Economic transition and the distributions of income and wealth

This paper relies on a model of wealth distribution dynamics and occupational choice to investigate the distributional consequences of policies and developments associated with transition from central planning to a market system. The model suggests that even an efficient privatization designed to be egalitarian may lead to increases in inequality (and possibly poverty), both during transition and in the new steady-state. Creation of new markets in services also supplied by the public sector may also contribute to an increase in inequality, as can labour market reforms that lead to a decompression of the earnings structure and to greater flexibility in employment. The results underline the importance of retaining government provision of basic public goods and services; of removing barriers that prevent the participation of the poor in the new private sector; and of ensuring that suitable safety nets are in place.     

On the dynamics of inequality in the transition

Inequality has increased in many of the transition economies. At the same time, spending on education has declined. In this paper we survey the factors driving these changes. We then set up a small general equilibrium model to simulate the effect of different policy choices on the path of inequality over the transition. We show that the policies selected in Central Europe engender a relatively rapid spike in inequality but with a Kuznets curve. In the simulations that broadly capture features of the policy regime dominating in Russia and the FSU, we find no Kuznets curve. We then turn to the longer run and look at the way in which both trade liberalization and technological and organizational change are likely to affect the relative demand for types of labour. We show how substantial technological and organizational change - obvious features of transition - can result in raising inequality. Persistence in inequality can be expected to depend critically on the pace at which the acquisition of skills takes place in the economy - and, hence, on the evolution of the educational system. As such, policies aimed at raising adaptability - such as quality educational systems - can be expected to dampen the increase in wage inequality.     

Growth, income distribution and well-being in transition countries

We apply several well-being measures that combine average income with a measure of inequality to international and intertemporal comparisons of well-being in transition countries. Our well-being measures drastically change the impression of levels and changes in well-being compared to a traditional reliance on income measures. Due to low inequality and moderate income levels, socialist countries enjoyed relatively high levels of economic well-being. In the transition process, rising inequality and falling incomes have led to a dramatic absolute decline in well-being and a considerable drop in relative well-being vis-à-vis non-transition countries. We also find a close correlation between income losses and inequality increases. While the transition has been successful in expanding political and civil rights, our indicators suggest that most transition countries are still below the level of economic well-being of the late 1980s.
JEL classification: D6, O15, P27.     

Relative price shifts,economies of scale and poverty during economic transition1

Economic transition is associated with significant shifts in relative prices between private and public goods. If, as a result, public goods claim a larger share of total expenditures, economies of scale in consumption increase. We show how relative price changes might alter the welfare of different‐sized households in the short run and over time. We illustrate, for a selection of transition economies, that conventional poverty profiles are quite sensitive to assumptions made about economies of scale in consumption. In particular, the common view that large households with many children are poor relative to small households (such as those comprising the elderly) is shown to be highly non‐robust.     

Explaining the increase in inequality during transition

This paper attempts to explain the increase in inequality that has been observed in all transition economies by constructing a simple model of change in composition of employment during the transition. The change consists of the 'hollowing-out' of the state-sector middle class as it moves into either the 'rich' private sector or the 'poor' unemployed sector. The predictions of the model are contrasted with the empirical evidence from annual household income surveys from six transition economies (Bulgaria, Hungary, Latvia, Poland, Russia and Slovenia) over the period 1987-95. We find that the most important factor driving overall inequality upwards was increased inequality of wage distribution. The non-wage private sector contributed strongly to inequality only in Latvia and Russia. Pensions, paradoxically, also pushed inequality up in Central Europe, while non-pension social transfers were too small everywhere and too poorly focussed to make much difference.     

Reasons for the low valuation of Russian shares

This note analyses the valuation of Russian assets focusing on the market capitalization of major Russian firms trading in Moscow. It documents that valuations are very low compared to similar assets in mature economies. Several reasons are advanced to explain this phenomenon. The most important of these seems to be the poor record of Russian firms with respect to honouring shareholder rights. Some policy proposals are made to address this problem.     

