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---

### Related literature
- Kuznets (1955): conjecture of an inverted U-shaped relationship between economic development and income inequality.
- Cross-country findings:
  - Positive correlation between growth and inequality: Greenwood and Jovanovic (1990); Banerjee and Newman (1993); Galor and Zeira (1993); Perotti (1993); Barro (2000).
  - No empirical support for Kuznets: Adelman and Robinson (1989); Anand and Kanbur (1993); Ravallion (1995).
- Macroeconomic instability: tends to depress income growth for the poor and increase inequality (Datt and Ravallion, 1998; Ferreira, Leite, and Litchfield, 2007).
- Globalization and openness:
  - Theoretical effect depends on factor endowments (human capital).
  - Empirical mixed evidence: Dollar and Kraay (2004) vs. Barro (2000) and Milanovic (2005).
  - FDI often found to increase inequality; some evidence of inverted U-shaped relationship (Alderson and Nielson, 1999).
- Financial development:
  - Generally lowers inequality in the long term (Beck, Demirguc-Kunt, and Levine, 2007; Demirguc-Kunt and Levine, 2009; Galor and Zeira, 1993; Banerjee and Newman, 1993; Clarke, Xu, and Zou, 2006).
  - Distribution of capital income can exacerbate inequality (Rajan and Zingales, 2003; McKenzie and Woodruff, 2006; Rajan, 2010).
- Demographics and social characteristics:
  - Population growth and demographic composition matter (Alderson and Nielsen, 1999; Deaton and Paxson, 1997).
  - Urbanization and education affect inequality; relationship with education is complex (Barro, 2000; Checci, 2000).
- Institutions and political regimes:
  - Democracy often associated with greater equality (Rodrik, 1999), but evidence is mixed (Muller, 1988; Burkhart, 1997; Gradstein and Milanovic, 2004; Huber, 2005; Dreher and Gaston, 2008).
  - Transition processes may have diverging effects; privatization can worsen inequality (Bandelj and Mahutga, 2010; Grimalda, Barlow, and Meschi, 2010).
- Fiscal policy:
  - Fiscal instruments (taxation and expenditure) can influence income distribution (Musgrave, 1959; Feenberg and Poterba 1993; Auten and Carroll 1999; Benabou 2000; Muinelo-Gallo and Roca-Sagales 2011; Woo and others, 2017).
  - Direct income taxes and cash transfers reduced the average Gini coefficient by about one-third in OECD countries during 1985–2005 (Bastagli, Coady, and Gupta, 2012).
- Transition economies:
  - Historically low inequality due to redistributive policies; post-transition increase in inequality linked to wage decompression, unemployment, inflation, fiscal adjustment, privatization, and technological change (Flakierski, 1992; Kornai, 1992; Aghion and Commander, 1998; Tridico, 2010; Aristei and Perugini, 2012; Forster and Toth, 1997; Flemming and Micklewright, 1999; Keane and Prasad, 2000; Lehmann and Wadsworth, 2001; Birdsall and Nellis, 2003; Fleisher, Sabirianova, and Wang, 2005; Flabbi, Paternostro, and Tiongson, 2007).

