Economic Systems 36 (2012) 210

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Economic Systems
jo urnal home page : www.elsevier.com/loc ate/ecos ys

Inequality and reforms in transition countries

David Aristei, Cristiano Perugini *
Department of Economics, Finance and Statistics, University of Perugia, Via A. Pascoli 20, 06123 Perugia, Italy

A R T I C L E I N F O A B S T R A C T

Article history: Distributional patterns evolved quite differently and stabilized at

Received 4 October 2010 diversied levels across the CentralEastern European and former
Received in revised form 15 March 2011 Soviet Union countries which underwent transition. In this paper
Accepted 22 April 2011
we provide an overview of income inequality dynamics for 22
Available online 16 September 2011
transition countries from 1989 to 2008 and of the explanations and
interpretations proposed by the main literature. We then highlight
JEL classication: that while the effects of different transition approaches on output
D31
dynamics and other macroeconomic aggregates have been largely
P21
analysed, scarce attention has been devoted so far to their impact on
P36
distributive patterns. However, this kind of analysis might usefully
Keywords:
contribute to complete the complex picture of the many social,
Inequality economic and structural factors affected by transition and provide
Transition useful policy insights for those countries still experiencing deep
Reform approaches institutional change.
2011 Elsevier B.V. All rights reserved.

1. Introduction

The transition of formerly planned economies towards market economy that started at the
beginning of the 90s has provided a stunning opportunity for economists to observe a process of
systemic transformation as it had never happened and been theorised before. While economic and
political theory was familiar with the causes and processes of transformation of capitalist societies
into centrally planned systems, the reverse direction of change largely took economists by surprise.
The main consequence of this lack of theoretical and empirical knowledge was that policy makers
governing Central and Eastern Europe and dissolving Soviet Union countries at the outset of
transformation had to deal with a huge and urgent necessity of shaping market institutions with a
variety of policy recommendations and advice, sometimes contrasting, received initially on the basis
of theoretical conjectures only. As a result, and also due to the many country-specic internal and
external constrictions, actual transition patterns turned out to be quite diversied in terms of speed

* Corresponding author. Tel.: +39 075 585 5285; fax: +39 075 585 5299.
E-mail address: perugini@unipg.it (C. Perugini).

0939-3625/$ see front matter 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecosys.2011.09.001
 D. Aristei, C. Perugini / Economic Systems 36 (2012) 210 3

and sequencing of reforms, and contributed to shape a variety of macroeconomic conditions. Due to
the unexpectedly large and persistent initial output drop and to the high ination dynamics that
occurred, the early theoretical and empirical literature devoted scarce direct attention to changes in
distributive patterns (Roland, 2001). However, in more recent years an extensive literature has
highlighted the reasons and mechanisms behind the generalised raise in economic and social
inequality which accompanied transition. Distributional patterns in the 90s evolved quite differently
across Central and Eastern European and post-Soviet Union countries, attaining (and in some cases
stabilising at) diversied levels after two decades of reforms.
The aim of this paper is to offer an overview of the evolution of income inequality in these countries
during transition (Section 2) and of the explanations proposed by the selected literature (Section 3),
while highlighting the contribution provided by the four papers included in this Symposium Issue. We
then discuss the opportunity of investigating more directly the impacts of different reform approaches
on inequality (Section 4). Section 5 briey concludes.

2. Inequality during transition: an empirical overview

Although some forms of disparities also existed under central planning and were tolerated for various
reasons (see Milanovic, 1998), the shift towards market economies allowed existing visible and hidden
inequalities to develop and new inequalities to unfold. Fig. 1 reports income inequality levels for
transition countries of Central and Eastern Europe (CEE) and former Soviet Union (FSU) countries just
before transition (1989), ten years later (1998) and in the most recent year available (2008).
In all transition countries, as underlined by an extensive literature, income inequality has been
rising compared to the pre-transition level. However, the picture is, interestingly, quite diversied. As
a reference point, average OECD income inequality measured by the Gini coefcient has increased
from 29.3% in the mid-1980s to 31.3% in the mid-2000s (OECD, 2008). Average inequality for the
western EU countries in the same years has instead increased from 27.7% to 29.3%. The CEE countries
presented, at the outset of transition, low levels of measured inequality: the Gini coefcient
approached 0.28 points only for Poland, Estonia and Croatia, whereas the Czech Republic and the

