Economic inclusion in transition

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Economic inclusion

Economic inclusion is essential for development. This chapter analyses the inclusiveness of economic systems in the transition region, and finds large differences both across countries and across dimensions of inclusion. Inequality of opportunity is highest in the Western Balkans and some eastern European and Central Asian countries. This partly reflects a failure to provide young people with relevant education and job opportunities. Inclusion gaps also exist with regard to gender, particularly in the SEMED region.

Economic inclusion, defined as broad access to economic opportunity, has come to be regarded as integral to economic development. Besides the intrinsic appeal of spreading opportunities and benefits widely, inclusion generates good incentives: if people are given a chance to succeed, they are more likely to pursue education, participate in the workforce and invest or engage in activities that lead to economic growth and prosperity.¹

A related argument focuses on the sustainability of reform. Market reforms that fail to benefit the population as a whole will not enjoy public support for long. Popular demand for subsidies and state employment to make up for a lack of opportunities has, in several instances, prevented governments from pushing reforms further. For example, reforms pursued by previous administrations in Egypt and Tunisia failed to broaden economic opportunity sufficiently. This contributed initially to resistance to those reforms, which were viewed as mainly benefiting the elite, and ultimately to the popular uprisings of 2011.²

Economic inclusion is important in the context of this Transition Report for two reasons. First, as in the case of Egypt, a lack of inclusion might help to explain why populations turn against market-oriented reform and why countries can become “stuck” in transition. Second, inclusion is a specific and critical dimension of the quality of economic and social systems and institutions. The analysis in the previous three chapters touches on this dimension, but does not fully capture it.

• In market-based systems economic inclusion is usually associated with democratic forms of government. Democracies generally look at the welfare of the majority, while autocratic regimes tend to favour politically powerful elites. That said, even in democracies it may be difficult for minorities (and in some cases even for poor majorities) to access high-quality education and employment; and some countries without pluralistic political systems may well provide economic opportunities to large segments of the population as long as there is no challenge to the existing political order.
• The measures of economic institutions used in Chapter 3 are closely related to economic inclusion. Law and order, government effectiveness and a lack of corruption should all impact positively on economic opportunity. However, they may not benefit all groups in the same way. This may reflect discrimination, lack of education or regional variation in the quality of institutions. The excellent economic institutions in the United States, for example, did not prevent the US economy from providing only limited and inferior opportunities to women and African Americans, even through most of the 20th century.
• Good education is a key condition for broad access to opportunity. Countries with stronger publicly funded education systems are more likely to even out disadvantages linked to social backgrounds. Variations in the quality and quantity of human capital described in Chapter 4 are therefore likely to be correlated with differences in economic inclusion. Nevertheless, the correlation will be far from perfect. Chapter 4 considered quality and quantity, rather than access to education, and disregarded differences within countries in terms of educational quality.

The purpose of this last chapter is to supplement the analysis in previous chapters by providing direct evidence of the state of economic inclusion in the transition region. Equality of opportunity – where a person’s social background, place of birth, gender and other factors (other than innate talent) are not predictors of individual economic success – is the benchmark against which countries are measured.³

Two complementary approaches are employed, which we can broadly describe as bottom-up and top-down.

The bottom-up approach focuses on the individual or household level. Building on a new body of research on equality of opportunity,⁴ it measures the extent to which differences in wealth or education across households are attributable to circumstances at birth. The stronger the relationship between circumstances and outcomes, the further a country is from the ideal of equality of opportunity

The top-down approach attempts to rate the institutions, markets and education systems of most countries in the transition region in terms of their capacity to extend economic opportunity to individuals regardless of people’s specific circumstances or attributes. The analysis focuses on gender, place of birth and the situation of young adults. Although the last of those does not reflect a circumstance at birth, it is used to show the opportunities for people from non-privileged social backgrounds at a critical stage of their lives.

Because these approaches focus on equality of opportunity across various groups in society (as opposed to the level or quantity of opportunities on offer to members of these groups), economic inclusion as defined in this chapter is a relative concept. In principle, a society can be poor and lacking in opportunities, but still be fair in how it distributes those opportunities between the various groups. Hence, the measures presented in the following analysis do not cover prosperity. They are intended to complement standard measures of human and institutional development, capturing a dimension that is usually overlooked.

1. See Acemoğlu and Robinson (2012) and Marrero and Rodríguez (2013). [back]
2. See Galal and Selim (2012) and Diwan (2012). [back]
3. This concept follows the approach adopted in Roemer (1998) and Rawls (1971). [back]
4. See Bourguignon et al. (2007), Checchi et al. (2010), Hassine (2012), Salehi-Isfahani et al. (2011) and Ferreira et al. (2011). [back]

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