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Income inequality and its driving forces in transitional countries: Evidence from Armenia, Azerbaijan and Georgia

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Abstract

The purpose of this study is to measure and compare income inequality and its driving forces in the low-income countries of the Caucasus by drawing on micro-data from nationally representative household surveys in Armenia, Georgia, and Azerbaijan. Inequality in the region of the Caucasus is very high. The Gini coefficient for the regions as a whole reached 55%. Azerbaijan has the lowest income inequality, followed by Armenia and Georgia. Among predictors, graduate and postgraduate education has the strongest positive effect on income in all countries. By contrast, the positive effect of technical vocational education is relatively smaller and can be observed only in Azerbaijan and Georgia. In addition to formal education, knowledge of English and computers also has a separate positive effect in all countries. An increase in age, and therefore an increase in years of experience, has a low positive impact on the increase in income in all countries. By contrast, being a female has the strongest negative effect on income across the region. Living in rural areas and reporting poor health is associated with having lower income.

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We examine household data from the Central Asian successor states to the Soviet Union to analyze how living standards are determined in newly established market economies. Three variables, namely location, children, and university education, are consistently significant across all four countries studied and play the largest role in determining household expenditure. The first two are of special significance to Central Asia, with its relative economic backwardness and high birth rate, but the importance of high-level general-purpose education appears to be a ubiquitous but underappreciated factor. Higher returns to education were expected in a market economy, but few observers distinguish between types of education; in the shift from central planning people with high-level general-purpose education have been best able to take advantage of new opportunities, while narrower technical education, by contrast, has left many with obsolete skills yielding zero returns in the market. J. Comp. Econ., June 2002 30(4), pp. 683–708. Department of Economics, Vanderbilt University, Nashville, Tennessee 37235; and School of Economics, University of Adelaide, Adelaide, South Australia 5005, Australia. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: D1, D31, O12, P36.
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I consider evidence on differences in access to education and in learning achievement within the countries of Central and Eastern Europe and the former Soviet Union. The situation inherited from the communist period is first summarized: there were some significant disparities with, for example, family background having a strong association with tertiary enrolments, as in Western countries. Analysis of the transition period focuses on differences in access and achievement associated with household income and geographic location. Disparities are not the same across the region; in some countries, such as Russia, there are clear grounds for serious concern, but it is unlikely that any country has cause for complacency.
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Inequality has increased in many of the transition economies. At the same time, spending on education has declined. In this paper we survey the factors driving these changes. We then set up a small general equilibrium model to simulate the effect of different policy choices on the path of inequality over the transition. We show that the policies selected in Central Europe engender a relatively rapid spike in inequality but with a Kuznets curve. In the simulations that broadly capture features of the policy regime dominating in Russia and the FSU, we find no Kuznets curve. We then turn to the longer run and look at the way in which both trade liberalization and technological and organizational change are likely to affect the relative demand for types of labour. We show how substantial technological and organizational change--obvious features of transition--can result in raising inequality. Persistence in inequality can be expected to depend critically on the pace at which the acquisition of skills takes place in the economy--and, hence, on the evolution of the educational system. As such, policies aimed at raising adaptability--such as quality educational systems--can be expected to dampen the increase in wage inequality.
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We use two rounds of surveys, taken in 2000 and 2008 in the Zhili Township children's garment cluster in Zhejiang Province, to examine in depth the evolution of this industrial cluster. Firm size has grown on average in terms of output and employment, and increasing divergence in firm sizes has been associated with a significant rise in specialization and outsourcing among firms in the cluster. Although the investment amount needed to start a business has more than tripled, this amount remains low enough that formal bank loans remain an insignificant source of finance. Because of low entry barriers, the number of firms in the cluster has risen, driving down profits and bidding up wages, particularly since the year 2000. Facing severe competition, more firms have begun to upgrade their product quality. By the year 2007, nearly half of the sampled firms had established registered trademarks and nearly 20 percent had become International Office of Standardization (ISO) certified.
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