Income inequality and poverty in Poland and Romania

Daniel MortazaviIsabel David

João SousaRenato Alves

General background

Communist Heritage Socialist ideology is against wide

differences in income Manual and non-manual wages were similar Vast majority of people worked in a state

firms

Romania 95,20%

Poland 70,40%

Socialist average 90%

OECD avarage 21,20%

State employment as a porportion of the labour force (1988)

Collapse of communism

What happened to the levels of social inequality and poverty in these countries?

Our goal is to answer this question to the specific cases of Romania and Poland

Income

Income: Poland and Romania

GDP Evolution: Growth and Decline

Private Entrepreneurialship Population Income

Social Transfers Structure of Employment

Sectors 1989 & 1997

Real GDP Evolution

Years Did GDP 1997

of GDP

Fall After Some Growth?

GDP index

Decline(1989 = 100)

Poland 2 no -3.1 1.6 111.8 1Romania 4 yes -6.4 -2.2 82.4 7

6.32.1

Countries

(Average Annual Rate

Rank

of GDP Growth)

90-93 94-97 90-97

Real GDP EvolutionReal GDP Evolution

Comparison of GDP Distribution

Entrepreneurial Activity

Population IncomeEconomic Importance of Social Transfers

1987-88 1993-94 1987-88 1993-94 1987-88 1993-94 1987-88 1993-94 1987-88 1993-94Poland 27 32 9 20 22 25 7 9 65 85Romania 35 33 9 9 3 14 4 5 52 61

TotalWages Cash social transfersNon-wage private

sector income

Social transfers in kind (health and

education)

Population income by sources (%GDP)

Structure of Employment Sectors 1989

Sector Bulgaria Czech Republic

Poland Romania Slovakia South OECD

North OECD

Agriculture 19.0 11.7 26.8 27.9 13.8 10.7 4.1Mining 2.6 3.6 3.4 2.3 1.0 0.4 1.0Manufacturing

34.9 34.0 24.5 33.0 32.1 22.0 26.3

Electricity, gas, water

0.8 1.4 1.1 1.2 1.6 0.9 1.1

Construction

7.8 7.3 7.8 7.0 11.6 8.1 6.4

Trade 9.2 11.5 8.9 5.9 11.1 19.3 17.4Transportation

6.8 6.5 7.2 6.9 6.4 6.0 6.0

Finance 0.6 0.5 1.0 0.3 0.4 6.1 8.6Community services

18.4 23.5 19.3 15.3 22.0 26.5 28.7

RI-South 24.2 17.2 23.0 31.3 18.4 - 10.0RI-North 27.3 19.6 27.7 33.4 21.6 10.0 -Source: OECD-Labor Force Statistics (1998) for OECD countries, and authors’ computations for Eastern European economies.

Structure of Employment Sectors 1997

Sector Bulgaria Hungary Poland Romania Slovakia South OECD

North OECD

Agriculture 24.3 7.9 20.5 37.5 8.6 9.3 3.0Mining 2.0 0.7 2.5 2.0 1.7 0.5 0.3Manufacturing

23.2 23.7 21.0 23.0 26.1 20.8 19.2

Electricity, gas, water

1.1 2.7 1.8 2.1 2.5 0.9 0.7

Construction 4.9 6.0 6.6 4.9 8.9 8.3 7.2Trade 12.4 16.9 14.5 10.3 14.4 21.2 18.6Transportation

7.7 8.5 6.2 5.6 7.4 5.6 6.2

Finance 1.6 2.3 2.1 0.8 1.4 7.7 11.2Community services

21.8 31.3 24.8 13.7 29.0 25.7 30.

RI-South 21.2 13.4 14.9 33.1 13.8 - -RI-North 28.9 15.4 22.6 40.0 18.6 12.0 -RI-North-89 27.3 19.6 27.7 33.4 21.6 - 9.3Source: OECD-Labor Force Statistics (1998) for OECD countries, and authors’ computations for Eastern European economies.

