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; 1.Studying the effect of globalization on growth and inequality; 2.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 1.Globalization has 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. 2.Globalization reduces inequality between nations (Hecksher-Ohlin Model)

Problems in H.Ohlin Model in Case of CIS Countries There are at least two empirical problems with the Heckscher – Ohlin model. First, it predicts that bilateral trade will be greatest when factor endowments are most different (Vanek, 1968). There is little trade between 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 evidence from examination of specific developing countries following trade liberalization and from cross-country studies does not suggest that trade liberalization generally reduces inequality in transition countries and in fact frequently suggests that 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 $ GDP per capita.

Variation in within-country income inequality Russia0++ Khazakstan++ Ukraine++++ Azerbaijan--+++ Georgia+++ Armenia-++ Uzbekistan-+ Tajikstan-++ Turkmenistan+- Belarus HIGH INCREASE> 15% ++INCREASE7-15% +MODERATE INCREASE2-7% 0NO VARIATION % -MODERATE REDUCTION2-7% --REDUCTION7-15% ---STRONG REDUCTION> 15% Source: OECD and Authors Calculations

Gini coefficient in CIS countries Armenia Azerbaijan Belarus Georgia Kazakhstan Kyrgyz Republic Moldova Russian Federation Ukraine Turkmenistan Tajikistan Source; UNDP and Authors Calculations

GDP Growth and Inequality Rate in the selected CIS countries Country Azerbaijan Kazakhstan Russia Georgia GDP Growth 34 % 16 % 12 % Changes in Gini Coefficient 4 point 3.6 point 22.3 point 21,4 point

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 cannot guarantee the equitable distribution of benefits and convergence. Not only does government intervention at the domestic level have a role, but so do mechanisms at the regional level. These interventions stem from the theory 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) Fax (99412) ; Web;