Abstract

Among the most striking developments in the process of economic transition has been the very diverse paths these economies have taken with respect to income distribution, with some maintaining degrees of equality similar to the socialist era while others now exhibit degrees of inequality noticeably greater than any advanced market capitalist economies. We argue that these outcomes reflect divergent dynamics with multiple equilibria wherein the pattern of income distribution interacts with the level of corruption and the breakdown of the public sector and social safety nets, with the possibility of societies going sharply in one direction or another. This argument is supported by empirical data linking income inequality and measures of the size of the unofficial economy in a set of fifteen transitional economies.