Inequality and growth in transition: does China’s rising inequality portend Russia’s future?

This paper reviews the literature on inequality dynamics in the transition to a market economy in order to answer the question about the relevance of China’s fast growing inequality for transition economies in Eastern Europe and the former Soviet Union. It relies for its empirical analysis on data produced for the recent World Bank study “Growth, Poverty and Inequality in Eastern Europe and the Former Soviet Union: 1998-2003” [World Bank (2005b)] and its predecessor "Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia” [World Bank (2000)]. The paper shows that an increase in inequality in transition, as predicted by a number of theoretical models, in practice differed across countries, with inequality evolving at different speeds depending on the relative importance of its key drivers, viz., changes in wage distribution, employment, entrepreneurial incomes and safety nets. In some countries, the process of reaching a new, higher long-term level of inequality is taking longer thanexpected; while in others, there has been a clear overshooting of inequality levels comparedto the likely final outcome of the transition process. Available data suggest that rapid increases in wage inequality in Russia, driven in part
by arrears, with some moderation in the later years of the transition, have so far determined the pace of inequality dynamics. In that respect, Russia is different from economies in Central and Eastern Europe, where changes in employment and compensating adjustments in the social safety nets have played a greater role. We also contrast key features of inequality in Russia in the context of other transition economies and compare them to trends in inequality observed in China, arguing that the latter’s experience of rapidly rising inequality
is to a large extent a developmental, rather than a transitional phenomenon, and therefore has limited relevance for predicting changes in inequality in Russia.
The paper attempts to assess the likely evolution of Russian inequality in the future. Given current underlying structural characteristics of these economies, it argues that the process of transition to a market economy in Eastern Europe and the former Soviet Union has not yet been completed, and transitional dynamics, as well as, increasingly, other global factors will influence further evolution of inequality. To make a more informed judgment on possible long-term paths of inequality dynamics in Russia, the paper applies the framework developed in the World Development Report 2006 on “Equity and Development” [World Bank (2005a)]. The discussion of “non-transitional” components of inequality, suchas equality of opportunities, preferences for equality or global drivers of inequality in the context of Russia and other countries in the Region finds that they do not all point in one direction. Some factors, such as a preference for greater equality or universal access to public services, tend to moderate inequality through a variety of channels, while others, such as increases in the returns to skills in a global economy, or constraints to migration tend to magnify it. While discussing the possible outcomes of these complex interactions, it is important to remember that many of these long-term factors are not given once and for all; and that they can be influenced by policy.

• http://siteresources.worldbank.org/INTDECABC2006/Resources/Pradeep.PDF