Inequality

Gini coefficient Explanation:

Scores are based on the Lorenz curve, which plots cumulative percentages of the population against their cumulative aggregate income

Ranges: 0 (0%) no concentration (perfect equality) 1 (100%) where there is total concentration

(perfect inequality).

Gini Coefficient

Gini Coefficient - Evolution

1987-88 1993-95 1996 1997 1998 1999 2000Romania 23 29 30,3 42,2 31,1 30,6Poland 26 28 32,8 33,4 31,6 29,3

Inequality distributionChanges in Quintile Shares between 1987-88 and 1993-94: Moderate Regressive

Disparity among social groups

Country 1987-88 1993-94Poland

Workers 107 85Farmers 121 77Pensioners 95 89

RomaniaWorkers 100 76Farmers 74 59Pensioners 88 68

P>W>F

F>P>W

Change in relative position

Change in Real and per Capita Income of Worker, Farmer and Pensioner Households

(Workers’ households real per capita income in 1987=100)

Composition of Disposable Income

Composition of Disposable Income in Poland, 1987-95

Concentration Coefficients of Wages, Cash Social Transfers, and Non-wage Private Sector Income in Poland, 1987-95

Evolution of welfare systems

Total Social Expenditures Poland

0

5

10

15

20

25

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

% of

GDP

Total Social Expenditures Romania

0

5

10

15

20

25

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

% of

GDP

Evolution of welfare systems

Poland

0

2

4

6

8

10

12

14

16

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

% o

f GDP

Pensions Unemployment benefits Other Benefits

Romania

02468

10121416

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

% of

GDP

Pensions Unemployment benefits Health Insurance

In 1992 was introduced the individual income tax

The gross wages and pensions were raised by the amount corresponding to the lowest tax rate (20%)

Personal Income Tax Expenditure Programs

Taxation System: Poland

These programs are being criticized Too costly They turned out to be extremely

regressive benefiting the high income tax payers

Taxation System: Poland

I 40% 25%II 30% 16%III 19% 14%

Normal Income Tax Brackets

With exemptions allowed

Poland is introducing a fiscal reform Gradual reduction of corporate income

tax In 2000 to 30% In 2001 to 28% In 2002 to 24% In 2004 to 22%

VAT is being changed according to EU rules

Taxation System: Poland

Initialy Romania introduced a one rate VAT taxe, but then moved for a two rate tax Reduced and normal rate Exemptions like: Bread, Fuel and electricity

for domestic use In 2000 New global income tax regime

Salaries and income from independent activities will be aggregated and taxed at progressive tax rates

Taxation System: Romania

New proposal to reform (2003) Introduce a flat-tax-rate Inequality problems: It is a not a progressive tax

Some changes in VAT (once again according to EU rules) Tax-rate increased to 22% and 11% (normal and

reduced rate) Reduce the scope of exempt transactions (ex.

bread and newspapers) Eliminate differences in taxation between

imported services and similar domestic services

Taxation System: Romania

Poverty

Poverty Headcount

Definition: number of people falling below the poverty line, divided by total population

Poverty Headcount

Poverty Headcount (%)

0

10

20

30

40

50

60

70

Romania Poland

1987-1988 1993-1995

Who are the poor?

Large households Unemployed Low education of the heads Rural areas

Health

Infant Mortality (per 1000)

0

5

10

15

20

25

30

35

Poland Romania

1980

1996

2000

Health

Adult Mortality Rate (per 1000)

0

50

100

150

200

250

300

Male Female Male Female

Poland Romania

1980

1995

1997

1999

2000

2000-2001

Health

Mortality rate (per 100 000 inhabitants) by cause Romania

0,0100,0200,0300,0400,0500,0600,0700,0800,0900,0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Circulatory diseases Tumors Respiratory diseases

Health

Annual average consumption of alcohol (liters per capita)

0,0

2,0

4,0

6,0

8,0

10,0

Poland Romania

1991

1994

1999

Health

Life Expectancy (Years)

67

68

69

70

71

72

73

74

Poland Romania

1980

1995

2000