### Data overview (Section III)
- Sample and period:
  - Unbalanced panel dataset of annual observations on 29 transition economies from 1990 to 2018.
  - Countries: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
- Data sources:
  - IMF’s Government Finance Statistics (GFS) and World Economic Outlook (WEO).
  - World Bank’s World Development Indicators (WDI).
  - International Country Risk Guide (ICRG).
  - Transition Indicators database of the EBRD (composite index of structural reform progress).
  - Dependent variable: net Gini coefficient (after taxes and transfers) from the Standardized World Income Inequality Database (SWIID) (Solt, 2009).
  - Robustness checks: gross Gini (SWIID) and net Gini (WIID).
- Measurement notes:
  - SWIID uses imputation methodology—subject to measurement uncertainty (Jenkins, 2015; Ferreira, Lustig, and Teles, 2015).
  - WIID compiles actual (non-imputed) data; most WIID data appear to be on a net income basis and correlate highly with SWIID net Gini.
- Stationarity:
  - Panel unit root tests using Im-Pesaran-Shin (2003) indicate variables are stationary after logarithmic transformation (results available upon request).
- Summary statistics (selected exact figures preserved):
  - Net Gini (SWIID): Obs 698; Mean 31.58; Std. Dev. 5.08; Min 17.40; Max 44.50.
    - between: 4.64; 23.78; 41.08.
    - within: 2.00; 22.54; 35.00.
  - Gross Gini (SWIID): Obs 698; Mean 43.81; Std. Dev. 7.26; Min 21.90; Max 56.90.
    - between: 6.91; 23.63; 55.67.
    - within: 1.85; 34.04; 47.99.
  - Net Gini (WIID): Obs 528; Mean 32.86; Std. Dev. 5.81; Min 20.10; Max 55.50.
    - between: 4.52; 25.84; 44.90.
    - within: 4.10; 20.06; 52.57.
  - Real GDP per capita: Obs 761; Mean 761213948; Std. Dev. 521011; Min 2543400000.
  - Tax revenue: Obs 757; Mean 23.96; Std. Dev. 8.44; Min 2.57; Max 45.80.
  - Government spending: Obs 760; Mean 35.72; Std. Dev. 10.08; Min 8.54; Max 71.90.
  - Income tax: Obs 488; Mean 26.30; Std. Dev. 12.12; Min -4.47; Max 62.28.
  - Education spending: Obs 698; Mean 4.60; Std. Dev. 1.65; Min 0.99; Max 13.54.
  - Health spending: Obs 740; Mean 3.65; Std. Dev. 1.56; Min 0.77; Max 7.04.
  - Trade openness: Obs 737; Mean 96.18; Std. Dev. 33.07; Min 23.22; Max 192.35.
  - Financial development: Obs 552; Mean 34.31; Std. Dev. 21.45; Min 0.92; Max 101.29.
  - Share of agriculture: Obs 693; Mean 11.68; Std. Dev. 9.96; Min 1.52; Max 56.61.
  - Old age dependency: Obs 782; Mean 17.49; Std. Dev. 6.44; Min 5.36; Max 32.65.
  - Transition index: Obs 818; Mean 2.96; Std. Dev. 0.82; Min 1.00; Max 4.06.
  - EU membership (binary): Obs 812; Mean 0.20; Std. Dev. 0.40; Min 0.00; Max 1.00.
  - Bureaucratic quality: Obs 519; Mean 2.08; Std. Dev. 0.86; Min 1.00; Max 4.00.
  - Corruption: Obs 519; Mean 2.68; Std. Dev. 0.97; Min 1.00; Max 5.00.
  - Democracy: Obs 519; Mean 4.21; Std. Dev. 1.53; Min 1.00; Max 6.00.
- Source: Authors' calculations.

### Empirical strategy (Section IV)
- Model specifications:
  - Static model and dynamic model with lagged dependent variable.
  - Dynamic specification (as presented):
    - llolll( GINI_it ) = λ0 + θ llolll( GINI_{i,t-1} ) + μμμμ_{i,t} + β X_{i,t} + η_i + ν_t + ε_{i,t}
    - GINI_it: net Gini coefficient in country i at time t.
    - μμμ_{i,t}: set of fiscal policy instruments (tax revenue and government spending as share of GDP).
    - X_{i,t}: controls including real GDP per capita, share of agriculture, trade openness (exports+imports/GDP), financial development (credit to private sector/GDP), share of population over 65, composite index of structural reform progress, and EU membership binary.
    - η_i and ν_t: country- and time-specific effects; ε_{i,t}: idiosyncratic error term.
  - Robust standard errors clustered at the country level.
- Econometric challenges:
  - Potential endogeneity of real GDP per capita with income inequality.
  - Temporal and spatial correlation in panel errors; persistence in income inequality (serial correlation).
- Identification strategy:
  - Trade-weighted per capita income of main trading partners used as an instrument (IV) for domestic real GDP per capita.
  - Estimators:
    - IV-2SLS for static models.
    - IV-GMM for dynamic models.
  - Rationale: Trading partners’ weighted average real GDP per capita is highly correlated with a country’s own real GDP per capita but remains unaffected by domestic income inequality; suitable IV to address endogeneity.

