A local study," Journal of Comparative Economics, Elsevier, vol. 33(4), pages 772-787, December.
  18. 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).
  19. John Haltiwanger & Hartmut Lehmann & Katherine Terrell, 2003. "Job Creation and Job Destruction in Transition Countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(2), pages 205-219, June.
  20. Milanovic, Branko, 1998. "Explaining the increase in inequality during the transition," Policy Research Working Paper Series 1935, The World Bank.
  21. 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.
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