The Drivers of Personal Income Inequality in Transition, and the Role of Reform Approaches

The transition of the Formerly Planned Economies in the ‘90s has provided a stunning opportunity for economists to observe a process of systemic transformation that has never happened or even been theorised before. The transition patterns in the Central Eastern European, Baltic, Western Balkan and former Soviet Union countries took a variety of forms in terms of speed and sequencing of reforms, capturing the attention of an extensive literature (e.g., Murrell, 1992; Roland, 2001). Understandably, the debate and the empirical research focused almost exclusively on what sequencing and (more importantly) what speed of reforms would be more beneficial to short-term output dynamics. Among the very first contributions, Fischer et al. (1996) and de Melo et al. (1997) used a cumulative liberalisation index in growth regressions along with other macroeconomic variables, and found that the index was positively related to growth. The use of a simple cumulative index of transition was strongly criticised on the basis that it contains information about the extent of reforms undertaken earlier but ignores their pace and does not separate the effects of the reform level nor indeed those of earlier reforms (Staehr, 2005). Subsequent attempts to provide more accurate measurement of the speed of reform were, for example, Berg et al. (1999), Wolf (1999), Heybey and Murrell (1999), Staehr (2005) and Godoy and Stiglitz (2006).