### Estimation results (Section V)
- Main findings (IV-2SLS static results emphasized):
  - Real GDP per capita (instrumented) has a positive and statistically significant effect on income inequality.
  - Real GDP per capita squared is statistically significant with a negative coefficient — consistent with an inverted U-shaped Kuznets relationship.
  - Fiscal policy (aggregated) is statistically insignificant at conventional levels when instrumenting GDP per capita.
  - Taxation and government spending show opposing signs:
    - Government spending: negative coefficient (increased government spending could lower net Gini).
    - Taxation (tax-to-GDP ratio): positive coefficient (increase in tax-to-GDP ratio associated with higher net Gini).
  - Other controls:
    - Trade openness: worsens income inequality.
    - Financial development: improves income distribution (negative coefficient).
    - Share of agriculture: positive coefficient.
    - Old age dependency: positive coefficient.
    - Transition index and EU membership: statistically significant worsening effects on income inequality for CEE/CIS over 1990-2018.
- Selected exact coefficients and statistics from Table 2 (Static Models — Net Gini Coefficient):
  - Estimation methods reported: FE, RE, IV.
  - Real GDP per capita: 0.148*** (FE), 0.091*** (RE), 0.395*** (IV) [standard errors: [0.031], [0.025], [0.029]].
  - Real GDP per capita^2: -0.011*** (FE), -0.003*** (RE), -0.004*** (IV) [std. errors: [0.002], [0.001], [0.001]].
  - Taxation: 0.056*** (FE), 0.106*** (RE), 0.043 (IV) [std. errors: [0.013], [0.023], [0.057]].
  - Government spending: -0.001* (FE), -0.097* (RE), -0.031 (IV) [std. errors: [0.018], [0.028], [0.041]].
  - Trade openness: 0.027*** (FE), 0.109*** (RE), 0.072*** (IV) [std. errors: [0.011], [0.019], [0.034]].
  - Financial development: -0.019*** (FE), -0.047*** (RE), -0.023*** (IV) [std. errors: [0.004], [0.011], [0.007]].
  - Share of agriculture: 0.023* (FE), 0.191*** (RE), 0.060** (IV) [std. errors: [0.011], [0.013], [0.033]].
  - Old age dependency: 0.165* (FE), 0.009* (RE), 0.048 (IV) [std. errors: [0.025], [0.020], [0.052]].
  - Transition index: 0.082*** (FE), 0.299*** (RE), 0.199*** (IV) [std. errors: [0.025], [0.035], [0.055]].
  - EU membership: 0.042*** (FE), 0.027*** (RE), 0.090*** (IV) [std. errors: [0.009], [0.019], [0.020]].
  - Fixed effects: Yes for all.
  - Number of observations: 433 (all); Number of countries: 29.
  - R^2: 0.49 (FE), 0.62 (RE), 0.20 (IV).
- Dynamic model (IV-GMM) results — selected exact figures from Table 3:
  - Net Gini coefficient t-1: 0.851*** (IV-GMM (1)), 0.817*** (IV-GMM (2)), 0.438*** (IV-GMM (3)) [std. errors: [0.016], [0.041], [0.046]].
  - Real GDP per capita: 0.138** (IV-GMM (1)), 0.203** (IV-GMM (2)), 0.127** (IV-GMM (3)) [std. errors: [0.072], [0.025], [0.029]].
  - Real GDP per capita^2: -0.008*** (IV-GMM (1)), -0.011** (IV-GMM (2)), -0.006** (IV-GMM (3)) [std. errors: [0.003], [0.006], [0.001]].
  - Taxation: 0.002 (IV-GMM (1)), 0.015 (IV-GMM (2)) [std. errors: [0.012], [0.209]].
  - Government spending: -0.008 (IV-GMM (1)), -0.052 (IV-GMM (2)) [std. errors: [0.010], [0.091]].
  - Trade openness: 0.079** (IV-GMM (1)) [std. error: [0.106]].
  - Financial development: -0.011** (IV-GMM (1)) [std. error: [0.010]].
  - Fixed effects: Yes for all IV-GMM specifications.
  - Number of observations: 602 (IV-GMM (1)), 588 (IV-GMM (2)), 405 (IV-GMM (3)).
  - Number of countries: 29.
  - F-stat: 2438.69 (IV-GMM (1)); 983.51 (IV-GMM (2)); 529.28 (IV-GMM (3)) with [p-value] 0.000 for all.
  - R^2: 0.93 (IV-GMM (1)), 0.89 (IV-GMM (2)), 0.76 (IV-GMM (3)).
- Interpretation:
  - Persistence: high persistence in income inequality (lagged Gini significant).
  - Core relationships (Kuznets curve, trade openness, financial development) remain across static and dynamic specifications.
  - Fiscal policy (aggregate measures) remains statistically insignificant when addressing endogeneity; taxation and spending have opposing signs across specifications.

