Is inequality an inevitable fact of transition?

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According to Dan Ariely prof. of psychology and behavioral economics from MIT top 20% of the Americans have 85-90% of the wealth which is not astonishing for the most of educated people, but prof. Ariely also claim that bottom 40% of Americans have only 0.3% of the wealth which is quite shocking.[1] USA is probably the most outstanding representative of market economy and one may wonder what changes did socialist countries of the former Soviet Union experienced during the transition from a command economy to a market economy, from communist political system to democracy. It is natural to think that income inequality is an inevitable fact of transition and this issue had been discussed a lot lately by many researchers. There are number of studies and statistical reports on the income levels in CIS (Ukraine, Russia, Kazakhstan, Belarus, Azerbaijan, Uzbekistan, Turkmenistan, Georgia, Armenia, Tajikistan, Kirgizstan and Moldova) countries and we will use some of them to see the level of income inequality. It is also important to analyze the reasons for income inequality during the transition to market economy and onwards. Finally, it is crucial to see the gains and losses of inequality and transition.

GINI index map for CIS countries of 1987-1991

GINI index map for CIS countries of 1987 – 1991.

Let us consider the situation with income distribution in Russian Federation the biggest representative of CIS countries. We can see from the data given by Mihali Simai in his paper[2] that real wages in all CIS countries decreased on average by 50% and the income inequality in Russian Federation (i.e. the gap in income of the poorest 20% and the richest 20% of population) have been gradually increasing during the 1990 – 2001. Historical GINI index (which is used to measure the income inequality) for CIS countries in 1987 – 1991 and 2007 – 2011[3] supports our claim. We can see that since the beginning of transition GINI index had increased in most countries of the former Soviet Union, which implies that gap between incomes of the rich and the poor had become bigger.

 

GINI index map for CIS countries of 2007 – 2011

GINI index map for CIS countries of 2007 – 2011.

Knowing that the income inequality took place during the transition and onwards we should look for reasons. First of all one should take into consideration that privatization had become an important step on the way to market economy. In Soviet Union everything was mutual or belonged to the state and no one had property, but when the transaction started people started to privatize not only their flats and houses, but also industrial objects and plants in some countries (i.e. Ukraine). This process became a basis for income inequality because after the first wave of privatization there was rich owners of plants and industrial objects, medium income people (mostly the owners of medium size manufactures) and the poor – those who did not manage to privatize anything. Secondly, transition made entrepreneurship possible and smart, talented people who had enough luck started their businesses and formed a middle class, but there was few of such.[4] Finally, any competitive labor market should have an income inequality as well as unemployment to create incentives to induce greater effort. The vast diversity of different education levels, skills and efforts of workers had become a main reason for wage differentials.

Almost 15 years have passed since the beginning of the transition in the economies of the CIS countries and one can find a lot of cons and pros of inequality. Probably the most evident gain is that transition led to equality in opportunities through income inequality. Basically in democratic society of market economy there is more social mobility, it is possible to achieve anything independently on ones social background. On the other hand most countries experienced a significant recession during the transition and the living conditions of people in lower part of the income distribution had fallen far beyond standards of living.[5]

So, when talking about the market economy we should always keep in mind that market economy often implies income inequality, which had become a hot topic back in 1990’s during the fall of Soviet Union. Most countries of CIS (Ukraine, Russia, Kazakhstan, Belarus, Azerbaijan, Uzbekistan, Turkmenistan, Georgia, Armenia, Tajikistan, Kirgizstan and Moldova) experienced drastic increase in income inequality compared to the years in Soviet Union. These changes in income distribution were caused by privatization, creation of labor market with strong dependence between the skills and wages of the employees. Income inequality became an integral factor in the system of incentives in the market economies and gave birth to equality in possibilities. But the dramatic consequence of the inequality is that it may increase the proportion of poor people in the economy and decrease the overall level of happiness in the country.



[1] http://www.youtube.com/watch?v=u8Beo9YM_Pk
[2] Poverty and Inequality in Eastern Europe and the CIS Transition Economie,  2006 United Nations, Department of Economics and Social Affairs,  12-17
[3] http://data.worldbank.org/indicator/SI.POV.GINI?page=4
http://data.worldbank.org/indicator/SI.POV.GINI
[4] How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia and Central Asia, 2007, Aslund, Anders, 143 – 181.
[5] Income, Inequality and Poverty during the Transition from Planned to Market Economy, 1998, World Bank, Washington DC,  Milanovic Branco, 195 – 214.

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