Economic Growth and Income Inequality: The Challenge in Ex-Communist EU Countries

ABSTRACT

This paper explores the relationship between economic growth and income inequality by observing a set of 11 Central and Eastern European (CEE) countries during the period 1994 to 2020. We employ panel cointegration techniques in order to capture the common long-term dynamics of the CEE countries while not imposing equality on the short-run coefficients. Generally, it is found that there exists a monotonically decreasing growth-inequality link, contradicting Kuznets’ theory for emerging economies. However, in the short-run, several heterogeneities are found at the cross-country level, inferring the diffuse pattern of this association: inverted-U-shaped or linear (insignificant).

KEYWORDS:

• Central and Eastern Europe
• economic growth
• Gini coefficient
• income inequality
• Kuznets curve

JEL CLASSIFICATION:

• O40
• O47
• D63
• I32

Acknowledgments

I want to express my gratitude to the Editor, Prof. Christopher Hartwell, and one anonymous referee for their insightful comments and suggestions. I am very grateful to Alexandru Minea, Marcel Voia, and Monica Silaghi for their valuable discussions on an earlier draft of this article. I am also indebted to the French Ministry of Foreign Affairs for their Eiffel PhD scholarship. All possible errors and omissions are mine.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Data Availability Statement

The data that support the findings of this study are available from the corresponding author, [Teodora Mădălina POP], upon reasonable request.

Notes

1. The Gini coefficient is the most often used indicator for capturing income inequality because it allows comparisons between economies with different sociodemographic characteristics.

2. The CEE countries included in this study are Bulgaria, Croatia, Czech Republic, Hungary, Estonia, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

3. Fixed or random effects model (Topuz, 2022), Ordinary Least Squares (Aghion et al. 2018), Two-stage Least- Squares (Batuo, Kararach, and Malki, 2022).

4. The work of Dávila-Fernández and Punzo (2021) focuses mostly on wealth inequality, estimating an inverted U-shaped function between the wealth share of the top 1% and economic growth.

5. For investigations on regional inequalities in Eastern Europe, see the work of Psycharis, Kallioras, and Pantazis (2020).

6. Cointegration results imply that the variables under consideration move together over time so that short-term disturbances are corrected in the long-run (Engle and Granger, 1987; Stock and Watson, 1993), and therefore causality should be investigated through the panel VECM framework.

7. The Hausman test also confirms the hypothesis that the countries considered follow a common long-term path, but pattern different dynamics in the short-run, assuming that the PMG estimator is more appropriate than the DFE estimator.

8. We also performed the Utest algorithm developed by Lind and Mehlum (2010) to test for the presence of a U- shaped, inverted U-shaped, or monotonic nexus between variables. The results obtained cannot reject the null hypothesis in favor of a monotonic or an inverted U-shaped relationship because the extrema point lies outside the interval.

9. This demonstrates that income inequality, economic growth, and trade jointly manifest a causal relationship with the education proxy.

Additional information

Funding

The author(s) reported that there is no funding associated with the work featured in this article.

Notes on contributors

Teodora-Mădălina Pop

Teodora Mădălina Pop is a Ph.D. Candidate in Economics, member of the Department of Political Economy of the Faculty of Economics and Business Administration, Babeș-Bolyai University Cluj-Napoca (Romania) and the LEO-UCA Laboratory, Clermont-Auvergne University (France). She received an Eiffel Excellence Scholarship granted by the French Ministry of Foreign Affairs to carry out research activities in France. Her main areas of interest include macroeconomics, sustainable regional development, international economics, and empirical economics.