What controlling for aggregate and individual-level income
What are the sources of inequality in thepost-Soviet region? After the collapse of the communist regime,considered one of the most important events of the second half of the twentiethcentury, the states of the former Soviet Union and the former communist countriesunderwent a systematic transformation on all levels: political, economic andsocial.
(Mohan, 2009; Milanovic, 1999). Before the transition, not only theimportant role the state and the Communist Party had in both political,economic and social life, but also the central-planned market economy was beingable to limit inequality by compressing labor income, using taxes and transfersto suppress income differentials, providing universal social services and bysetting price on essential goods such as food and transportation. (Habibov,2012). All these features were abolished due to the transition from a centrallyplanned economy to a market-based economy, leaving space for different types ofinequality to increase their levels.
One of the most visible effects wasreflected in the raise of income inequality. Even if a modest raise could havebeen expected, the income gap between the rich and the poor increaseddramatically after 1990 (Aghion & Commander, 1999).This essay willpresent the main factors that determined this raise of income inequality,analyse the evolution of inequality in three of the CIS countries and argue thatthe main source of income inequality resulted from the different amount ofresources one region has, i.e, regional inequality. Finally, based on thesesections, alternative proposals for combating inequality will be suggested anda brief conclusion will be drawn. Does it make analytical sense here to analysethe post-Soviet region as a unitary region?Evidence from manycountries demonstrates that inequality is related to several socialpathologies, such as differential infant mortality rates, homicide, heartdisease, and other social pathologies—even after controlling for aggregate andindividual-level income (Remington, 2011a). However, differences in earningswithin a nation fuel the income inequality.
Metropolitan centres and areas thatare rich in natural resources experience much faster income growth then theless rich and rural areas of a country, thus continuously aggravating incomeinequality across the region. Nevertheless, modern studies of relationshipsbetween different types of inequality have shown that a change in incomeinequality does not necessary creates a movement in the other dimensions ofinequality. As such, this demonstrates that if a country finds itself in aneconomically poor state, or presents low levels of income, it does notnecessarily mean that it is also affected by inequality (Binelli, C, 2015).With that in mind,it does not make analytical sense to view the Post-Soviet region as a unitaryregion. Countries such as Armenia, Azerbaijan, Georgia, Kyrgyz Republic,Moldova, Tajikistan and Turkmenistan represent the lower spectrum of income inthe post-soviet region (Simai, M. 2006) and are considered economically poor,thus presenting the risk of offering an inconsequential analysis of inequalityoutside of income.
As such, through this paper, I will shift my interesttowards larger ex-soviet countries, mainly Russia alongside Ukraine andKazakhstan, which can offer a more analytical approach towards evaluating theimpact of inequality. Inequality in the post-Soviet regionEven though inequalityhas risen across all the former soviet region as countries have moved from acentrally planned economic system to a market driven capitalist system, Russiastill presents the highest level of inequality of any post-soviet country (Remington,2011b), thus making it the centre point of interest when discussing inequality,and the nucleus of this analysis. As previouslystated, inequality is directly related to the regional differences within astate, even after economic factors such as poverty or existence of high naturalresources are accounted for. This regional difference is more pronounced forlarge states like Russia which presents more demographic regimes. Theinequality of these regions keeps growing because the business is incentivisedto invest in the regions that start with a competitive advantage, like naturalresources. These investments make the country’s overall economy grow fasterbecause a more advantageous region will provide a better and faster return ofinvestment.
At the same time, this economic growth has a negative impact on aregional level and makes regional inequality even more severe, so thedifferences are not being smoothed (Zubarevich, 2010). Measuring inequality in Russia, Ukraine andKazakhstanTo start analysingthese regional differences, methods of measuring inequality will be taken intoaccount. Common inequality metrics that can be used here are the Gini index,and the per capita GDP measurement. Per capita GDP is a measure of the totaloutput of a country that takes gross domestic product (GDP) and divides it bythe number of people in the country. In the following analysis the GDP valuesof each region of the country will be taken into account and compared todemonstrate the levels of inequality within a state. Official figures forRussia, and the other countries, will be used to calculate the ratio of theincome or output of its richest to its poorest region.
By using this max/min ratio we observe (Table 1)that in contemporary Russia, the interregional inequality has spiked toenormous figures in the mid 2000s. By comparing the GDP per capita of thewealthiest region of Russia (Tyumen Oblast – 75,014, centre of oil production)with the poorest (Ingushetia – 5,323) it can be observed that its rating isstill 14 times higher (Worldbank, 2013). This substantial inequality betweenRussia’s regions is one of the reasons why policy-makers have considered thepossibility of Russia breaking up just as the Soviet Union did. Year Ingushetia ($) Tyumen Oblast ($) Max:Min Ratio GDP 1998 1,624 28,059 17.28 2002 1,254 44,577 35.
