Economic inequality in Estonia : describing and explaining the size and shape of economic inequality in Estonia in 1994

Abstract

Economic Inequality in Estonia: Describing and explaining the size and shape of economic inequality in Estonia in 1994 Synopsis: The transformation in Estonia was relatively successful, especially compared to the transformations in many other post-socialist countries. While the economic reforms were carried out swiftly and smoothly, however, extensive social costs were incurred. The closing down of unprofitable state-run firms and the re-structuring of the economy resulted in considerable unemployment, and price liberation led to high inflation and plummeting real wages. Consequently, a large proportion of the population experienced dropping living standards, while only a tiny minority profited. This study focuses on describing and explaining the patterns of economic inequality in Estonia in 1994. The year 1994 represents an interesting year to study, since the transformations were complete, but little time had passed in which to develop welfare systems necessary to cope with the increasing levels of economic differentiation between members of society. In order to describe the level of economic inequality in Estonia in 1994, the size of economic inequality is ascertained by exploring patterns of economic inequality in Estonia s Soviet past, and by examining and comparing Gini-coefficients for Estonia in 1994 and previous years. In order to describe the shape of economic inequality, the distributions of four measurements of economic welfare are inspected and compared. These four measures are based on data from the NORBALT Living Conditions Project, and include personal income, per capita household income, the need fulfilment index (constructed from data concerning household consumption patterns), and the wealth index (constructed from data concerning the ownership of household durable items). Since income does not always provide a precise indication of actual living standards in transition societies such as Estonia, it was considered important to examine aspects of economic welfare in addition to income. The rest of the analysis focuses on explaining patterns of economic inequality in Estonia in 1994. In order to achieve a complete picture, analysis is carried out on both macro and micro levels. On the macro level, the effects of various social, economic, and political factors on the overall level of economic welfare in Estonia in 1994 are examined. Independent variables in the macro-level analysis include economic development, the transition to political democracy, unemployment, the development of social policy, civil society, the informal economy, and demography. The micro-level analysis, meanwhile, involves a quantitative analysis of bivariate and multivariate relationships between micro-level independent variables and the relative economic welfare of micro-level units. The independent variables include individual background variables (such as gender, age, education, ethnicity and citizenship), and various household variables (such as household size, area of residency, and access to alternative food supplies). The study discovers that, despite Soviet ideals of equality, there was considerable economic inequality in the former Soviet Union, and that the level of economic inequality in Estonia prior to independence was not dissimilar to that in Western societies at that time. Between 1991 and 1994, however, the level of economic inequality rose considerably. Many state and structural factors contributed to increasing inequalities, while the government s focus on economic development meant that little was achieved in order to ease the negative consequences of the reforms on the population. The only consolation to the population was that the relative success of the Estonian transformation meant that overall levels of economic welfare were higher than they could have been. One of the finds of the micro-level analysis, was that many individual and household characteristics contributed to patterns of inequality one would expect to find in most societies. It was also discovered that participation in informal and domestic market activities enabled a large proportion of the population to increase their economic welfare during the turbulent reform years. The year 1994, meanwhile, perhaps represented the height of economic inequality in Estonia, and it is expected that economic, social and political developments will lead to a certain evening out between members of Estonian society.