Fig. 1. Income inequality in transition countries, Gini coefcients. Note: The intermediate year is 1996 for Armenia, 1997 for
Moldova and 1999 for Tajikistan; the nal year is 2004 for Tajikistan and 2005 for Uzbekistan. The following Gini coefcients are
based on earnings rather than income: 1989 for Russian Fed., Slovak Rep. and Slovenia; 1998 for Azerbaijan; 2008 for Russian
Fed., Azerbaijan and Kazakhstan. The 2008 Gini for Georgia is calculated on consumption.
Sources: WIID May 2008 release (version 2.0c), TransMONEE 2011 database, Eurostat, POVCALNET, CIA World Factbooks.
4 D. Aristei, C. Perugini / Economic Systems 36 (2012) 210

Slovak Republic were around 0.20. During the rst turbulent years of transition, inequality increased
in all countries, which, however, experienced remarkably different Gini growth rates. The Czech
Republic, the Slovak Republic and Slovenia, in particular, were able to keep their inequality growth to a
minimum; to a lower extent this was also the case for Hungary, Romania and Croatia. In the remaining
countries, at the end of the 90s, income inequality evolved more markedly, in a few cases approaching
35% (Bulgaria and Baltic Countries). During the ensuing decade, for various states, inequality kept
growing signicantly (Latvia and Romania) or weakly (Poland, Czech Republic, Hungary and
Lithuania), while the remaining CEE states experienced a decrease.
Due to the historical and political events that hit the Balkan Region during the 90s, data for the
remaining SouthEastern European countries are largely missing or incomplete. In Serbia, inequality
measured on income was at 0.40 in 2003 and showed a continuously decreasing trend (0.35 in 2008); a
substantial stability, but at lower levels (around 0.30/0.32), is instead recorded for earnings inequality
(source: TransMONEE 2011 Database). FYR Macedonia on the other hand observed an increase of Gini
coefcient from around 0.30 in the mid-90s to over 0.39 in 2006, when, however, a decreasing trend
seems to have started (0.37 in 2008). The little information available for Albania and Bosnia and
Herzegovina reveals Gini coefcients above 0.44 and 0.40 in the second half of the 2000s, respectively.
In the FSU, with the only exceptions of Belarus and Ukraine, pre-transition inequality was relatively
higher and growing dramatically during the 1990s, exceeding 40% for most of the countries and 50
Gini points in Kazakhstan and Georgia. However, contrary to what occurred in the European transition
countries, in many cases inequality has been decreasing during the ensuing decade, even remarkably
in the cases of Moldova, Georgia, Kazakhstan and Tajikistan. With few exceptions, inequality levels in
2008 in the FSU countries remain relatively high.
Fig. 2 focuses on the evolution of inequality in selected and meaningful transition countries, for
which relatively complete time series are available (Gini for EU-15 is also included as a benchmark).
The plots adequately represent the many features of inequality during transition: (a) its generalized
increase, but at remarkably different rates; (b) again a generalized decreasing pattern from the
beginning of the 2000s onwards, with new EU-members converging towards EU-15 levels; (c) the
specic and representative cases of the Czech Republic (low initial inequality, weak increase during
transition, lower than average nal Gini) and Russia (sharp increase during the 90s, decreasing trend
starting after 2000 and still high unequal distribution of income in 2008).
Lastly, we provide a snapshot on the relationship observed during transition between the evolution
of average income levels (proxied by per capita GDP) and income inequality (Fig. 3). This is done for
descriptive purposes only and is not aimed at deriving any implication on the inequality/growth
causal nexus in transition (see Sukiassyan, 2007, on this topic). The fact that output plunged and

Fig. 2. Income inequality trends in selected transition countries, Gini coefcients.

Sources: WIID May 2008 release (version 2.0c), TransMONEE 2011 database, Eurostat, POVCALNET, CIA World Factbooks.
 D. Aristei, C. Perugini / Economic Systems 36 (2012) 210 5

Fig. 3. Per capita GDP and inequality during transition (average annual % changes). Note: GDP per capita is in PPP, constant 2005
international $.
Sources: World Development Indicators (Edition: September 2009) for GDP data; WIID May 2008 release (version 2.0c),
TransMONEE 2011 database, Eurostat, POVCALNET, CIA World Factbooks for Gini coefcients.

persisted at unexpectedly low levels is now well-known and documented, even though different and
competing ex post explanations have been put forward (see next section for a brief discussion). Thus,
considering the evidence proposed in the previous section, it is little surprising that during the rst
period of transition a clearly negative inequality/growth relation took place, with the countries
experiencing the highest output drops also undergoing severe inequality growth. This means that if
we proxy societal well-being by means of inequality-adjusted measures obtained by correcting
average income for the observed level of inequality (see, among others, Aristei and Perugini, 2010, or
the discussion on this point in the next section), the objective conditions of these countries tended to
deteriorate considerably during the nineties.
Instead, the absence of any clear-cut GDP/inequality relationship in the following decade from 1998
to 2008 is remarkable and noteworthy, meaning that higher growth rates were not generally associated
with decreasing inequality. This is consistent with the evidence, derived both from objective (Gruen and
Klasen, in this issue) and subjective (e.g., Holscher, 2009; EBRD, 2007) measures, reporting well-being
levels after two decades of transition to be similar or lower than those under central planning.