### Robustness and sensitivity analysis
- Robustness checks and alternative specifications:
  - Truncated sample at the 5th and 95th percentiles: no significant change relative to baseline.
  - Alternative inequality measures: gross Gini (SWIID) and net Gini (WIID) yield similar empirical results.
  - Five-year nonoverlapping intervals instead of annual observations: broadly similar picture; some changes in magnitude but not significance.
  - Alternative fiscal measures:
    - Income tax share in total (measure of tax progressivity): negative coefficient (income tax helps improve distribution) but statistically insignificant at conventional levels.
    - Education and health spending (ratios to GDP): mitigating effects on inequality but statistically insignificant at conventional levels.
  - Additional controls: bureaucratic quality, corruption, democracy—quality of institutions matters but inclusion does not alter baseline findings.
- Select exact coefficients and model stats from Table 4 (IV-GMM robustness):
  - Gini coefficient t-1 in various models: 1.091***, 0.882***, 0.605***, 0.379***, 0.727***, 0.550***, 0.570***, 0.805***.
  - Real GDP per capita coefficients across robustness checks: 0.217***, 0.204**, 0.817*, 0.278**, 0.358**, 0.555*, 0.522**, 0.169**.
  - Real GDP per capita^2 coefficients across checks: -0.056***, -0.011**, -0.043*, -0.017***, -0.019***, -0.031**, -0.029***, -0.005**.
  - Taxation and government spending coefficients vary across specifications but do not overturn baseline conclusion of limited redistributive impact.
  - Number of observations and countries vary by specification (examples: Observations 295, 405, 314, 115, 315, 386, 410, 401; Number of countries 22, 29, 20, 26, 23, 23, 22, 41, 8).
  - F-statistics reported: e.g., 119.61, 235.04, 56.82, 13.43, 170.97, 59.27, 69.70, 721.22 with [p-value] 0.000 for all.
  - R^2 values reported across checks: 0.79, 0.86, 0.50, 0.38, 0.84, 0.44, 0.49, 0.94.

### Conclusion and policy implications (Section VI)
- Long-run evolution:
  - Average pretax market income Gini in transition countries increased by 15 percent from 39 in 1990 to 45 in 2018.
  - Average net Gini coefficient increased from 27 to 32 over 1990–2018.
  - Income inequality worsened in CEE/CIS during the transition; no significant improvement in the redistributive impact of fiscal policy (difference between gross and net Gini).
- Empirical summary:
  - Evidence for Kuznets curve: income per capita (instrumented) increases inequality up to a threshold; squared term negative and significant.
  - Fiscal policy (aggregate) statistically insignificant in affecting income inequality during 1990–2018 in transition economies.
  - Taxation and government spending exhibit opposing effects on net Gini in the sample.
  - Findings robust to alternative inequality measures, fiscal instruments, sample truncation, aggregation intervals, and additional institutional controls.
- Policy recommendations and implications:
  - Fiscal policy can be designed to achieve greater redistributive effects, especially in the long term.
  - Specific directions:
    - Enhance progressivity of taxation.
    - Develop more targeted expenditure policies (implied emphasis on education and health spending, though empirical effects were not statistically significant at conventional levels in this study).
  - Institutional quality matters for income inequality but improving institutions does not by itself overturn baseline findings on fiscal policy effectiveness.

