What Commander, 1999). This essay will present the

What are the sources of inequality in the
post-Soviet region?

 

 After the collapse of the communist regime,
considered one of the most important events of the second half of the twentieth
century, the states of the former Soviet Union and the former communist countries
underwent a systematic transformation on all levels: political, economic and
social. (Mohan, 2009; Milanovic, 1999). Before the transition, not only the
important role the state and the Communist Party had in both political,
economic and social life, but also the central-planned market economy was being
able to limit inequality by compressing labor income, using taxes and transfers
to suppress income differentials, providing universal social services and by
setting price on essential goods such as food and transportation. (Habibov,
2012). All these features were abolished due to the transition from a centrally
planned economy to a market-based economy, leaving space for different types of
inequality to increase their levels. One of the most visible effects was
reflected in the raise of income inequality. Even if a modest raise could have
been expected, the income gap between the rich and the poor increased
dramatically after 1990 (Aghion & Commander, 1999).

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This essay will
present the main factors that determined this raise of income inequality,
analyse the evolution of inequality in three of the CIS countries and argue that
the main source of income inequality resulted from the different amount of
resources one region has, i.e, regional inequality. Finally, based on these
sections, alternative proposals for combating inequality will be suggested and
a brief conclusion will be drawn.

 

Does it make analytical sense here to analyse
the post-Soviet region as a unitary region?

Evidence from many
countries demonstrates that inequality is related to several social
pathologies, such as differential infant mortality rates, homicide, heart
disease, and other social pathologies—even after controlling for aggregate and
individual-level income (Remington, 2011a). However, differences in earnings
within a nation fuel the income inequality. Metropolitan centres and areas that
are rich in natural resources experience much faster income growth then the
less rich and rural areas of a country, thus continuously aggravating income
inequality across the region. Nevertheless, modern studies of relationships
between different types of inequality have shown that a change in income
inequality does not necessary creates a movement in the other dimensions of
inequality. As such, this demonstrates that if a country finds itself in an
economically poor state, or presents low levels of income, it does not
necessarily 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 unitary
region. Countries such as Armenia, Azerbaijan, Georgia, Kyrgyz Republic,
Moldova, Tajikistan and Turkmenistan represent the lower spectrum of income in
the post-soviet region (Simai, M. 2006) and are considered economically poor,
thus presenting the risk of offering an inconsequential analysis of inequality
outside of income. As such, through this paper, I will shift my interest
towards larger ex-soviet countries, mainly Russia alongside Ukraine and
Kazakhstan, which can offer a more analytical approach towards evaluating the
impact of inequality.

 

Inequality in the post-Soviet region

Even though inequality
has risen across all the former soviet region as countries have moved from a
centrally planned economic system to a market driven capitalist system, Russia
still 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 previously
stated, inequality is directly related to the regional differences within a
state, even after economic factors such as poverty or existence of high natural
resources are accounted for. This regional difference is more pronounced for
large states like Russia which presents more demographic regimes. The
inequality of these regions keeps growing because the business is incentivised
to invest in the regions that start with a competitive advantage, like natural
resources. These investments make the country’s overall economy grow faster
because a more advantageous region will provide a better and faster return of
investment. At the same time, this economic growth has a negative impact on a
regional level and makes regional inequality even more severe, so the
differences are not being smoothed (Zubarevich, 2010).

 

 

Measuring inequality in Russia, Ukraine and
Kazakhstan

To start analysing
these regional differences, methods of measuring inequality will be taken into
account. 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 total
output of a country that takes gross domestic product (GDP) and divides it by
the number of people in the country. In the following analysis the GDP values
of each region of the country will be taken into account and compared to
demonstrate the levels of inequality within a state. Official figures for
Russia, and the other countries, will be used to calculate the ratio of the
income 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 to
enormous figures in the mid 2000s. By comparing the GDP per capita of the
wealthiest region of Russia (Tyumen Oblast – 75,014, centre of oil production)
with the poorest (Ingushetia – 5,323) it can be observed that its rating is
still 14 times higher (Worldbank, 2013). This substantial inequality between
Russia’s regions is one of the reasons why policy-makers have considered the
possibility 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’s
cross-regional inequality has risen in the late 90s and 2000s before descending
again towards the late 2000s due to the crisis of 2008. The personal income
rating has dropped more than the output towards recent times, suggesting that
the social policies under Putin mitigated income inequality by raising incomes
at the lower end of the distribution.