Foreign direct investment in economic transition: the changing pattern of investments

Foreign direct investment into transition economies is reviewed in detail, both from aggregate data and from a survey of senior managers in 117 western manufacturing companies. It is found that host country transition progress, political stability and perceived risk influence FDI inflows as well as the predominant type of investment.     

Privatization and corruption in transition economies: a panel study

By using three corruption indices, six privatization indicators, and taking the endogeneity problem into consideration, we test the hypothesis that privatization contributes to a decrease in corruption in transition economies. We identified a highly statistically significant and negative association between privatization and corruption in transition economies for three different corruption indices and six different privatization indicators.     

Economic reforms and human development: evidence from transition economies

Do market-oriented economic reforms result in higher levels of human well-being? This article studies the impact of macro-level institutional and infrastructure reforms on the economic, educational and health dimensions of human well-being among 25 transition economies. We use panel data econometrics based on the LSDVC technique to analyse the effects of market-oriented reforms on the human development index (HDI), as a measure of human well-being, from 1992 to 2007. The results show the complexity of reform impacts in transition countries. They show that institutional and economic reforms led to positive economic effect and significant impacts on other dimensions of human development. We find some positive economic impacts from infrastructure sectors reforms. However, not every reform measure appears to generate positive impacts. Large-scale privatizations show negative effects in health and economic outcomes. The overall results show the importance of the interaction among different reform measures and the combined effect of these on human development.     

The curse of natural resources in the transition economies*

The curse of natural resources is a well‐documented phenomenon for developing countries. Economies that are richly endowed with natural resources tend to grow slowly. Among the transition economies of the former ‘Eastern Bloc’, a similar pattern can be observed. This paper shows that a large part of the variation in growth rates among the transition economies can be attributed to the curse of natural resources. After controlling for numerous other factors, there is still a strong negative correlation between natural resource abundance and economic growth. Among the transition economies the prime reasons for the curse of natural resources were corruption and a neglect of basic education. In order to overcome the curse of natural resources and move to a sustainable path of development, the resource abundant transition countries should fight corruption and ensure that their resource revenues are invested in human capital or the preservation of natural capital.     

Outsiders in economic integrationThe case of a transition economy

We use a spatial model of endogenous growth to investigate the likely impact of discriminatory integration between two advanced insider countries on their own welfare as well as on the welfare of an outsider transition economy. A first point is that, since convergence in per capita income levels depends on relative market access and local market size, piece-wise integration causes insider-outsider divergence. Nonetheless, outsiders can gain in absolute terms if integration fosters the global growth rate. We also show that exclusion from a regional agreement and on-going transition have unpredictable joint effects on the structural adjustment, which might even exhibit a swinging behaviour. Such swings may imply large adjustment costs, which can be reduced by careful integration design. With this respect, the asymmetric phasing-out of trade barriers built into the Europe Agreements seems to work in the right direction. Finally, we point out that the predictions of the model in terms of direct investment and terms-of-trade dynamics are broadly consistent with some actual developments in transition economies.     

Enterprise restructuring and bank competition in transition economies

We investigate how bank competition affects the efficiency of credit allocation, using a model of spatial competition. Our analysis shows that bad loans are more likely the larger the number of banks competing for customers. We study further how many banks will be active if market entry is not regulated. Free entry can induce too much entry and thus too many bad loans compared to the social optimum. Finally we analyse how bank competition affects the restructuring efforts of firms. We find that restructuring has positive externalities which give rise to multiple equilibria, with either much or little restructuring activity.
JEL classification: D43, G21, G34, L13, P31, P34.     

Education, inequality and transition

I consider evidence on differences in access to education and in learning achievement within the countries of Central and Eastern Europe and the former Soviet Union. The situation inherited from the communist period is first summarized: there were some significant disparities with, for example, family background having a strong association with tertiary enrolments, as in Western countries. Analysis of the transition period focuses on differences in access and achievement associated with household income and geographic location. Disparities are not the same across the region; in some countries, such as Russia, there are clear grounds for serious concern, but it is unlikely that any country has cause for complacency.     

