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Content archived on 2024-05-07

Distributional effects of reform and the political economy of transition


Research objectives and content:
The transition of Eastern European countries and former Soviet Union from central planning to market regime has become a I subject of huge economic debate during these last years. At the beginning of the transition this debate typically focused on macro-economic questions, while much more attention has been paid to micro-economic reforms as the process of transformation continued. Therefore, the concern of the economic theory has progressively shifted toward the definition of optimal reforming strategies. Since the economic reforms have important social and political consequences. the design of optimal reform needs to take into account the political behaviour of agents toward the reform process. Our focus in this research will precisely be on that political behaviour. We consider that an important determinant of agent' s attitude toward the transition will be the eventual change in income distribution, therefore, we will address the following general questions: how transition affects income distribution and how shifts in income distribution affects political attitude toward reform ? We will investigate such question in an empirical as well as theoretical approach. Empirical issues are those of examining the evolution of income and consumption, trough micro-data from household survey, in order to follow the pattern of inequality and poverty during the transition period. Concerning the theoretical analysis, we need to focus on single micro-reforms in order to analyse their welfare impact and the subsequent political equilibrium. We decided to concentrate on the price reform. The starting point of our analysis is a simple model of consumers ' behaviour under uniform rationing and market regime. We consider heterogeneity of income and we ask the following particular questions: Are there gainers and losers from price liberalisation ? ls there a political equilibrium for price reform? Is the political equilibrium time consistent? In our analysis we have found three classes of agents in term of nominal income (low, medium, high), with opposite interests on reform: medium and high classes demand price liberalisation, while low class prefers uniform rationing. Indeed, if we apply standard median s voter theorem and we parametrize the income, we can also find inter-temporal political inconsistency of the reform. Our research objective is to extent this first analysis in several directions. First, since we have found that the reform is not pareto-improving, we will seek a compensation scheme making everybody better-off. Second, given the political opposition of the higher income tax to redistributive politics in order to compensate the lowest one, we will select compensation schemes that are politically feasible . Third, we will introduce the Supply side in order to find the political equilibrium under shifts to income trough profit distribution and inter-sectoral factors' reallocation (endogenous income).
Training content (objective, benefit and expected impact):
Our research objective is firstly to concentrate on a welfare analysis of the reform process according to the research proposal outlined above, and secondly to consider empirical development of the theoretical results. For the theoretical development of our research, the contact with our host institution has already been found very stimulating since important work on related fields has already been done there. We expect the same for our empirical analysis. The ability of work in an institution with a large experience of income distribution will live us the opportunity to acquire the technical and econometric skill to carry out this research project.

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EU contribution
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Houghton Street
United Kingdom

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