Equality, Participation, Transition: Essays in Honour of Branko Horvat

Branko Milanović 65
Table 4.3 Factors explaining the difference in inequality compared
to OECD countries (in Gini points)
Due to: Socialist Africa Asia LAC
(1) State sector 16.8 2.4 2.1 0.5
(2) Size of transfers 3.0 9.4 8.8 8.4
(3) The Asia dummy 8.2
Social choice (1) to (3) 13.8 11.6 2.7 8.9
Income level 5.1 7.3 6.2 6.8
Unexplained 2.3 2.2 0.9 2.3
Actual difference 6.4 21.1 9.8 18.0
Calculated from the coefficients in regression 7 in Table 4. 2 and summary data
in Table 4.1. Negative sign indicates that a given element reduces inequality in
the region in comparison with inequality in OECD countries.
inequality, from the levels predicted by the three general variables, by
about 8 Gini points. Because of lower state-sector employment, the
Gini coefficient in Africa and Asia would be greater by between 2 and 2
1/2 points, and by only 1/2 Gini points in Latin America.
In the case of Eastern Europe, by far the most important factor
explaining lower inequality than the OECD countries’ is the greater
share of state-sector workers: this lowers the Gini coefficient by 16.8
points on average. All other elements point to a greater inequality in
Eastern Europe than in OECD countries, but their impact is not sufficient
to offset the impact of the large state sector. The debate about
the lower income inequality in socialist economies (Ahluwalia 1976,
Morrison 1984) can now be placed within a larger context of factors
which explain income inequality in general. Socialist economies display
lower inequality owing to the key feature of their system: the high
share of state-sector employment.
If the Asian dummy is, faute de mieux, interpreted as some kind of
specifically Asian social choice variable, then the difference between
the social choice elements in OECD countries and Asia is very small
(see row 5 in Table 4.3, where the OECD-Asia difference is only 2.4
Gini points, much less than compared to any other area). However,
this is only a speculation because the Asian dummy might also reflect
something very different (say, family values, large inter-household
transfers, or an economic and not at all social variable that we were
unable to pin down).
In conclusion, how do we account for higher inequality in less developed
countries and the lower inequality in Eastern Europe, compared