The same principle can be applied for Ukraine to compare its richest
region: Dnipropetrovsk Oblast – GDP per capita 5,797 with its poorest,
Chernivtsi Oblast – 1,896 (Table 2). The data presents a more recent view on
Ukraine’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 GDP
per 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 when
analysing the data is the stability of growth but also the low rating of
inequality. Compared to Russia which reaches GDP levels of inequality of 25,
Ukraine presents a more downsized Max/Min ratio of only 3, thus enforcing its
equality. Nevertheless, if we look at the actual figures of the GDP, the
highest one for Ukraine is 5,797 where Russia’s in Tyumen is 57,175, a region
ten time richer. Thus, it reiterates the concept that an economically poor
country does not necessary offer a good reflection of it being disadvantaged.

Analysing Kazakhstan, a similarity to Russia’s
source of inequality can be seen among its regions. Kazakhstan is now the
largest economy force in central Asia, with enormous resources of oil, minerals
and metals. Furthermore, because of its dependency on oil extraction, a severe
discrepancy in cross-regional equality has been formed between the two leading
oil production regions (Atyrau and Mangystau) and the more median regions.

There are gaps in the region-specific data that
is available for Kazakhstan, but the GDP per capita for the country can be
aligned 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 GDP
per capita (Worldbank, 2015 & Nathan Associates, 2006)

 

Considering only
the presented data, Kazakhstan’s regional inequality finds itself in the middle
of Russia and Ukraine, but if the Russian indices of income were to be adjusted
to the price levels of Kazakhstan, its indicators would be higher than
Russia’s. This again, represents a consequence of the dependency that
Kazakhstan has on oil extraction, which is much higher than Russia’s (Temirbekova,
2015).

Considering the above
analysis, both differences and similarities can be found in the dynamics of
regional equality between the three countries. In the past decade, the trend
has been both economic growth and inequality growth of regions of Russia,
Ukraine and Kazakhstan until the beginning of the economic crisis of 2008, when
the discrepancies have levelled.

 

There exists
another aspect of the problem, along with the economic inequality of regions
measured by per capita GRP. This aspect is social inequality, which is measured
by a set of indicators, namely, differences in income rates, as well as
qualitative features, such as health and education. The social inequality of
regions hinders the growth of human capital and modernization of institutions.
(Binelli, C 2015). A common metric that can be used to express a nation’s
levels of inequality is the Gini index. Gini index measures the extent to which
the distribution of income or consumption expenditure among individuals or
households within an economy deviates from a perfectly equal distribution. (OCED,
2002).

As such, the Gini
index can be used in the analysis of social inequality within a region, in this
case targeting the levels of income inequality of that specific nation. It
bases its computation on the country’s distribution of income and wealth and
comes up with a result between 0, perfect equality, and 100, total inequality.
The trends in income inequality dynamics estimated with the Gini index for the
countries being analysed in this paper, can then be compared with the estimated
inequality results obtained by using the GDP per capita ratio.

For facilitating
comparison between the analysed nations, Gini index data has been gathered and
showcased in an identical matter, solution that was allowed by the existence of
a clear database of Gini Indexes, compared to the limited information available
on cross-regional GDP.

Figure 1. Gini
Index Comparison – Russia/Ukraine/Kazakhstan (WorldBank, 2013)

 

Based on the
presented data, we draw the same conclusion as per the GDP rating: Income
inequality, as measured by the Gini Index is much stronger in Russia. The wide
spread of values is caused by the large number of Russia’s regions and their
heterogeneity in terms of population and the level of development.

In Kazakhstan
regional differences are lower, but the Gini Index still remains high due to
the discrepancy between the country’s two large oil centric metropolitan cities
and the other poorer regions. In Russia the growth of regional disparities in
employment continued until the crisis of 2008, while in Ukraine it ceased
earlier, in 2002–2003. One of the causes is low investments due to political
instability, 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 with
income growth, and that interregional inequality is a function of trends in
interpersonal inequality. The dismantling of the Soviet-era system linking
employment, wages, and social entitlements has given way to a partially
decentralized, partially commercialized and privatized set of mechanisms for
determining earnings, employment, access to education and health care, pension
rights and other social benefits. (N. V. Zubarevich, 2010).

 

How could inequality in the
post-Soviet region be remedied?

