Inequality, Poverty and Growth: the Balkan Case

The aim of this paper is threefold: to draw a picture of the present situation of the Balkans with respect to growth performances, income distribution and trade policies currently followed; to examine the implications for the sustainability of growth in the long run using the main theoretical results available so far in the literature; to highlight some features that are specific to the region. We first discuss the role of trade-integration as a growth-supporting and as a source of within the country inequalities. We show that in and of themselves trade and trade related policies are not necessarily growth-supportin policies and that they imply significant redistributive effects, effects that can create some diffuse fears about the social and private costs of adjustments. These results are critical because, even independently of trade, growth is generating increasing inequalities in the Balkans. Thus, specific attention has to be paid to the distributional consequences of trade and growth. We then discuss the consequences of high levels of inequality for growth and poverty reduction. If trade and growth worsen the income distribution, the speed at which poverty may be reduced in the region will be much slower, and the prospects of future growth will be undermined. A short run argument about the importance of socio-political stability for growth can be added to the long-run arguments that highlight a negative effect of high inequality on growth. The marked spatial, regional, and ethnic dimensions of poverty and inequality suggest that, if economic growth bypasses the areas where the poor are concentrated, it will further increase inequality and exacerbate spatial and social gaps in standards of living. Therefore, the local development of the poorest areas or regions becomes a strategic goal not only for the reduction of poverty and inequality but also for the long run sustainability of growth. Trade policy reforms will not yield the desired benefits unless there are parallel efforts to institutional upgrading, addressing the redistribution of the gains from trade and the interaction between trade openness and domestic and local redistributive policies. The form of support inside the welfare state may matter as much as its local size. Distributive and redistributive local dimensions of trade integration are to be taken into account if one wants to ensure the political viability of the process.