From the beginning it was clear that during the transformation, all aspects of economic inequality were likely to be exacerbated and that poverty was likely to emerge. This paper discusses the size and consequences of transformation-generated changes in economic inequality and poverty, both “real” and “subjective”, for future economic growth and the legitimacy of continued transformation in the Mediterranean economies in transformation (Bosnia and Herzegovina, Croatia, Macedonia, Serbia and Montenegro and Slovenia), which have been expanded to include Romania and Bulgaria. This area is referred to as the “region”

Ivo Bićanić

Vojmir Franičević

English

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13THE CHALLENGES OF REAL AND SUBJECTIVE POVERTYAND THE GROWTH OF INEQUALITY IN THE ECONOMIES OFSOUTHEAST EUROPE IN TRANSITION1Ivo Biæaniæ DSc Summary*Faculty of Economics, Zagreb UDC 365.65(4-11)Vojmir FRANIÈEVIÆ DSc JEL I32, P36Faculty of Economics, Zagreb AbstractFrom the beginning it was clear that during the transformation, all aspects of eco-nomic inequality were likely to be exacerbated and that poverty was likely to emerge.This paper discusses the size and consequences of transformation-generated changes ineconomic inequality and poverty, both “real” and “subjective”, for future economicgrowth and the legitimacy of continued transformation in the Mediterranean economiesin transformation (Bosnia and Herzegovina, Croatia, Macedonia, Serbia andMontenegro and Slovenia), which have been expanded to include Romania andBulgaria. This area is referred to as the “region”.1. Transformation-generated inequality and povertyIn spite of the differences in initial conditions with respect to economic inequalityand poverty, the similarities among the transformation economies are striking.Transformation is a process that aims fundamentally to change a society’s notions ofequity and unavoidably, significantly and lastingly to increase its inequality and intro-duce visible poverty and extend social exclusion. Admittedly, only the former is an overt goal of transformation-led social engineer-ing, while the latter two are not primary goals rather derived consequences or goals. * Received: December 17, 2004Accepted: January 25, 20051 Summary of the paper printed in Croatian at Financijska teorija i praksa [http://www.ijf.hr/financijska-_praksa/PDF-2005/1-05/bicanic-franicevic.pdf].The conscious and policy-generated increase in inequality can be seen by lookingat the main policy paradigm applied in some form in all transformation economies. Allthree policy pillars of the dominant “grand” policy paradigm (i.e. the "holy trinity" oftransformation: liberalization, privatization and multiparty democracy with the attendantmacroeconomic stabilization) and the main supporting policy referred to as theWashington consensus policies generate a change in economic inequality and every-thing related to it in a fundamental and lasting way (i.e. over the long term).In spite of the variety of transformation policies, the generated economic inequali-ty and poverty and their evolution during the process have some striking similarities,sufficiently marked to allow the identification of the following “stylized” facts (derivedfrom various sources in the relevant literature):• inequalities during the transition should have initially increased significantly andprobably later decreased or at least stagnated;• some of the changes were desirable while others may have been the result of tran-sition pathologies;• the pattern of change was determined by the various social deficits, their size andspeed and way they were "filled in"; • sources of inequality should have changed, initial changes being influenced bylabour incomes and later by income from assets;• changes may have led to poverty increases, some social groups being excludedfrom the benefits of transition, both in the short term and the long term;• the effect of the pathologies can vary and lead to a 'winners curse' blocking laterreform;• the initial increase in inequality is a result of polarization and major changes in themiddle of the distribution and implies a change of shape.Of course, in any given economy or group of economies these stylized facts mayhave been differently reflected.2. Transformation generated inequality and poverty in the regionIn the economies of the region, in spite of important initial differences in startingpositions, there were many similarities that became clearer as the transformation unfold-ed, the region's economies having become increasingly grouped into the 'Southern trans-formation tier'. In comparison to the benchmark values of Slovenia (which is the trans-formation frontrunner) all the economies of the region had a more unstable (inflation,government deficit), more costly (fall of production, level of recovery, years of risingunemployment) and longer (crises lasting longer and upswing starting later and beingslower) transformation experience. The higher transformation costs were attended withrelatively higher inequality and poverty levels. This is shown both by direct measure-ment of changes in inequality and poverty levels and indirectly from aggregate statisticsreflecting the quality of life. 14I. Biæaniæ, V. Franièeviæ: The Challenges of Real and Subjective Poverty and the Growth of Inequalityin the Economies of Southeast Europe in TransitionFinancial Theory and Practice 29 (1), 13-16 (2005)In addition to the initial conditions the region has one specific and very importantfeature which distinguishes it from other transformation economies (except some CISeconomies). These are the international military conflicts (Wars of the YugoslavSuccession) spawned by the violent break-up of Yugoslavia in 1991. The Yugoslavsuccessor states were obviously affected but so were Romania and Bulgaria, which hadto contend with a closed Danube waterway and the indirect effects of the embargo onSerbia. These wars certainly contributed to increased inequality both through theirinfluence on the bottom of the distribution (loss of life, displaced persons, refugees,property destruction) and the top (war profiteers at many levels, of the usual kind andthose generated by state-related embargoes).Another important aspect influencing the top end of the distribution must be noted.In all the economies (except Bosnia and Herzegovina) the wars ran concurrently withthe transformation. Croatia may provide the clearest example of developments presentin different forms and at different times in all the region's economies. In the exampleof Croatia, liberalization took place amid an institutional deficit and a war, privatiza-tion designed to be state-managed ran concurrently to the war and the extensive mili-tary mobilization of large sections of the population and displaced persons in Croatia.Of course a few were well placed to personally while many were simply excluded fromthe process. 