*Source: Authors' calculations based on the supplied sections III–VI of the document.*

### Section III describes the data used in the analysis Section IV introduces the salient features of our

### Section III–VI

### Related literature
- Kuznets (1955): conjecture of an inverted U-shaped relationship between economic development and income inequality.
- Cross-country findings:
  - Positive correlation between growth and inequality: Greenwood and Jovanovic (1990); Banerjee and Newman (1993); Galor and Zeira (1993); Perotti (1993); Barro (2000).
  - No empirical support for Kuznets: Adelman and Robinson (1989); Anand and Kanbur (1993); Ravallion (1995).
- Macroeconomic instability: tends to depress income growth for the poor and increase inequality (Datt and Ravallion, 1998; Ferreira, Leite, and Litchfield, 2007).
- Globalization and openness:
  - Theoretical effect depends on factor endowments (human capital).
  - Empirical mixed evidence: Dollar and Kraay (2004) vs. Barro (2000) and Milanovic (2005).
  - FDI often found to increase inequality; some evidence of inverted U-shaped relationship (Alderson and Nielson, 1999).
- Financial development:
  - Generally lowers inequality in the long term (Beck, Demirguc-Kunt, and Levine, 2007; Demirguc-Kunt and Levine, 2009; Galor and Zeira, 1993; Banerjee and Newman, 1993; Clarke, Xu, and Zou, 2006).
  - Distribution of capital income can exacerbate inequality (Rajan and Zingales, 2003; McKenzie and Woodruff, 2006; Rajan, 2010).
- Demographics and social characteristics:
  - Population growth and demographic composition matter (Alderson and Nielsen, 1999; Deaton and Paxson, 1997).
  - Urbanization and education affect inequality; relationship with education is complex (Barro, 2000; Checci, 2000).
- Institutions and political regimes:
  - Democracy often associated with greater equality (Rodrik, 1999), but evidence is mixed (Muller, 1988; Burkhart, 1997; Gradstein and Milanovic, 2004; Huber, 2005; Dreher and Gaston, 2008).
  - Transition processes may have diverging effects; privatization can worsen inequality (Bandelj and Mahutga, 2010; Grimalda, Barlow, and Meschi, 2010).
- Fiscal policy:
  - Fiscal instruments (taxation and expenditure) can influence income distribution (Musgrave, 1959; Feenberg and Poterba 1993; Auten and Carroll 1999; Benabou 2000; Muinelo-Gallo and Roca-Sagales 2011; Woo and others, 2017).
  - Direct income taxes and cash transfers reduced the average Gini coefficient by about one-third in OECD countries during 1985–2005 (Bastagli, Coady, and Gupta, 2012).
- Transition economies:
  - Historically low inequality due to redistributive policies; post-transition increase in inequality linked to wage decompression, unemployment, inflation, fiscal adjustment, privatization, and technological change (Flakierski, 1992; Kornai, 1992; Aghion and Commander, 1998; Tridico, 2010; Aristei and Perugini, 2012; Forster and Toth, 1997; Flemming and Micklewright, 1999; Keane and Prasad, 2000; Lehmann and Wadsworth, 2001; Birdsall and Nellis, 2003; Fleisher, Sabirianova, and Wang, 2005; Flabbi, Paternostro, and Tiongson, 2007).