55 2006 2,101 74,085 35.26 2009 3,409 62,979 18.47 2013 5,323 75,014 14.09 Table 1. Russia GDP per capita and personal income (Worldbank,2013) The data shows that Russia’scross-regional inequality has risen in the late 90s and 2000s before descendingagain towards the late 2000s due to the crisis of 2008. The personal incomerating has dropped more than the output towards recent times, suggesting thatthe social policies under Putin mitigated income inequality by raising incomesat the lower end of the distribution. The same principle can be applied for Ukraine to compare its richestregion: Dnipropetrovsk Oblast – GDP per capita 5,797 with its poorest,Chernivtsi Oblast – 1,896 (Table 2).
The data presents a more recent view onUkraine’s cross-regional evolution as earlier data were not available. Year Chernivsti Dnipropetrovsk Max:Min Ratio GDP 2004 675 1,618 2.397 2007 1,495 4,132 2.764 2009 1,204 3,560 2.957 2011 1,666 5,298 3.18 2013 1,896 5,797 3.057 Table 2.
Ukraine GDPper capita (Worldbank, 2013) Similar to the patterns seen in Russia’s analysis,the cross-regional inequality was on the rise until the 2008 economic crisis,continuing to ascend afterwards. The main difference that stands out whenanalysing the data is the stability of growth but also the low rating ofinequality. Compared to Russia which reaches GDP levels of inequality of 25,Ukraine presents a more downsized Max/Min ratio of only 3, thus enforcing itsequality. Nevertheless, if we look at the actual figures of the GDP, thehighest one for Ukraine is 5,797 where Russia’s in Tyumen is 57,175, a regionten time richer. Thus, it reiterates the concept that an economically poorcountry does not necessary offer a good reflection of it being disadvantaged.
Analysing Kazakhstan, a similarity to Russia’ssource of inequality can be seen among its regions. Kazakhstan is now thelargest economy force in central Asia, with enormous resources of oil, mineralsand metals. Furthermore, because of its dependency on oil extraction, a severediscrepancy in cross-regional equality has been formed between the two leadingoil production regions (Atyrau and Mangystau) and the more median regions.
There are gaps in the region-specific data thatis available for Kazakhstan, but the GDP per capita for the country can bealigned to the available data to fill those gaps. Year Kazakhstan GDP per capita Atyrau GDP Zhambyl GDP Min:Max Ratio 1999 4,100 10,207 1,551 6.58 2002 5,606 n/a n/a 2004 6,647 30,467 2,522 12.08 2009 8,573 n/a n/a 2015 10,616 n/a n/a Table 2. Kazakhstan GDPper capita (Worldbank, 2015 & Nathan Associates, 2006) Considering onlythe presented data, Kazakhstan’s regional inequality finds itself in the middleof Russia and Ukraine, but if the Russian indices of income were to be adjustedto the price levels of Kazakhstan, its indicators would be higher thanRussia’s. This again, represents a consequence of the dependency thatKazakhstan has on oil extraction, which is much higher than Russia’s (Temirbekova,2015). Considering the aboveanalysis, both differences and similarities can be found in the dynamics ofregional equality between the three countries.
In the past decade, the trendhas been both economic growth and inequality growth of regions of Russia,Ukraine and Kazakhstan until the beginning of the economic crisis of 2008, whenthe discrepancies have levelled. There existsanother aspect of the problem, along with the economic inequality of regionsmeasured by per capita GRP. This aspect is social inequality, which is measuredby a set of indicators, namely, differences in income rates, as well asqualitative features, such as health and education. The social inequality ofregions hinders the growth of human capital and modernization of institutions.(Binelli, C 2015). A common metric that can be used to express a nation’slevels of inequality is the Gini index. Gini index measures the extent to whichthe distribution of income or consumption expenditure among individuals orhouseholds within an economy deviates from a perfectly equal distribution. (OCED,2002).
As such, the Giniindex can be used in the analysis of social inequality within a region, in thiscase targeting the levels of income inequality of that specific nation. Itbases its computation on the country’s distribution of income and wealth andcomes up with a result between 0, perfect equality, and 100, total inequality.The trends in income inequality dynamics estimated with the Gini index for thecountries being analysed in this paper, can then be compared with the estimatedinequality results obtained by using the GDP per capita ratio.For facilitatingcomparison between the analysed nations, Gini index data has been gathered andshowcased in an identical matter, solution that was allowed by the existence ofa clear database of Gini Indexes, compared to the limited information availableon cross-regional GDP.
Figure 1. GiniIndex Comparison – Russia/Ukraine/Kazakhstan (WorldBank, 2013) Based on thepresented data, we draw the same conclusion as per the GDP rating: Incomeinequality, as measured by the Gini Index is much stronger in Russia. The widespread of values is caused by the large number of Russia’s regions and theirheterogeneity in terms of population and the level of development. In Kazakhstanregional differences are lower, but the Gini Index still remains high due tothe discrepancy between the country’s two large oil centric metropolitan citiesand the other poorer regions. In Russia the growth of regional disparities inemployment continued until the crisis of 2008, while in Ukraine it ceasedearlier, in 2002–2003. One of the causes is low investments due to politicalinstability, which reinforced the regional differences in unemployment rates.Inequality in Ukraine is the lowest among the three countries. According to N.