3. Interpretations and explanations of inequality patterns in transition

Starting from the end of the 1990s, an extensive literature has provided interpretations and
possible explanations of inequality dynamics in transition. Comprehensive and reference theoretical
models of inequality in transition can be found in Ferreira (1999) and Aghion and Commander (1999),
but we want to focus here on the main contributions with cross-country empirical contents1 and
particularly on those relating inequality directly to reforms implementation. Clearly, this section only
considers a limited set of selected contributions and is by no means intended as an exhaustive
literature review, which should be the object of a specic paper.
Undoubtedly, the rst comprehensive studies were those by Milanovic (1998, 1999), in which he
provided an extensive cross-country picture on the dynamics and drivers of inequality and poverty
during the rst stage of transition. Among many insights, his main general ndings were that: (a)

1
The difculties in obtaining data on income inequality are well known and the early phases of transition posed additional
problems of data reliability and comparability across countries. This explains why the extensive empirical literature on
inequality dynamics focused mainly on single countries (or on one income component). Setting apart the extensive literature
developed on China, examples of these papers are Gustafsson and Nivorozhkina (2004), Jovanovic and Lokshin (2004) and
Alexeev (1999) for Russia; Newell and Socha (2007) and Szulc (2006) for Poland; Gardner and Terrel (1998) for the Czech and
Slovak Republics; Sahn et al. (2000) and Skouas (2003) for Romania; Kattuman and Redmond (2001) for Hungary; Dimova and
Wolff (2008) for Bulgaria; Leping and Toomet (2008) for Estonia; Bruck et al. (2010) for Ukraine; Pastore and Verashchiagina
(2006) for Belarus; Krstic and Sanfey (2007) for Bosnia and Herzegovina.
6 D. Aristei, C. Perugini / Economic Systems 36 (2012) 210

increasing wage dispersion was the main driver of the raise in income inequality everywhere; (b) private
income sources other than wages contributed little to inequality (with the exception of a few countries);
(c) social transfers played a minor countervailing role, with pensions being paradoxically pro-inequality
in some countries of Central Europe and especially in Russia. A comparably extensive work is that by
Flemming and Micklewright (2000), who tentatively interpreted the generalized increase in transition in
the light of the regressive impact of the removal of price subsidies through price liberalization, the
massive privatization of public sector housing stocks, and the reduction in social benets in kind, such as
education and health. Again on redistribution policies, Giammatteo (2006) and Gerry and Mickiewicz
(2008) show that state transfers and taxes played a vigorous and comparatively stronger role in Poland
and Hungary during the transition period, allowing their governments to hold down inequality during
the most turbulent years. Conversely, Ivanova (2007) points out that the weak social policies which
accompanied liberalization and privatization in Hungary, Poland and Bulgaria did not play any
countervailing role on inequality, since the strong bias towards growth promoting measures, and their
failure in the short run, allowed the economic conditions of large shares of the population to deteriorate
in the absence of a minimal safety net. Ivaschenko (2002) nds that, during the 1990s, development level
was associated with higher inequality in Eastern Europe, but with lower inequality in former Soviet
Union countries. Beyond hyperination and war episodes, systemic changes driven by liberalization,
privatization and deindustrialization are also found to raise income inequality throughout the whole
transition region. However, the role of government does prove to be signicant in curbing inequality. The
distinctive feature of the work by Mikhalev (2003) is the focus on the distributive consequences
associated with the evolution of the social structure accompanying capitalist development in Russia and
other former Soviet Union countries. In particular, the study emphasizes the new social stratication
(new elites partially overlapping with the old ones; middle class of commercial, managerial and
professional positions; low-income class consisting of blue-collars, farmers, and state sector employees;
and the lowest social position occupied by deprived and marginalized people) as the basis of income
polarization. The paper by Lukiyanova and Oshchepkov (in this issue) sheds light on Russia in the period
20002005, emphasizing that upward income mobility was higher compared to western standards and
contributed remarkably to offset the pro-inequality effect induced by the fall into the bottom of the
income distribution by individuals who were initially non-poor.
A relatively more recent important reference point in the literature is represented by the article by
Mitra and Yemtsov (2006). Beyond providing empirical evidence on the variety of components, patterns
and size of inequality growth (especially contrasting CentralEastern European and former Soviet Union
countries), the paper has the merit of thoughtfully reviewing the existing literature and summarizing its
ndings into six drivers of inequality in transition: (i) wage decompression and growth of the private
sector; (ii) restructuring and unemployment; (iii) changes in government expenditure and taxation; (iv)
price liberalization, ination and arrears; (v) asset transfer and growth of property income; (vi)
technological change and globalization. Holscher (2006) contrasts inequality dynamics in the 1990s for
the Czech Republic, Hungary, Poland and Russia with that of Germany; his analysis of functional income
distribution shows the peculiarity of Russia, where the share of prots declined as opposed to the share of
transfers, the importance of wage having remained relatively stable. This indirectly conrms the likely
progressive effects of transfers. Emphasis is also posed on the possible role of informal economy in
affecting the quality of data and the true dynamics of inequality (on this point, see also Rosser et al.,
2000). Kecmanovic (in this issue) also envisages the possibility that the absorption of the emerging
private sector in Serbia into the legal economy after 2000 might be a major explanation of the decline in
wage inequality observed from 2001 to 2005 due to the increasing share of the economy falling under
labour market laws and regulations, particularly minimum wage provisions.
Another strand of the literature has emphasized the evolution of well-being levels and distribution
during transition. Among the most important cross-country analyses, Gruen and Klasen (2001) provide
evidence that well-being levels in a large pool of transition countries fell sharply during transition since
generalized output decline was accompanied by increasing income inequality. The paper by Gruen and
Klasen published in this issue extends the previous work considering the period 19882008. The authors
basically conclude that the steep rise in inequality is one of the main reasons why well-being in 2008
(proxied by various measures, including multidimensional and subjective indicators) for most of the 21
transition countries considered was similar or lower than the level recorded before transition. Again on
 D. Aristei, C. Perugini / Economic Systems 36 (2012) 210 7

