Squeezing the lemon in the East: The map of redistribution during the boom

1 Oct

Clearly the Baltics, Romania and Bulgaria built varieties of capitalism much more punishing for the rest of us than Visegrad and especially Slovenia. Andthis goes for the best of times. Here’s some data on the eve of the crisis.

The 10 new EU members of CEE spend less on social protection compared to the EU-15. The ten new member states with the highest social spending in Slovenia (21%), Hungary (22), Poland (18%) and the Czech Republic (19%) do not outnumber the EU-15 (27%) average spending on social protection. The share of GDP spent on social protection in the three Baltic States (12–13%) is among the lowest in the European Union.

Concerning per capita social protection expenditures, again the ten new member states of CEE are at the bottom in comparison with the EU-15. Social protection expenditures can tell a lot about the performance of a welfare state. Many previous studies have demonstrated that countries that spend more on social protection have lower levels of inequalities and poverty, higher quality of social services and benefits, and consequently, higher longevity of their populations and a higher standard of overall well-being.

Although there can be other factors influencing the degree of inequalities in society, such as macroeconomic conditions, which include economic and employment growth, the higher social spending still shows a capacity to determine the degree of inequalities in society. For instance, the three Baltic states spend the least on social protection in comparison with the other ten new EU member states. The income inequalities expressed as a ‘Gini coefficient’ are also highest in these societies, ranging from 36 in Estonia and Lithuania to almost 38 in Latvia. While in the three Visegrad countries (the Czech Republic (25), Slovakia (26) and Hungary (27)) and in Slovenia (28) the income inequality is below the EU-15 average (29). The latter countries spend remarkably more on social protection than the rest of the new EU countries. The relative poverty rate also correlates with the social spending in the new member states. At-risk-of-poverty rate after social transfers is much higher in the three Baltic States, Bulgaria and Romania compared to the Czech Republic, Slovenia, Slovakia and Hungary. As noted, the latter countries are remarkable spenders on social protection. The absolute poverty rate is non-existent or very low (ranging from 0% in the Czech Republic, Slovenia and Hungary to 5% in Estonia) in the new EU member states. The number of people living on less than $2.15 a day is, however, high in Romania (12%). This is due to a large number of Roma minorities living in poverty in this country (Sandu, 2009).

Nevertheless, the relative poverty rates might not tell true picture about the performance in Central and Eastern Europe. One reason for this is the pervasiveness of a shadow economy in many of these societies. The shadow economy on average is higher in the new EU countries of Central and Eastern Europe (31%) than in the old EU-15 member states (18%). However, there are some variations within these countries. The lower shadow economy rates are found in countries, which are doing better in terms of the minimum wage, such as the Czech Republic (18%), Slovakia (18%), Hungary (24%) and Slovenia (27%). Obviously, these countries spend more on social protection due to their governments’ ability to collect more taxes for the social insurance funds. Romania (51%), Bulgaria (37%) and the three Baltic states (Estonia (38%), Latvia (38%) and Lithuania (30%)) have the highest shadow economy rates among the new EU-10 countries. It could be argued that people in many new EU member states avoid paying taxes because the state fails to ensure adequate support in case of various social risks. This creates a vicious circle: too little benefit from the welfare state, consequently, a fewer are willing to pay social taxes; the less social taxes are collected – the lower social spending and the affordability of the welfare state, consequently, the state cannot ensure adequate support when various social risks arise.

Jolanta Aidukaite, Lithuanian Social Research Centre, Lithuania, Welfare reforms and socio-economic trends in the 10 new EU member states of Central and Eastern Europe, in Communist and Post-Communist Studies 44 (2011) 211–219

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