The threatening
consequences of the high rates of inequality raised concern among the leaders
of the former USSR states. For instance, in his address to the State Council on
February 8,2008, President Putin stated that the current level of income
inequality was “absolutely unacceptable” and should be diminished by initiating
reforms 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 the
middle class is the key to the success of economic and political modernisation.
Therefore, one could argue that a solution for diminishing inequality would be
a raise in the percentage of the middle class in society.

However, opportunities
for mitigating social and economic inequality among countries has been one of
the most debated topic for the past 20 years. Even western and more economic
developed countries have done extensive research and have implemented a series
of steps over the years to strive for a more competitive economy.

At the European
Council of Lisbon in 2000, a plan was proposed to make the EU the world’s top
Economy by 2015. The plan covered a multitude of steps and objectives to
promote social cohesion and fight inequality among the less developed states of
the union. Specifically, there were 6 key objectives to the plan:

 

“1.            Promote employment and employability through active labor
market measures to help those who have the most difficulty in entering the
labor market and a mutually reinforcing system of social protection, lifelong
learning, and labor market policies.?

2.              Ensure adequate social protection systems, including
minimum income schemes, for all to have a sufficient income for a life with
dignity and effective work incentives for those who can work.

3.              Increase the access of the most vulnerable and those
most at risk of social exclusion to decent housing conditions, to quality
health and long-term care services, and to lifelong learning opportunities,
including to cultural activities.?

4.              Prevent early exit from schools and formal education
and training and facilitate the transition from school to work, in particular
of young people leaving school with low qualifications.

5.              Eliminate poverty and social exclusion among children
as a key step to combat the intergenerational inheritance of poverty, with a
particular focus on early intervention and early education initiatives that
identify and support children and poor families.

6.              Reduce the levels of poverty and social exclusion and
increase labor market participation of immigrants and ethnic minorities to the
same levels as the majority population.”

(Alam, A, Murthi,
M, & Yemtsov, R 2005)

 

Considering the
economic status of the Post-Soviet countries presented in this paper, it can be
concluded that there is a match between the current social and economic burdens
of the region and those that the EU were trying to mitigate in the 2000s. More
significant impacts on regional development can be drawn by measures of social
and institutional policies, instead of regional policies, aimed at increasing
human capital and population mobility, at targeted social support to vulnerable
population 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 of
ex-Soviet countries that raise barriers build out of bad institutions and
deterioration of human capital.

                  Furthermore,
such practices won’t allow future development, and the circle will keep closing
again and again. Without a modernisation plan for its institutions, the
problems of regional inequality will persist in Russia and other major
ex-Soviet countries (Hughes, J, & Sasse, G 2001).  Probably the main institution that requires
restructuring is the schooling system at all levels. Equal access to education
is the key to ensure that the low -income individuals will be able to increase
their human capital and gain higher income (Anderson, K 2003). For accelerated
results in combating inequality through education, resources can be shifted for
the development of short-term education, i.e. foreign languages or technical
courses, which will be a faster and inexpensive way of upgrading human capital.

Research done in
education around the post-soviet region has concluded that age and years of
experience have very little impact on the increase in income, and recent
graduates and postgraduates have been found to obtain higher income (Habibov,
2012). As such, the impact of graduate and postgraduate education should not be
underestimated, and ensuring access to education for the poorer should be
instrumental from the perspectives of poverty and inequality reduction.

 

Conclusion

This study has
demonstrated with the usage of both empirical results and literature that
inequality has remained high in the post-soviet region. The main sources of
inequality (such as the transition from a planned-economy to a market-economy,
globalisation and regional differences within a country) have been identified
and expanded upon while focusing on the principles of income and cross-regional
inequality.

Measurements were
presented and compared for Russia, Ukraine and Kazakhstan by using both the GDP
per capita analysis and the Gini Index. Similar results have been identified
and patterns found in the development of inequality over time, with volatile
values in the late 90 and early 2000, and then stabilising after the 2008
crisis. Still, the inequality remains high especially in states like Russia and
Kazakhstan, due to the high discrepancies between the regions. The economic
growth in the oil rich areas of Russia and Kazakhstan only made the regional
inequality more severe as the overall regional differences were not being
smoothed.

The findings of
this study have concluded with a set of suggestions, or practical measures that
can be implemented to counterbalance the growing inequality in the post-Soviet
region. From promoting employment through an active labour market, to
modernising education and leveling cross-regional differences, there are many
ways of combating inequality, but these measures should be combined with
effective institutions and a system willing to fight inequality.

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