A Novel Assessment of the Growth-Inequality Nexus in East-Central Europe

Abstract

Abstrac This paper investigates the nexus between economic growth and income inequality by exploring a sample of 11 Central and Eastern European (CEE) emerging countries from 2000 to 2019. The existing theory argues for three different situations that may appear: a positive link between economic growth and inequality, a negative association or a non-linear relationship. Generally, by employing a fixed-effects model that is robust to heteroskedasticity, cross-sectional dependence and autocorrelation, our findings reveal a significant non-linear growth-inequality connection, in accordance with Kuznets inverted U-shaped hypothesis. Additionally, we find that several transmission channels considerably influence this relationship in the CEE group, including poverty, educational attainment and trade openness. Our results denote a positive impact of international trade and human capital investment on reducing income inequality, emphasizing that an increase in the share of the population with tertiary education and trade openness will lead to a decrease in the Gini coefficient. Moreover, by improving the correlation between labour market requirements and the educational attainment of the population and adopting efficient poverty-reduction strategies, sustainable economic growth may mitigate the adverse influence of inequality in the long term. Therefore, policymakers should pay attention not only to the general macroeconomic framework of these countries but also to the implications of the socioeconomic dimension of inequality to reduce existing income disparities.