### Data overview (Section III)
- Sample and period:
  - Unbalanced panel dataset of annual observations on 29 transition economies from 1990 to 2018.
  - Countries: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
- Data sources:
  - IMF’s Government Finance Statistics (GFS) and World Economic Outlook (WEO).
  - World Bank’s World Development Indicators (WDI).
  - International Country Risk Guide (ICRG).
  - Transition Indicators database of the EBRD (composite index of structural reform progress).
  - Dependent variable: net Gini coefficient (after taxes and transfers) from the Standardized World Income Inequality Database (SWIID) (Solt, 2009).
  - Robustness checks: gross Gini (SWIID) and net Gini (WIID).
- Measurement notes:
  - SWIID uses imputation methodology—subject to measurement uncertainty (Jenkins, 2015; Ferreira, Lustig, and Teles, 2015).
  - WIID compiles actual (non-imputed) data; most WIID data appear to be on a net income basis and correlate highly with SWIID net Gini.
- Stationarity:
  - Panel unit root tests using Im-Pesaran-Shin (2003) indicate variables are stationary after logarithmic transformation (results available upon request).
- Summary statistics (Table 1) — selected exact figures preserved:
  - Net Gini (SWIID): Obs 698; Mean 31.58; Std. Dev. 5.08; Min 17.40; Max 44.50.
    - between: 4.64; 23.78; 41.08.
    - within: 2.00; 22.54; 35.00.
  - Gross Gini (SWIID): Obs 698; Mean 43.81; Std. Dev. 7.26; Min 21.90; Max 56.90.
    - between: 6.91; 23.63; 55.67.
    - within: 1.85; 34.04; 47.99.
  - Net Gini (WIID): Obs 528; Mean 32.86; Std. Dev. 5.81; Min 20.10; Max 55.50.
    - between: 4.52; 25.84; 44.90.
    - within: 4.10; 20.06; 52.57.
  - Real GDP per capita: Obs 761; Mean 2,139,48? (table formatting indicates numeric columns; preserve presented strings exactly: "761213948" mean; Std. Dev. "521011"; Min "2543400000"; Max ???) [Note: table shows concatenated numbers; preserved as in source.]
  - Tax revenue: Obs 757; Mean 23.96; Std. Dev. 8.44; Min 2.57; Max 45.80.
  - Government spending: Obs 760; Mean 35.72; Std. Dev. 10.08; Min 8.54; Max 71.90.
  - Income tax: Obs 488; Mean 26.30; Std. Dev. 12.12; Min -4.47; Max 62.28.
  - Education spending: Obs 698; Mean 4.60; Std. Dev. 1.65; Min 0.99; Max 13.54.
  - Health spending: Obs 740; Mean 3.65; Std. Dev. 1.56; Min 0.77; Max 7.04.
  - Trade openness: Obs 737; Mean 96.18; Std. Dev. 33.07; Min 23.22; Max 192.35.
  - Financial development: Obs 552; Mean 34.31; Std. Dev. 21.45; Min 0.92; Max 101.29.
  - Share of agriculture: Obs 693; Mean 11.68; Std. Dev. 9.96; Min 1.52; Max 56.61.
  - Old age dependency: Obs 782; Mean 17.49; Std. Dev. 6.44; Min 5.36; Max 32.65.
  - Transition index: Obs 818; Mean 2.96; Std. Dev. 0.82; Min 1.00; Max 4.06.
  - EU membership (binary): Obs 812; Mean 0.20; Std. Dev. 0.40; Min 0.00; Max 1.00.
  - Bureaucratic quality: Obs 519; Mean 2.08; Std. Dev. 0.86; Min 1.00; Max 4.00.
  - Corruption: Obs 519; Mean 2.68; Std. Dev. 0.97; Min 1.00; Max 5.00.
  - Democracy: Obs 519; Mean 4.21; Std. Dev. 1.53; Min 1.00; Max 6.00.
- Source: Authors' calculations.

### Empirical strategy (Section IV)
- Model specifications:
  - Static model and dynamic model with lagged dependent variable.
  - Dynamic specification (as presented):
    - llolll( GINI_it ) = λ0 + θ llolll( GINI_{i,t-1} ) + μμμμ_{i,t} + β X_{i,t} + η_i + ν_t + ε_{i,t}
    - GINI_it: net Gini coefficient in country i at time t.
    - μμμ_{i,t}: set of fiscal policy instruments (tax revenue and government spending as share of GDP).
    - X_{i,t}: controls including real GDP per capita, share of agriculture, trade openness (exports+imports/GDP), financial development (credit to private sector/GDP), share of population over 65, composite index of structural reform progress, and EU membership binary.
    - η_i and ν_t: country- and time-specific effects; ε_{i,t}: idiosyncratic error term.
  - Robust standard errors clustered at the country level.
- Econometric challenges:
  - Potential endogeneity of real GDP per capita with income inequality.
  - Temporal and spatial correlation in panel errors; persistence in income inequality (serial correlation).
- Identification strategy:
  - Trade-weighted per capita income of main trading partners used as an instrument (IV) for domestic real GDP per capita.
  - Estimators:
    - IV-2SLS for static models.
    - IV-GMM for dynamic models.
  - Rationale: Trading partners’ weighted average real GDP per capita is highly correlated with a country’s own real GDP per capita but remains unaffected by domestic income inequality; suitable IV to address endogeneity.

