Entrepreneurship and the Evolution of Income Distributions in Poland and Russia

Abstract

Differences in the evolution of income distribution in Poland and Russia in the post-socialist era are striking: for example, in Poland, the gini coefficient on earnings went from 0.28 to 0.33 between 1988 and 1998 while in Russia it went from 0.27 to 0.47 (UNICEF, 2001). We argue that these differences can be accounted for, in part, by the different patterns of entry of de novo firms and of spin-offs from privatized state companies (for herein denoted small enterprises). We use regional differences in early privatization as instruments to estimate the effect of small enterprises on income distribution. Early privatization is a plausible source of variation in small enterprises because it can either foster or deter entry and development via its impact on the regulatory environment. Using this identification strategy, we find, most notably, that a one standard deviation increase in the share of the workforce in small enterprises increases the share of income earned by the lowest 40-percent of the population by 1.4 percentage points in the Polish regions between 1993 and 1998 and by 1.25 percentage points in the Russian regions between 1995 and 2001. Our results suggest that early privatization in Poland was more successful in supporting an equitable income distribution via small enterprise development than in Russia.