Income Inequality and Economic Growth in Central and Eastern European Transition Countries

Evidence from countries transitioning to market economy regarding income inequality and growth relationship is scarce and inconclusive. The paper sets to analyse the phenomenon in10 countries from Central and Eastern Europe (CEE) that accessed European Union in 2004and 2007, highlighting two aspects: (1) the link between income inequality and economic growth; (2) the redistributive policies governments have taken to balance economic growth with income inequality levels. Different income inequality – growth transmission mechanisms are reviewed, and an overview of policies during the transition to a market economy and during the global financial crisis is given. Unified credit market imperfection and fiscal policy inequality – growth nonlinear models are tested empirically using autodistributive lag regression with market income data from 1995 to 2017 for CEE as an idiosyncratic region and disaggregated by average income inequality into two country groups. Empirical results are not robust but suggest that income inequality affects economic growth through various channels, and income inequality measures focusing on changes in the middle-income have strong explanatory power. Government expenditure and urbanisation have negative effects on growth, but the region is not idiosyncratic in respect due to different regional policies during the transition. Results from the policy literature overview suggest that the liberal and productivist welfare policies governments have undertaken during recessions of market transition in the 1990s and global economic crisis in 2008–2010 have been accompanied by redistributive policies, depending on budget availability, but have failed to support vulnerable groups, as well as have been transferred not accounting for specific circumstances of recipient countries. Governments should undertake a social investment policy approach to tackle inequalities and promote inclusive growth for sustained long-run growth.

ResearchGate
DOI: 10.13140/RG.2.2.20494.48960