### Estimation results (Section V)
- Main findings (IV-2SLS static results emphasized):
  - Real GDP per capita (instrumented) has a positive and statistically significant effect on income inequality.
  - Real GDP per capita squared is statistically significant with a negative coefficient — consistent with an inverted U-shaped Kuznets relationship.
  - Fiscal policy (aggregated) is statistically insignificant at conventional levels when instrumenting GDP per capita.
  - Taxation and government spending show opposing signs:
    - Government spending: negative coefficient (increased government spending could lower net Gini).
    - Taxation (tax-to-GDP ratio): positive coefficient (increase in tax-to-GDP ratio associated with higher net Gini).
  - Other controls:
    - Trade openness: worsens income inequality.
    - Financial development: improves income distribution (negative coefficient).
    - Share of agriculture: positive coefficient.
    - Old age dependency: positive coefficient.
    - Transition index and EU membership: statistically significant worsening effects on income inequality for CEE/CIS over 1990-2018.
- Selected exact coefficients and statistics from Table 2 (Static Models — Net Gini Coefficient):
  - Estimation methods reported: FE, RE, IV.
  - Real GDP per capita: 0.148*** (FE), 0.091*** (RE), 0.395*** (IV) [standard errors: [0.031], [0.025], [0.029]].
  - Real GDP per capita^2: -0.011*** (FE), -0.003*** (RE), -0.004*** (IV) [std. errors: [0.002], [0.001], [0.001]].
  - Taxation: 0.056*** (FE), 0.106*** (RE), 0.043 (IV) [std. errors: [0.013], [0.023], [0.057]].
  - Government spending: -0.001* (FE), -0.097* (RE), -0.031 (IV) [std. errors: [0.018], [0.028], [0.041]].
  - Trade openness: 0.027*** (FE), 0.109*** (RE), 0.072*** (IV) [std. errors: [0.011], [0.019], [0.034]].
  - Financial development: -0.019*** (FE), -0.047*** (RE), -0.023*** (IV) [std. errors: [0.004], [0.011], [0.007]].
  - Share of agriculture: 0.023* (FE), 0.191*** (RE), 0.060** (IV) [std. errors: [0.011], [0.013], [0.033]].
  - Old age dependency: 0.165* (FE), 0.009* (RE), 0.048 (IV) [std. errors: [0.025], [0.020], [0.052]].
  - Transition index: 0.082*** (FE), 0.299*** (RE), 0.199*** (IV) [std. errors: [0.025], [0.035], [0.055]].
  - EU membership: 0.042*** (FE), 0.027*** (RE), 0.090*** (IV) [std. errors: [0.009], [0.019], [0.020]].
  - Fixed effects: Yes for all.
  - Number of observations: 433 (all); Number of countries: 29.
  - R^2: 0.49 (FE), 0.62 (RE), 0.20 (IV).
- Dynamic model (IV-GMM) results — selected exact figures from Table 3:
  - Net Gini coefficient t-1: 0.851*** (IV-GMM (1)), 0.817*** (IV-GMM (2)), 0.438*** (IV-GMM (3)) [std. errors: [0.016], [0.041], [0.046]].
  - Real GDP per capita: 0.138** (IV-GMM (1)), 0.203** (IV-GMM (2)), 0.127** (IV-GMM (3)) [std. errors: [0.072], [0.025], [0.029]].
  - Real GDP per capita^2: -0.008*** (IV-GMM (1)), -0.011** (IV-GMM (2)), -0.006** (IV-GMM (3)) [std. errors: [0.003], [0.006], [0.001]].
  - Taxation: 0.002 (IV-GMM (1)), 0.015 (IV-GMM (2)) [std. errors: [0.012], [0.209]].
  - Government spending: -0.008 (IV-GMM (1)), -0.052 (IV-GMM (2)) [std. errors: [0.010], [0.091]].
  - Trade openness: 0.079** (IV-GMM (1)) [std. error: [0.106]].
  - Financial development: -0.011** (IV-GMM (1)) [std. error: [0.010]].
  - Fixed effects: Yes for all IV-GMM specifications.
  - Number of observations: 602 (IV-GMM (1)), 588 (IV-GMM (2)), 405 (IV-GMM (3)).
  - Number of countries: 29.
  - F-stat: 2438.69 (IV-GMM (1)); 983.51 (IV-GMM (2)); 529.28 (IV-GMM (3)) with [p-value] 0.000 for all.
  - R^2: 0.93 (IV-GMM (1)), 0.89 (IV-GMM (2)), 0.76 (IV-GMM (3)).
- Interpretation:
  - Persistence: high persistence in income inequality (lagged Gini significant).
  - Core relationships (Kuznets curve, trade openness, financial development) remain across static and dynamic specifications.
  - Fiscal policy (aggregate measures) remains statistically insignificant when addressing endogeneity; taxation and spending have opposing signs across specifications.

