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EBRD issues populism warning as inequality continues to hurt

By Anthony Williams

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EBRD issues populism warning as inequality continues to hurt

The European Bank for Reconstruction and Development (EBRD) has warned about the rising dangers of populism in the face of continued inequality in post-communist societies 25 years after they embarked on the road towards free-market economies.

The warning is contained in the EBRD’s latest annual Transition Report: “Transition for all: Equal opportunities in an unequal world”.

Access the full report here and listen to the podcast.

The report tracks the remarkable successes that have been achieved in post-communist societies, stressing that market economies have, on average, achieved impressive economic growth. Even if the path towards the market economy has involved short-term pain, this has been a price worth paying.

The report also shows that the “happiness gap” has finally closed with people on similar incomes in other regions.

But it points out not everyone has benefited from growing prosperity. Even where inequality has declined, a perception of rising inequality often persists. Moreover, a belief that reforms have been designed for the benefit of others has led to reversals in political and economic transition and opened the way to anti-reform populism.

The report stresses the importance of designing reforms that do not simply deliver long-term growth on average but provide economic opportunities to broad segments of the population, thus cementing support from the majority.

As the EBRD’s Chief Economist Sergei Guriev writes in his foreword to this year’s Transition Report: “(A) well-functioning market economy should be more than just competitive; it should also be inclusive, well governed, environmentally friendly, resilient and integrated.

“This is necessary in order to ensure that reforms are politically sustainable: reforms should deliver benefits to the majority of the population in both the short and the long term, preventing populism both in times of crisis and in normal times.”

The Transition Report draws on a uniquely wide-ranging survey of people who have experienced transition first hand, including those born at the time of tremendous political, social and economic upheaval.

It reveals the true physical impact of that shock on people born at the peak of this period, noting that babies born during the periods of price liberalisation have turned out, on average, to be 1.1 cm shorter than those in similar social circumstances born either earlier or later.

The survey, the EBRD and World Bank’s third Life in Transition Survey (LiTS III), the results of which will be published in full in December 2016, polled the views of more than 51,000 randomly selected households at 75 locations in each of 34 countries.

The Transition Report analyses the factors behind inequality of opportunity, including parental background, gender and geographic location.

It proposes policy responses that could help to address the challenges of inequality and also to tackle poverty and excessive concentrations of wealth.

On inequality the EBRD’s economists recommend improving access to tertiary education through targeted scholarship programmes and working to improve primary and secondary public education. They say it is important to respond to a continued gender pay gap. “Commitments to providing equal pay for equal work are critical in this regard.”

Improved infrastructure is also important: “Better links – both physical and technological – between urban and rural areas can help to ensure that there is no ‘wrong place’ to be born.”

The report says an excessive concentration of wealth has the potential to cause a backlash against institutions that support market economies and this could ultimately lead to weaker growth. In response, the taxation of wealth may be an effective method of fiscal redistribution, as well as a means of raising additional revenue.

The publication says that untargeted subsidies can be a costly way of reducing poverty and reaching out to those with the lowest incomes. It points specifically at energy subsidies, which it says often benefit the rich and discourage consumers from using energy efficiently

It suggests that a switch to targeted subsidies may be beneficial in terms of reducing poverty but points out that this route demands a high level of administrative capacity, which may be lacking in less developed economies and countries with weaker economic institutions.

One chapter in the report is dedicated to financial inclusion and draws on LiTS III and other data to reveal the barriers that people may experience when they try to access banking. In general, the young and elderly have more problems accessing financial services.

While the gender gap in ownership of a bank account is declining among the younger generation, a significant gender gap remains in the poorer countries of the EBRD region, particularly in rural areas and among older generations.

Recommended responses to these challenges include more digital payments by governments, an increase in mobile banking and the introduction of “no-frills” bank accounts. It is also important to build trust in banks via credible deposit insurance schemes and more bank branches in under-served areas.

The Transition Report concludes with a chapter outlining progress in delivering structural reforms across the regions where the EBRD invests.

This section notes that policy responses generally remain positive in response to persisting political and economic challenges. Positive reform developments outnumber negative developments by 15 to 10, although the margin has narrowed somewhat compared to last year.

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