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Transition's Social Costs

by Vladimir Mikhalev

The transition to a market economy in Eastern Europe and the Former Soviet Union (FSU) has been associated with increased inequality and social stratification. Living standards have fallen for the majority of people, unemployment and poverty are high, the distribution of assets and earnings has changed radically, and social benefits have fallen. The social distance between the ‘winners’ and ‘losers’ of the reforms has widened dramatically. The UNU/WIDER project on ‘Income Distribution and Social Structure during the Transition’ analyses trends in social stratification and their causes with the aim of improving social policy in the transition countries.​

Social structures have been deeply affected by macroeconomic and social-sector reforms. Differences in transition strategies across countries - and thus differences in the duration and length of recessions and inflation episodes - are important determinants of changes in social stratification. Social polarisation was further intensified by privatization - which shifted assets towards the wealthy - and by the rise in earnings inequality associated with changes in labour markets. Moreover, the collapse of the state created an administrative vacuum leading to the erosion of the social security system and a worsening situation for society’s most vulnerable people.

Social Inequality has Risen Steeply

The FSU countries have seen inequality climb to levels comparable to Latin America. In Bulgaria, Russia and the other FSU countries, poverty now engulfs a third and, in some cases, half the population. Unemployment is a significant cause of poverty. Moreover, many pensioners are poor together with many children living in large and single-parent families. In contrast, a new elite has arisen. This small group consists of the nomenklatura, enterprise managers and younger professionals who have adjusted to the new situation.

Rising income inequality has been associated with profound changes in social structures. Socialist societies were stratified into ‘status groups’ in which social capital rather than economic capital - and social networks rather than market power - determined a person’s status. These status groups have been replaced by new social classes in the transition to a market economy. People’s prospects in life are now largely determined by their possession of assets, goods and income opportunities. Change has been widespread, but it is not yet complete. Postcommunist economies remain mixed systems in which markets coexist with limited redistribution through the state. Mutual self-help also underpins the informal safety net.

This new pattern of social stratification is becoming clearer, although there are serious methodological and data problems in estimating its size. First, there is a new elite - the product of emerging capitalism. Second, the new commercial, managerial, and professional middle class has grown rapidly - despite the widespread perception that there is no middle class in post-communist societies. The available data suggest that about 6 per cent of Russians belong to the ‘rich’ or upper class, and 29 per cent to the middle class. Despite the rise of the new elite and the middle-class, the most numerous group consists of blue-collar workers, farmers, and state-sector employees. In Russia, this group accounts for 65 per cent of the population. About 8 per cent of this group consist of the most socially deprived and marginalized people who are in long-term poverty - their number has risen in the transition.

In summary, there are some common trends across countries. But the UNU/WIDER study also highlights significant differences. Thus, the slowly reforming economies of the FSU now have very high inequality and social polarisation. Central Europe’s transition countries have shown smaller increases in income inequality; their successful reforms resulted in the early resumption of economic growth.

Inequality is Higher in FSU than in Central Europe

To deepen our understanding of these contrasting experiences, the UNU/ WIDER study selected seven countries as case studies: Czech Republic, Kyrgyzstan, Poland, Romania, Russia, Ukraine, and Uzbekistan. These differ in their initial conditions, reform strategies, income-distribution patterns and evolving social structures. Six of the seven countries can be viewed as pairs; they have very similar initial conditions, but followed different reform strategies and/or exhibit different macroeconomic and social outcomes. These pairs are: Russia and the Ukraine; Poland and the Czech Republic; Uzbekistan and Kyrgyzstan.

The project’s findings confirm that the Central European countries did not experience extreme social polarisation. The gap between the elite and the rest of society - and the size of the severely deprived group - is less than in the FSU. Many professional workers, especially the young, have successfully entered the market economy. In contrast, an extremely wealthy and powerful economic elite has emerged in Russia and some other FSU countries; this is coupled with the impoverishment and deprivation of many of the population. An extremely skewed income and asset distribution impedes the formation of a middle class - losers from transition largely outnumber the small and heterogeneous group of winners.

Social Polarisation must be Reduced

Social polarisation in the FSU has large economic costs. Not surprisingly, corruption and crime in the FSU is more widespread than in Central Europe where inequality has risen by less. Thus, a more active social policy - promoting better livelihoods and more investment in human capital - could have large economic returns. But there is also a need for more effective public transfers and income redistribution policies to alleviate and reduce poverty. Social cohesion cannot be ignored.

Dr Vladimir Mikhalev is a UNU/WIDER Senior Research Fellow, and directs the Institute’s project on ‘Income Distribution and Social Structure during the Transition’. Details of this, and other UNU/WIDER projects, are available on the web site (www.wider.unu.edu).