the side of multidimensional well-being indicators, Aristei and Perugini (2010) show that inequality
aversion in Eastern EU countries after transition is on average lower than in Western Europe. As a
consequence, inequality in well-being in Eastern EU computed in 2006 approaches the western levels,
notwithstanding higher objective inequality in income and health distributions. Lastly, as regards
subjective well-being, Selezneva (2011) provides a comprehensive review about happiness and
satisfaction studies on income, work and family life in transition countries. The article by Silber and
Verme (in this issue) contributes to the latter strand of literature prevalently on a technical ground,
discussing which deprivation index corresponds better to the respondents satisfaction with respect to
their income. One of the conclusions of the empirical analysis is that income weighted measures of
deprivation more properly t subjective satisfaction for countries experiencing deep institutional
changes, as was the case for East Germany, Poland and Hungary.
The only attempt to link the impact of transition reforms directly to inequality in a cross-country
perspective is by Milanovic and Ersado (2011). In this paper, a panel data approach is employed to
identify the effects exerted on deciles income shares by progress in reforms towards full market
economies, as measured by the European Bank for Reconstruction and Development (EBRD) transition
indicators. The analysis covers the period 19902005 and 26 formerly planned economies and reveals
that economic reforms in general (e.g., measured using a summary transition indicator) were strongly
pro-rich and anti-poor. However, this only seems to be a net effect of different forces acting in opposite
directions: a statistically signicant pro-inequality role is only played by large-scale privatization and
infrastructure reforms, whereas small-scale privatization seems benecial for the income share of the
bottom deciles. Among the various insights for future research and policy implications drawn by the
authors, the most general one is the emphasis on the importance and need of discriminating the
various transition components when analyzing inequality and of considering their possible
interactions and compensating forces.

4. Transition approaches and inequality

As a matter of fact, actual transition approaches turned out to be quite diversied and were
classied by the early and subsequent extensive literature into two main groups, which under
different labels mainly reected the pace of reforms (e.g., Roland, 2001). It is not necessary here to
recall various arguments supporting gradualism (or incremental) versus shock therapy (or big bang)
views. As is well known within this juxtaposition, an important role has been played, as a reference
point, by the Aghion and Blanchard (1994) theoretical model of Optimal Speed of Transition (OST) and
its developments (Blanchard and Kremer, 1997; Boeri, 2000). However, as transition proceeded,
scholars became increasingly aware that the emphasis on the speed of reforms would be a too narrow
and limited perspective, since transition involved many other dimensions. In particular, the aspects
related to the relationship between timing of reforms in different elds gradually gained a prominent
role. The Washington Consensus view (as Roland, 2001, labels the shock therapy approach) basically
maintained the perfect complementarity of market institutions with reforms that should
consequently proceed simultaneously in all elds. Political economy arguments also supported this
view: exceptionally favourable short-term political conditions should be exploited to introduce
widespread reforms in all elds in order to create irreversibility of the process and to avoid partial
reforms which could favour the creation of rents and opposition to further steps forward. Conversely,
the evolutionary-institutional approach emphasized that the entering into play and efcient working
of market institutions and mechanisms may require time, exibility and adjustments.2 Moreover,