The impact of unemployment on inequality and poverty in OECD countries

The purpose of this research is to examine the contribution of unemployment to income inequality and poverty in various OECD countries. These relationships have been explored using Luxembourg Income Study micro-data. Considerable differences across OECD countries are revealed through the use of within-household unemployment distributions. These differences help to explain most of the observed divergences in the relationship between unemployment and income distribution, in conjunction with the heterogeneous influence of social benefits on the economic position of the unemployed in these countries. A sub-group decomposition analysis corroborates the limited effect of unemployment on income distribution in most of the considered countries. However, it seems clear that the unemployed are among those with the highest risk of experiencing poverty.
JEL classification: D31, I32, J31.     

Distance in time between transition economies and the European Union

The time distance methodology used offers a new perspective to the problem, an additional statistical measure, and a presentation tool for policy analysis and debate readily understood by policy makers, media and general public. Disparity between the analysed transition economies and EU countries is considerably smaller for other indicators than for GDP per capita. Compared with Ireland, Portugal and Greece Slovenia was in 1995 in 13 cases behind (but time lag of Slovenia never exceeded 10 years) and in 13 cases ahead of them. Sicherl (1997a) discusses application of S-distance to time series regressions, models, forecasting and monitoring. First version received: October 1995/final version received: April 1998     

Deficits for the Rich: Inequality and Instability

Abstract

Deficit spending has long been understood as a stabilizing counter-cyclical force. The thesis presented herein is that over recent decades, the cumulative deficits of government and non-corporate entities have expanded the inequality of wealth and income, which, over the long haul, contributes to slow growth and potential instability. The thesis builds on the Kaleckian-Minsky insight that deficits create gross profits in excess of new investment expenditures (free cash). Since the 1980s, this free cash has been spilled in the stock market through mergers, dividends and stock buybacks—worsening inequality. As the upper classes have a larger range of discretionary spending options, this expanded inequality has made for more spending volatility and speculative endeavors. The authors call for expanded taxes on the rich to claim the deficit-generated free cash. Such taxes would be in the service of more stability and equity.     

Toward an Improved Definition of the Wealthy*

A definition of the wealthy was proposed in this journal [Eisenhauer, J. G. (2008). An economic definition of the middle class. Forum for Social Economics, 37, 103–113]. According to the definition, “the wealthy” are people who could live poorly for a year while living off the interest on their wealth. This paper suggests a more general definition of the wealthy, which encompasses that definition as well as ones based on the ability to live at higher standards of living than the poverty level over longer periods of time than one year while living off interest income alone. Previous empirical work is revisited to show new insights offered by the new definition. The evidence points to the reemergence of a rentier class.     

Inequality in democracies: Testing the classic democratic theory of redistribution

The classic democratic theory of redistribution claims that an increase in the mean-to-median (MM) income ratio causes a majority coalition in the electorate to collectively demand more redistribution. The functional dependence of redistribution on the MM income ratio is tested in parametric and nonparametric regression frameworks using an OECD panel dataset. While the parametric regression model is found to be misspecified rendering subsequent inference invalid, the robust nonparametric regression model fails to uncover evidence that the MM income ratio is relevant for predicting redistribution.     

要素生产率和要素配置作用下的中国城乡收入差距

根据城乡生产函数差异的特征事实构建了城乡收入差距模型,利用我国各省1997—2009年数据研究城乡劳动力比、固定资产比、人力资本比、农业中间品投入、工业化和第三产业规模对城乡收入差距的影响。结果显示,我国城乡要素生产率与城乡要素配置的差异对城乡收入差距具有决定性作用;城乡劳动力比的增长明显有助于缩小城乡收入差距,而城乡人力资本比、固定资本投入比、农业成本、以及相邻地区间的相关性都导致了城乡收入差距的扩大。缩小城乡差距的重要途径是加快农村劳动力的城市化、增加农村教育投入、提高农业生产率、增加农村的物质资本投入,各省缩小城乡收入差距的努力对邻近省份也会产生积极影响。