Incomes Policy, Equity Issues, and Poverty Reduction in Transition Economies

• Author: Grzegorz W. Kolodko
• Position: Professor at the Warsaw School of Economics and was a visiting scholar at the IMF in 1999. He was First Deputy Prime Minister and Minister of Finance of Poland from 1994 to 1997, and was a key architect of the Polish reform program

Ensuring that income is fairly distributed is always a concern of policymakers, but such a focus is especially important during the early years of systemic change and contraction in transition economies. It is often difficult, when formulating policy in these countries, to resolve income distribution issues because of their social and political implications. Poland's experience suggests that fast growth makes a resolution easier.

During the last years of socialism, a growing disparity in real incomes gave rise to widespread social dissatisfaction and political tension. After the transition process was launched, an excessive optimism that reforms would quickly and fairly distribute the fruits of a better-performing economy failed to take into account the complex history of industrial country development. As a general rule, centrally planned systems distribute income more evenly than do market and transition economies. Since the beginning of the transition, it can be seen that-while income distribution varies-all transition economies have had one common feature: income inequality is increasing. It cannot be denied that under central planning, there were rich and poor-though determining the number of each depends on how they are counted. But whatever method is used, the market transition has increased the numbers of both the rich and the poor, because, as inequality has increased, so has the number of people at each end of the spectrum.

In the late 1980s, the Gini coefficients for socialist economies averaged 23 or 24 points. (The Gini coefficient measures income distribution: the lower the number, the more even the income distribution.) At the same time, the advanced market economies of Western Europe had average Gini coefficients 6 points higher than those of the countries of Eastern Europe (excluding the territory of the former Yugoslavia). Chart 1 shows that, since then, transition countries' Gini coefficients have worsened-in some countries quite dramatically.

Rising income disparity

There are several reasons for rising income inequality. One of the most immediate is the reduction of state subsidies. A central goal of the transition was to establish predominantly market pricing and, therefore, to eliminate subsidies. Removing subsidies has affected many social groups but has been especially hard on the poor, who have had to apply a larger portion of their disposable income to the purchase of formerly inexpensive goods and services. The state sector has also played a role. Economic reforms have freed wages and allowed incomes to diverge. As late as the mid-1990s, in most transition economies, the state sector continued to employ more than half the labor force, but the incomes of these state employees have become more tightly linked to qualifications, experience, occupation, and...