V.Zubarevich, “In Russia, interpersonal income inequality rises and falls withincome growth, and that interregional inequality is a function of trends ininterpersonal inequality. The dismantling of the Soviet-era system linkingemployment, wages, and social entitlements has given way to a partiallydecentralized, partially commercialized and privatized set of mechanisms fordetermining earnings, employment, access to education and health care, pensionrights and other social benefits. (N. V. Zubarevich, 2010). How could inequality in thepost-Soviet region be remedied?The threateningconsequences of the high rates of inequality raised concern among the leadersof the former USSR states.
For instance, in his address to the State Council onFebruary 8,2008, President Putin stated that the current level of incomeinequality was “absolutely unacceptable” and should be diminished by initiatingreforms to enlarge the percentage of the middle class in society to 60% or 70%.(Putin, 2008). On the same note, Igor Iurgens emphasised that building themiddle class is the key to the success of economic and political modernisation.Therefore, one could argue that a solution for diminishing inequality would bea raise in the percentage of the middle class in society.However, opportunitiesfor mitigating social and economic inequality among countries has been one ofthe most debated topic for the past 20 years. Even western and more economicdeveloped countries have done extensive research and have implemented a seriesof steps over the years to strive for a more competitive economy.
At the EuropeanCouncil of Lisbon in 2000, a plan was proposed to make the EU the world’s topEconomy by 2015. The plan covered a multitude of steps and objectives topromote social cohesion and fight inequality among the less developed states ofthe union. Specifically, there were 6 key objectives to the plan: “1. Promote employment and employability through active labormarket measures to help those who have the most difficulty in entering thelabor market and a mutually reinforcing system of social protection, lifelonglearning, and labor market policies.?2.
Ensure adequate social protection systems, includingminimum income schemes, for all to have a sufficient income for a life withdignity and effective work incentives for those who can work.3. Increase the access of the most vulnerable and thosemost at risk of social exclusion to decent housing conditions, to qualityhealth and long-term care services, and to lifelong learning opportunities,including to cultural activities.?4. Prevent early exit from schools and formal educationand training and facilitate the transition from school to work, in particularof young people leaving school with low qualifications.5. Eliminate poverty and social exclusion among childrenas a key step to combat the intergenerational inheritance of poverty, with aparticular focus on early intervention and early education initiatives thatidentify and support children and poor families.
6. Reduce the levels of poverty and social exclusion andincrease labor market participation of immigrants and ethnic minorities to thesame levels as the majority population.”(Alam, A, Murthi,M, & Yemtsov, R 2005) Considering theeconomic status of the Post-Soviet countries presented in this paper, it can beconcluded that there is a match between the current social and economic burdensof the region and those that the EU were trying to mitigate in the 2000s. Moresignificant impacts on regional development can be drawn by measures of socialand institutional policies, instead of regional policies, aimed at increasinghuman capital and population mobility, at targeted social support to vulnerablepopulation strata, and at the modernization of institutions.
(S. G. Safronov,2010). This statement relates perfectly to points 1, 3 and 4 on the EU list,and such recommendations have become commonplace, but it’s the system ofex-Soviet countries that raise barriers build out of bad institutions anddeterioration of human capital. Furthermore,such practices won’t allow future development, and the circle will keep closingagain and again.
Without a modernisation plan for its institutions, theproblems of regional inequality will persist in Russia and other majorex-Soviet countries (Hughes, J, & Sasse, G 2001). Probably the main institution that requiresrestructuring is the schooling system at all levels. Equal access to educationis the key to ensure that the low -income individuals will be able to increasetheir human capital and gain higher income (Anderson, K 2003). For acceleratedresults in combating inequality through education, resources can be shifted forthe development of short-term education, i.e. foreign languages or technicalcourses, which will be a faster and inexpensive way of upgrading human capital.Research done ineducation around the post-soviet region has concluded that age and years ofexperience have very little impact on the increase in income, and recentgraduates and postgraduates have been found to obtain higher income (Habibov,2012). As such, the impact of graduate and postgraduate education should not beunderestimated, and ensuring access to education for the poorer should beinstrumental from the perspectives of poverty and inequality reduction.
ConclusionThis study hasdemonstrated with the usage of both empirical results and literature thatinequality has remained high in the post-soviet region. The main sources ofinequality (such as the transition from a planned-economy to a market-economy,globalisation and regional differences within a country) have been identifiedand expanded upon while focusing on the principles of income and cross-regionalinequality. Measurements werepresented and compared for Russia, Ukraine and Kazakhstan by using both the GDPper capita analysis and the Gini Index. Similar results have been identifiedand patterns found in the development of inequality over time, with volatilevalues in the late 90 and early 2000, and then stabilising after the 2008crisis.
Still, the inequality remains high especially in states like Russia andKazakhstan, due to the high discrepancies between the regions. The economicgrowth in the oil rich areas of Russia and Kazakhstan only made the regionalinequality more severe as the overall regional differences were not beingsmoothed. The findings ofthis study have concluded with a set of suggestions, or practical measures thatcan be implemented to counterbalance the growing inequality in the post-Sovietregion. From promoting employment through an active labour market, tomodernising education and leveling cross-regional differences, there are manyways of combating inequality, but these measures should be combined witheffective institutions and a system willing to fight inequality.