### Robustness and sensitivity analysis
- Robustness checks (Table 4) and alternative specifications:
  - Truncated sample at the 5th and 95th percentiles: no significant change relative to baseline.
  - Alternative inequality measures: gross Gini (SWIID) and net Gini (WIID) yield similar empirical results.
  - Five-year nonoverlapping intervals instead of annual observations: broadly similar picture; some changes in magnitude but not significance.
  - Alternative fiscal measures:
    - Income tax share in total (measure of tax progressivity): negative coefficient (income tax helps improve distribution) but statistically insignificant at conventional levels.
    - Education and health spending (ratios to GDP): mitigating effects on inequality but statistically insignificant at conventional levels.
  - Additional controls: bureaucratic quality, corruption, democracy—quality of institutions matters but inclusion does not alter baseline findings.
- Select exact coefficients and model stats from Table 4 (IV-GMM robustness):
  - Gini coefficient t-1 in various models: 1.091***, 0.882***, 0.605***, 0.379***, 0.727***, 0.550***, 0.570***, 0.805*** [std. errors vary as reported].
  - Real GDP per capita coefficients across robustness checks: 0.217***, 0.204**, 0.817*, 0.278**, 0.358**, 0.555*, 0.522**, 0.169**.
  - Real GDP per capita^2 coefficients across checks: -0.056***, -0.011**, -0.043*, -0.017***, -0.019***, -0.031**, -0.029***, -0.005**.
  - Taxation and government spending coefficients vary across specifications but do not overturn baseline conclusion of limited redistributive impact.
  - Number of observations and countries vary by specification (examples: Observations 295, 405, 314, 115, 315, 386, 410, 401; Number of countries 22, 29, 20, 26, 23, 23, 22, 41, 8).
  - F-statistics reported: e.g., 119.61, 235.04, 56.82, 13.43, 170.97, 59.27, 69.70, 721.22 with [p-value] 0.000 for all.
  - R^2 values reported across checks: 0.79, 0.86, 0.50, 0.38, 0.84, 0.44, 0.49, 0.94.

### Conclusion and policy implications (Section VI)
- Long-run evolution:
  - Average pretax market income Gini in transition countries increased by 15 percent from 39 in 1990 to 45 in 2018.
  - Average net Gini coefficient increased from 27 to 32 over 1990–2018.
  - Income inequality worsened in CEE/CIS during the transition; no significant improvement in the redistributive impact of fiscal policy (difference between gross and net Gini).
- Empirical summary:
  - Evidence for Kuznets curve: income per capita (instrumented) increases inequality up to a threshold; squared term negative and significant.
  - Fiscal policy (aggregate) statistically insignificant in affecting income inequality during 1990–2018 in transition economies.
  - Taxation and government spending exhibit opposing effects on net Gini in the sample.
  - Findings robust to alternative inequality measures, fiscal instruments, sample truncation, aggregation intervals, and additional institutional controls.
- Policy recommendations and implications:
  - Fiscal policy can be designed to achieve greater redistributive effects, especially in the long term.
  - Specific directions:
    - Enhance progressivity of taxation.
    - Develop more targeted expenditure policies (implied emphasis on education and health spending, though empirical effects were not statistically significant at conventional levels in this study).
  - Institutional quality matters for income inequality but improving institutions does not by itself overturn baseline findings on fiscal policy effectiveness.

*Source: Authors' calculations based on the supplied sections III–VI of the document.*

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*Source: wpiea2020032-print-pdf - References*

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