#16 - JRL 8089 - JRL Home
From: "Ed Dolan" <dolan@alumni.indiana.edu>
Subject: Wolpin/ Normality and Inequality/ 8087
Date: Thu, 26 Feb 2004

Joseph Wolpin [JRL 8087] makes an important point when he criticizes Schleifer and Treisman [JRL 8078] for dismissing the rise in inequality in Russia as an unfortunate by product of otherwise beneficial reforms: "[a]s unfortunate as the growth of inequality in Russia has been, it is largely the result of the inevitable upheavals associated with rationalizing economic activity."

Wolpin is right. The Shleifer/Treisman view is inconsistent with recent scholarship on the sources of inequality in transition economies, which suggests that in Central and Southern Europe and the Baltic States, the view of inequality as a by-product of beneficial reforms is valid, whereas in Russia and other CIS states, rising inequality is a sign of a distorted and incomplete transition process characterized by corruption and state capture. A short summary of the World Bank research follows:

Excerpted from Transition: The First Ten Years, World Bank, 2002 (Box 1, p. xiv)

Increased Inequality The countries of Europe and Central Asia started the transition with some of the lowest levels of inequality in the world. Since then, however,inequality has increased steadily in all transition economies and dramatically in some of them. Countries such as Armenia, the Kyrgyz Republic, Moldova, and Russia are now among the most unequal in the world, with Gini coefficients (a standard measure of inequality) nearly twice their pretransition levels. It is tempting to attribute increasing inequality to reforms and liberalization. But this is only part of the story. While inequality has increased almost everywhere, the more advanced reformers show much more equal, rather than more unequal, outcomes, compared with less advanced reformers. This difference cannot be solely explained by different conditions across the countries at the start of transition.

Rather, a recent World Bank study [Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia. World Bank, 2000]. shows that positive developments largely explain the rise in inequality in the CSB [Central and Southern Europe and the Baltic States] : rising returns to education, decompressing wages, and emerging returns to risk taking and entrepreneurship. These forces are welcome despite the increase in inequality, because they signal that the market is now rewarding skills and effort, as in more mature market economies. In the CSB, moreover, strong social transfers and redistribution mechanisms have dampened the rise in education premiums and wage dispersion, in line with the demands these societies have placed on their governments for such measures.

The experience of the CIS is very different. Rising education premiums and wage dispersion explain very little of the rise in inequality. In Armenia, Georgia, the Kyrgyz Republic, Moldova, and Russia income differences linked to educational achievement explain less than 5 percent of inequality, compared with 20 percent in Slovenia and 15 percent in Hungary and Poland. The causes of the huge rise in inequality lie: In the prevalence of widespread corruption and rent seeking, in the capture of the state by narrow vested interests, and in the resulting collapse of formal wages and income opportunities. People, except for a privileged few, are largely stuck in their low-paying (and sometimes nonpaying) jobs. To make ends meet they supplement their incomes with diverse forms of self-employment, much of it subsistence agriculture in small household plots. This has led to highly unequal outcomes.