Taking from the rich and giving to the poor? Romania ranks among the EU countries which redistribute the least to its poor people

Romania and most other countries from the eastern bloc of the European Union are much less effective than the western members in redistributing income from the rich to the poor, even if income inequality is much higher in the east, according to a working paper released by the World Bank.

The working paper “Vertical and Horizontal Redistribution. The Cases of Western and Eastern Europe”, signed by seven European experts, indicates that Lithuania is the European country which redistributes the least, with 14.9 Gini points of redistribution from the rich to the poor.

The Gini index is a measure of income or wealth distribution of a nation’s residents, and is the most commonly used measurement of inequality.

A Gini coefficient of zero expresses perfect equality and a Gini coefficient of 1 (or 100 percent, in this working paper) expresses maximal inequality.

At the opposite end of the scale, Belgium is the EU country which redistributes the most, with 27.5 points.

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According to the report, redistribution size does not seem to correlate with market income inequality but tends to be higher in countries with high market income levels.

“For example, Romania and Ireland have a similar, relatively high Gini index of market income, but the former country reduces it by only 18 points, while the latter reduces it by 27 points. Conversely, the size of redistribution in Bulgaria and in the Netherlands is quite similar, but the Bulgarian Gini index of market income is 51, while that of the Netherlands is almost 10 points lower,” the report says.

In Eastern Europe, the evidence is mixed: in about half of the countries, redistribution has increased over time, while in the other half, it has decreased.

“In Hungary, for instance, there has been a significant reduction in redistribution between 2007 and 2014, equivalent to over 5 Gini points. Reductions in the size of the redistribution are also observed in Romania, Poland, the Slovak Republic and Lithuania,” the experts say.

Strong East-West divide

In contrast to the western wing of the EU (EU15), changes in tax and transfer policies in the eastern wing (EU13) countries reduced the degree of redistribution in one-third of the countries, with positive effects on average displaying a lower magnitude than in the EU15, according to the report.

In the majority of countries, the total degree of redistribution increased, predominately driven by changes in the market income component.

The change in total distribution oftentimes largely exceeded the change in redistribution due to policy changes, with governments not fully compensating the decline in redistribution driven by the structure of the system, the experts note.

“For example, while Romania displayed the largest increase in redistribution due to changes in taxes and transfers, this was not sufficient to compensate for the decline in redistribution driven by changes in the underlying structure of the system. In a few countries, including Hungary, and, to a minor extent, Poland, Bulgaria and the Czech Republic, changes in tax and transfer policies even reduced the amount of redistribution,” the report points out.

Across Europe, these three different patterns of active positive compensation, active negative compensation and automatic compensation are replicated in many countries.

Somewhat similar to Germany, active positive compensation is observed in Belgium and Finland, among others.

“Active negative compensation, such as in the case of Poland, occurs in Bulgaria and Hungary, for example. In the latter case, average tax rates were even raised for those in routine manual occupations and fell for non-routine cognitive occupations. Lastly, those countries where, like in Spain, most of the change is explained by automatic reaction of the system are France, Romania and Estonia,” the report underlines.

Unlike the case of the horizontal, generational dimension, where a strong East-West divide was present, the scenario is more mixed with respect to the occupational structure.

“European countries have the world’s most redistributive tax and transfer systems. Although they have been well equipped to deal with vertical inequality—that is, fostering redistribution from the rich to the poor—less is known about their performance in dealing with horizontal inequality, that is, in redistributing among socioeconomic groups,” the experts say.

In a context where individuals may not only care about vertical redistribution, but also about the economic situation of the specific groups to which they belong, the horizontal dimension of redistribution becomes politically salient and can be a source of social tensions, the experts suggest.

According to a recent Credit Suisse study called “Global Wealth 2018”, 62 percent of Romanian adults have negligible wealth of less than USD 10,000, a proportion close to those seen in Mexico or South Africa, while only 0.1 percent could be considered millionaires.