EKIP– Expert Club for Economics and Politics A Different Opinion
Recent decades have shown a clear trend of simultaneous increase in income inequality and strong economic growth in the developing world. This phenomenon is somewhat inevitable from the point of view of the economic processes taking place there. Just as Kuznets suggests, industrialization and urbanization create large differences in income among the population. The replacement of agricultural work with more productive activity in cities is among the main reasons for the increasing imbalance in the distribution of income in developing countries.
Stoyan Hristov
However, this cannot be the full explanation. In the 1960s and 1970s, some of the emerging markets in Asia – Japan, Hong Kong, South Korea and Taiwan – experienced unprecedented developments. Their economies grew at a rapid pace, while income inequality declined. The Gini coefficient fell by over 24% in Japan and by over 40% in Taiwan[1].
Nowadays, this model is increasingly rare in the developing world. The reasons are various. One of them is explained by the rapid technological development and globalization as the main drivers of modern economies. The highly qualified and educated employee mainly benefits from this process, and this is true for both the developing world and the developed countries. While this is mainly a consequence of economic processes, the experience of China shows that government actions can lead to a significant increase in inequality. The report of The Economist states that cronyism is the main way of implementing policies among the countries of Asia. Capitalism in modern developing economies outlines a strong relationship between politicians and plutocrats. The volume of assets transferred from the government to selected private individuals is impressive.
History shows that growth in most developing economies leads to an increase in inequality. However, this is a result of both the economic processes taking place in these countries and the policies pursued by the authorities. Good examples show that it is possible to achieve economic prosperity and an increase in income equality between people at the same time. In other words, it is extremely important to isolate the increase in income inequality solely to normal differences between individuals in society (different skills, productivity and even luck). Otherwise, the result is a nervousness in the opportunities for realization of certain groups of the population and an increase in the risk of their social exclusion.
The data show that for the moment the Bulgarian economy is moving away from the good examples in Asia. The Bulgarian economy has recorded strong growth of over 45% for the period 2001-2008. At the same time, however, for the same period the Gini coefficient[2] has recorded a similar growth - 38%. The problem becomes even more serious when we consider the ratio between the incomes of the richest 20% and the poorest 20% of the population - the S80/S20 coefficient - it has increased by over 84%. The data show that the strong growth of the economy has led to a disproportionate increase in incomes among the population, with the rich clearly benefiting the most from this growth.
Chart 1. Change in the S 80/S 20 ratio and real GDP in Bulgaria
Bulgaria is among the countries where the problem is most serious. Since 2005, income inequality in the country, measured by the S80/S20 ratio, has remained above the EU average. In fact, in 2011, it was higher only in Spain and Latvia. Although recent years have been characterized by a strong increase in incomes in the country (average income increased by over 115% for the period 2006-2011[3]), income inequality data show that the rich are the ones who mainly contribute to this increase.
This is indicated by the fact that the country has the highest share of people at risk of poverty or social exclusion in the EU – around 47.1%. This category includes people living below the poverty line after social transfers, those with seriously deteriorated living conditions or living in families with very low work intensity. In fact, only Romania and Latvia come close to the high levels of this indicator in Bulgaria. Moreover, the percentage of people falling into this category in Bulgaria is almost 2 times higher than the average levels for the EU (24.1%) and almost 3.5 times higher than the leader in Europe on this indicator – Ireland (13.7%).
Figure 8. Population at risk of poverty or social exclusion (2011)
Source: Eurostat
In order to maximize the objectivity of the analysis, it is necessary to check the severity of the problem at the regional level. The reason is that there are regions in Bulgaria where incomes and opportunities for realization are greater than in others. A group of 4 regions is outlined – those of Northern Bulgaria and the southeastern part of the country – in which income inequality in 2010. is above the national average[4]. In other words, about 39% of the population in Bulgaria in 2010. lives in regions with income inequality above the weighted average values for the entire country. The situation is similar for the population at risk of poverty or social exclusion. Again, only 2 of the regions are below the average levels, which in this case means that nearly 56% of the population is located in regions with a share above the national average.
The data clearly outlines that not only does Bulgaria have an inequality problem - it is one of the most serious in the EU. Its resolution requires targeted actions, other than the so-called "active measures" on the labor market, which put pressure on young and low-skilled employees rather than having any positive effect on the economy. Good examples in Europe show that high income redistribution is not mandatory to reduce inequality. For example, in countries such as Slovakia and the Czech Republic, where the tax rate is 19% and 15% respectively, inequality is among the lowest in Europe - at levels around that in Sweden, where the income tax rate reaches 59.3%[5].
A policy of reducing inequality is in line with the idea of improving the social and economic well-being of the economy. The arguments here are both social and purely economic. High levels of inequality increase the risk of social exclusion of part of the population and reduce the opportunities for realization for these people. In other words, some of them will encounter increasingly serious difficulties in achieving the necessary standard of living due to reasons beyond their control (for example, education and parental income). The negative consequences are many, but they all have a common final effect - a decrease in labor productivity, which of course limits the potential for economic growth in the long term.
The reasons for inequality in Bulgaria can be sought in several directions. On the one hand, the high regulation of a number of industries, the presence of state-supported monopolies and preferential opportunities for the activities of companies close to power limit the freedom of the market and the opportunities for people to realize themselves. The lack of a connection between the labor market and the inefficient education system is another reason for the high levels of inequality in the country. Pupils and students acquire knowledge and skills that are clearly not in demand by the market, and this in turn limits the possibility of high incomes and a good standard of living. Another reason for inequality between certain groups in the country can be the collapse of the socialist economy - for a large part of the people, the skills they had developed up to now turned out to be unnecessary, which automatically lowers their potential.
The main efforts should be directed towards effective programs to improve the quality of education, improve labor market conditions and reduce the risk of social exclusion. The increase in inequality in developing economies is somewhat justified in view of the growing demand for skilled labor, which in turn increases the income gap. However, the arguments in favor of inequality and its existence should not serve as a justification for the emergence of cronyism and the implementation of policies that benefit a small and selected part of the population.