2
These lines of reasoning were especially put forward to justify the unexpectedly huge and prolonged output drop at the
beginning of transition. Examples of these attempts are the disorganization hypotheses provided by Blanchard and Kremer
(1997) and Roland and Verdier (1999), the monopolization effect (i.e., liberalization of prices in the absence of competitive
markets leads to price increase and output contraction by monopolistic rms) put forward by Li (1996), and the role of adverse
supply shocks related by the sudden change in relative prices (Popov, 2007). Carlin (2010), comparing reform effects in West
Germany in 1948 with those in the former Soviet bloc in the 1990s, concludes that the surprising output fall observed in the
latter can be attributed to the total initial inexistence of certain market institutions (particularly property rights), which take
time to be built and to enter into action. For a survey of this literature and a comprehensive model of gradualist transition from a
political economy perspective, see Marangos (2005).
8 D. Aristei, C. Perugini / Economic Systems 36 (2012) 210

although the idea of complementarily of reforms was not denied, its perfect attribute was relaxed in
favour of desirability of adequate sequencing, with some institutional advancements considered as
preconditions to maximise the probability of successfully implementing further steps (e.g.,
Dewatripont and Roland, 1995, 1997; Barlow and Radulescu, 2005). Thus, from the mid-1990s
onwards, the debate between shock therapy and gradualism also focused on which sequencing
(beyond speed) of reforms would have been most desirable, particularly to promote growth (e.g., de
Melo et al., 1997; Staehr, 2005; Godoy and Stiglitz, 2006; Havrylyshyn, 2001). Although we are not
aware of any studies explicitly considering the effects of different reform approaches on income
inequality, the literature so far mentioned inherently touches distributive aspects and provides some
insights. For example, in the OST literature, the speed of transition drives the size of the
unemployment pool and the extent of wage decline, which busts prot prospects; at the same time,
the nal equilibrium results as well as the net distributive outcomes during transition also depend on
the countervailing role played by the social support granted to unemployed. Similarly, the literature
supporting gradualism via political economy arguments in a median voter environment maintains
that reform patterns should carefully preserve acceptable levels of social cohesion and prevent
excessive inequality, which are likely to create aversion to further reforms, feed pressures for
redistribution or generate political instability (Roland, 2001). This suggests that an appropriate
reforms sequencing should be designed to avoid inequality outburst, which is likely to prevent further
steps forward in the reform process.
In addition, considering the distributive impact of single reforms alone or of a general progress in
transition might provide only partially informative insights. For example, privatization processes (and
their speed) are generally expected to drive inequality upwards via their effects on the labour market,
i.e. creation of unemployment pools and increase in wage dispersion typical of the private sector
(Milanovic, 1998, 1999; Ivanova, 2007). However, this effect might be expected to be lower in those
contexts in which new entry of businesses is relatively easy and therefore partially offsets
unemployment. This, in turn, depends on the pace and stage of implementation of competition policy
and/or on the development of nancial markets. Similar considerations may be put forward with
reference to the prot and rent positions deriving from privatization: their size clearly depends on the
degree of competition which is assured in the markets, on the degree to which private entrepreneurs
are allowed to freely set prices and on the development of nancial markets (which may encourage
new business entries). According to this perspective, mainly the mix and timing of reforms, beyond
their relative speed, matter for inequality.

5. Conclusions

In this paper we have provided a brief overview of the evolution of inequality during the transition
of CentralEastern European and former Soviet Union countries and of the major explanations
proposed by a selected literature. Transition unambiguously and inevitably meant an increase in
inequality, but remarkable differences exist across countries both in terms of income distribution
dynamics during the process and of levels attained at the end of the period. Interpretation of the
determinants of distributive patterns involves structural, economic and social factors, but all of them
can be directly or indirectly connected to the introduction and implementation of market institutions.
With few exceptions, the investigation of the role of different transition approaches in shaping
inequality has attracted scarce attention so far. However, since the mix and timing of reforms in
different elds may impact income sources and shares very differently, nding out whether different
speed and sequencing of implementation provided a relatively stronger acceleration of inequality or
not appears as a priority in the research agenda.

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