Globalization and Inequality in CIS Countries

Globalization and Inequality in CIS Countries Vugar Bayramov, Centre for Economic and Social Development (CESD), Azerbaijan

Commonwealth Independent States (CIS)

Contents • Theoretical Approaches on correlation between globalization and inequality in CIS countries • Empirical research on impacts of globalization process on inequality in CIS countries

Last Changes in CIS • Dramatic rise in inequality in CIS • Absolute poverty widespread in CIS • Highest risk of poverty faced by: • children • rural households • excluded groups (e.g. Roma, refugees) • Working households: largest share of poor • Non-income poverty growing • Growing gap between CIS and CEE • Collapse in living standards

Literature • Two strands of literature; • Studying the effect of globalization on growth and inequality; • Which factors as the result of globalization affect on growth and inequality. Literature focuses on CIS economy insist that; • Globalization is to lead to an increase in income inequality between skilled and unskilled labor (Aghion, 2002) • Changes in inequality vary greatly across countries which have stepped up their integration into the world economy (Dollar and Kraay,2001)

Two Opposite Approaches • Globalizationhas dramatically increased inequality between and within nations (Mazur,2000), and in particular that it has marginalized the poor in transition countries and left behind the poorest countries. • Globalization reduces inequality between nations (Hecksher-Ohlin Model)

Problems in H.Ohlin Model in Case of CIS Countries • There areat least two empirical problems with the Heckscher –Ohlin model. First, it predicts that bilateral trade will be greatest when factor endowmentsare most different(Vanek, 1968). There is little tradebetween advanced countries such as the U.S. and very poor transition countries such as Tajikstan. A second problem with the Heckscher – Ohlin model is that evidencefrom examination of specific developing countries following trade liberalizationand from cross-country studies does not suggest that trade liberalization generally reduces inequality in transition countries and in fact frequently suggeststhat trade liberalization can increase inequality.

GDP Per Capita and Inequality in Context of Globalization Process • Survey covers transition economy as well indicate that globalization increases equality in low-income countries, such as Tajikistan and Moldova and decrease inequality in developed countries (Milanovich, 2001). Turning point is around $ 6 000 GDP per capita.

Variation in within-country income inequality Source: OECD and Author’s Calculations

Gini coefficient in CIS countries Source; UNDP and Author’s Calculations

GDP Growth and Inequality Rate in the selected CIS countries

Openness and Inequality Researches indicate that after WTO Accession Inequality has been Increased in Kyrgyzstan, Moldova, Georgia and Armenia. All WTO members in CIS apply very low tariffs, for example, average tariff rate is 4.3 % in Georgia, 9.1 % in Russia, 14.3 % Belarus. Other research indicate that leas open countries has low inequality (Kray, 2003) such as Belarus.

Key message from Globalization Process in CIS countries The key message is that so-called ‘market forces’ cannotguarantee the equitable distribution of benefits andconvergence. Not only does government intervention atthe domestic level have a role, but so do mechanisms atthe regional level. These interventions stem from thetheory underlying market failure, positive externalities,and the provision of public goods.

Conclusion • Theories support globalization decrease inequality in CIS counties have major problems to be empirically approved; • High inequality is observed in more liberalized countries, such as Georgia and Moldova; • WTO Accession increase inequality in CIS countries such as Kyrgyz Republic and Armenia; • Poor institutions in CIS countries increase negative impacts of globalization on inequality in CIS countries; • Trade integration associated with higher growth, growth associated with poverty reduction, but no evidence of significant link between trade and poverty in CIS countries • Trade and financial integration associated with rising inequality, higher consumption volatility in transition countries; • Financial crises hurt the poor and increase inequality in CIS countries;

Thank You Center for Economic and Social Development (CESD) Address; Shirin Mirzeyev 76 "a"/ 33, Baku Az1002, Azerbaijan Phone: (99412) 4 971161 Fax (99412) 5984431 Email; cesd@aztelekom.net Web; http://www.cesd.az

Globalization and Inequality in CIS Countries