3. Subjective poverty and expectationsIn addition to 'real' increases in inequality and poverty there were major changesin subjective inequality and poverty evaluations. These are very important. Subjectivepoverty seems to be the missing critical link between economic and social reforms andtheir political legitimacy. The actors perceive distributional changes not as a static sim-ple framework of redistribution obtaining over the short term, when changes can goeither way, but rather as something dynamic and more substantial, entailing deep-seat-ed and long-term changes that takes in at least their children. The underlying processis, of course, a deep social restructuring, a process which is unfortunately not well andsystematically researched, when individuals and families are defining not only theirposition on the emerging new social ladder, but also their chances of ascending it in thefuture. In spite of many measurement problems it seems that subjective perceptions ofinequality and poverty levels have been markedly exacerbated.An interesting aspect of subjective poverty is what relationship it bears to changesin the real economy. If correct, then the data on these subjective perceptions shouldhave some foundation in more robust data, if not they may indicate a paradox. In spiteof the lack of research throughout the region, subjective poverty levels seem muchhigher than the 'objective' calculation seems to warrant. Furthermore, the proportion ofthose who consider themselves 'losers' in the transformation process is greater than onecould possibly expect from the real data (on growth, real wage etc.). By drawing atten-tion to this paradox we are far from denying the extent of true poverty and are certain-ly not denying the need and value for pro-poor social and economic policies. However,15I. Biæaniæ, V. Franièeviæ: The Challenges of Real and Subjective Poverty and the Growth of Inequalityin the Economies of Southeast Europe in TransitionFinancial Theory and Practice 29 (1), 13-16 (2005)framing the issue of poverty in the context of actors' perceptions and normative judge-ments indicates only that much more may be at stake, and that the issue of subjectivepoverty might be indicative of much deeper changes and concerns. 4. Two critical policy implications of subjective inequality and poverty The region (with the exception of Slovenia) is still in many aspects unsettled (evenwhen security, political and boundary issues are omitted). It still faces two major all-encompassing and ongoing restructuring processes. The first is the still unfinished trans-formation with respect to which in spite of differences the region is considered a com-parative laggard. The second concerns convergence to the EU, which is only starting.Given this double pressure for future changes, and the feedback, it seems justified totake a forward-looking view and see how poverty, exclusion and inequality, both actu-al and subjective, can influence these vital processes and whether they can act as anaccelerator or a barrier. It is important to realize that the dynamics of poverty and inequality levels, actualand subjective, in transformation economies are deeply influenced by the dynamics andnature of reforms. And vice versa. No less importantly, reforms may be strongly influ-enced by both the impact of real social trends and the various actors' perceptions andinterpretations of these trends, that is, by their moral economies. The moral economy isabout social norms and perceptions, values and judgements which the actors have abouttheir individual participation and roles in the economic processes, as well as about thenature of the economic system and its outcomes at large. It is particularly about equityand justice, fairness and deserts, acceptable and unacceptable. Its central role is in pro-viding the economic system, processes and outcomes with legitimacy.The legitimacy of reforms in the region is closely linked democratic consolidation.In the region only in Romania and Bulgaria and probably in Croatia does the democra-tization process seem to have reached an advanced and/or sustainable level. In somecountries or territories in the region this has not yet been achieved. They are either at thestart of the process (Albania, Serbia and Montenegro), in a state of political crisis(Macedonia) or are quasi- or de facto international protectorates (Bosnia andHerzegovina and Kosovo). Democratic consolidation and legitimacy of democraticregimes and ongoing reforms relies not only on the economic and social output, but onpeople's perceptions and (moral and equity) interpretations of it. The poverty paradoxlikely has a central place in this. Importantly, the paradox indicates that economicgrowth is not enough for legitimacy and consolidation and the continuation of the trans-formation With respect to each of them, major reasons for concerns remain, as well asmajor challenges. These challenges stem from serious institutional and democraticdeficits, uncompensated losers and undeserving winners, a continuing strong base forfundamentalist nationalism, inequalities and uncertainties concerning personal andinterregional developments which are all coupled with widespread pessimism and toomany with pessimistic expectations. They may easily lead to a questioning of the post-socialist reform agenda, particularly if economic growth is not sustained and moderneconomic growth is.16I. Biæaniæ, V. Franièeviæ: The Challenges of Real and Subjective Poverty and the Growth of Inequalityin the Economies of Southeast Europe in TransitionFinancial Theory and Practice 29 (1), 13-16 (2005)

Che Challenges of Real and Subjective Poverty and the Growth of Inequality in the Economies of South Eastern Europe in Transition

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