Income inequality and influencing factors in the Western Balkans

Our analysis shows that income inequality is a major contributor to the distribution of household income, but not to the fair distribution of wealth and well-being in Western Balkan countries (WB6).

This is observed in the case of possession of assets at disposal, where there is a direct impact of income from capital, as well as informal income from various sources (crime, evasion, corruption).

From the intersection of the wealth distribution indicators with the minimum and average wage indicators (Table above) there is a mismatch between the wage level for each country and the wealth distribution by value in possession[1].

Take the case of Albania, where the minimum wage and the average wage in the last 10 years are among the last countries in the Western Balkans (WB6). Meanwhile, this distribution of labor income does not coincide with wealth possession between 2014 – 2022. In 2022 there is a large decrease in the number of individuals with wealth up to 10,000 US.D and there is a large increase in the number of individuals with wealth between 10,000 US.D to 100,000 US.D and likewise for individuals with assets over 100,000 US.D.

In the case of the minimum wage, but especially the average wage, it can be seen that its impact to a large extent for the last 9 years is seen in the reduction of the number of individuals with wealth in possession of up to 10,000 US.D. We see the biggest change in Serbia (36.2% less) and Albania (31.1% less).

Meanwhile, we see the increase in the number of individuals with wealth from 10,000 US.D to 100,000 US.D. The biggest increase is in Serbia (30.9% more individuals) and in Albania (25.4% more individuals) and in BiH (17.3% more individuals)

While Montenegro has a smaller increase in individuals that coincide with this group (5.5% more individuals), but there is a very significant increase and the largest among BP6 countries in the number of individuals owning wealth from 100,000 US .D to 1 million US.D (16.7% more individuals). Other countries have three times less growth in the number of individuals with wealth at the level of the group that tends to become wealthy.

In most countries of WB6 there is an influence of salary income, but not only, as the case of Albania with low salaries does not convincingly support this argument. If we can go further with the analysis, it can be seen that clearly. Other impacts that come in relation to the redistribution of welfare through fiscal policy is the impact from the level of corruption and informality.

During 2023, the perceived level of corruption is in Montenegro, North Macedonia and Kosovo (Table above).

The same is the ranking for the level of informality, but in this group the place of Kosovo is held by Bosnia-Herzegovina.

Albania, Serbia and Bosnia-Herzegovina are perceived by citizens and businesses as the most corrupt.

The countries above including Kosovo (which is 1% more informal than BiH) have a higher level of informality.

Based on the indicators of corruption and informality in WB6 countries, as a rule, corruption not only lowers the tax burden ratio, but also causes long-term damage to the economy by reducing investment, increasing the size of the informal economy, as well as distorting tax structures and eroding tax morale of taxpayers.

Under these effects of corruption in WB6 countries, we see that:

– in Montenegro, corruption is the lowest[2] and has a higher tax burden than other countries, but also lower informality.
– in North Macedonia, corruption is lower than the other four countries, but it has a lower tax burden than them, but meanwhile informality is lower.
– in Kosovo, corruption is lower than the other three countries, but it has the lowest tax burden, but there is also a level of informality that is at the high levels of the region.
– in Albania, corruption is higher than the three neighboring countries and has a lower tax burden than them, but meanwhile informality is higher.
– in Serbia, corruption is higher than neighboring countries, but it has a lower tax burden than them, but meanwhile informality is also higher.
– in BiH, corruption is the highest among countries in the region, but it has a high tax burden, as well as the highest level of informality.

From the situation and the influence of the factors as above, it can be seen that the effects of corruption are generally visible in each country, but meanwhile the tax burden and informality are also related to the level of fiscal culture, the redistribution of expenses from the budget and other indicators. Depending on which of the factors has more influence, it also gives the effect on the level of informality and tax burden.

The growing high level of income inequality in the Balkans continues to receive increasing attention from governments, but it seems that this focus is not addressing the right solutions. Governments try to address the phenomenon of inequality, as a challenge that each country must take appropriate actions. But it is now necessary that the redistribution of income is clearly addressed through the policy and the redistribution of expenses.

Money transfers in 2023 from the budget to different groups of the population, such as pensioners, the unemployed, the unemployed and those in need, etc. constitute a share of 11.1% to 15.7% of the GDP of budget expenditures. Most WB6 countries have reduced social transfers compared to 2022, except for North Macedonia with an increase of 0.2% of GDP and Montenegro with an increase of 0.8% of GDP.

These transfers are mainly aimed at redistributing income throughout the life of individuals to meet growing spending needs, but which is not yet a fully functional formula, especially if we compare it to the average level in EU countries. which reaches 27.2% of GDP in 2022[3]. Although the values of these transfers per individual represent small amounts of money in relation to individual consumption, they remain a permanent instrument of income redistribution for long-term or permanent periods.

While government social protection transfers in EU countries have an average of 27.2%, WB6 countries have an average of 13.2% of GDP, or less than half of the EU

In particular, the lower the fiscal burden, the higher the Gini Index. According to the summarized information about the Gini index in BP6 countries[4], it turns out that inequality is related to the tax burden. We see this clearly in the case of Albania, where the tax burden is low and in the second place in the region, but meanwhile the GINI index shows less inequality than other countries, ranking Albania in second place.

Whereas, Montenegro or Serbia and BiH, which have a high tax burden, have a corruption index that shows high inequality in the region.

As we explained above, the tax burden is related to and has an impact on the level of income inequality. However, not only the tax burden, but also the informal money that enters WB6 from sources of evasion, corruption and criminality, has a great impact on this distribution.

Some of the causes of economic inequality are differences in the marginal product[5], differences in the tax burden, in human capital, in social capital[6], in inheritance, in discrimination and in bargaining power within economic and social units.

However, inequality was beneficial (as a necessary evil) in this last decade for WB6 countries, as it is thought to have boosted economic growth by increasing physical capital investment.

But, based on the current reality, when income levels have increased, then inequality must close the roads and opportunities to grow further, since human capital is becoming more important than physical capital, then inequality tends to hinder growth economic impacting the accumulation of human capital

Studies conducted[7] show that a 1% increase in the level of inequality reduces GDP by 0.6% to 1.1% for middle-income countries. So, at least in WB6, higher levels of inequality may affect a stagnation to a decrease in GDP per capita.

This conclusion studied for developed countries seems to be proven by the indicator of average income per capita during the years 2021-2023 in WB6.

Montenegro has the highest growth in per capita income and the lowest inequality in the region.

Serbia has a moderate increase in income per capita and it seems that the impact of the increase in inequality has also had an effect on economic growth.

BiH with moderate growth in average income per capita has a greater level of inequality and it seems that this has an impact on the growth of the economy.

Even Albania, with the same level of income per capita as in BiH, seems that the lower inequality has influenced the increase in income per capita. Meanwhile, for Kosovo and North Macedonia, not having updated data, we cannot reach an accurate analysis.

This comparative analysis is in fact the most visible indicator of the productivity of the economy, policies and strategies for development, as well as the appropriate level of addressing economic models towards increasing the welfare of taxpayers, even based on the level of income inequality of individuals.

[1] assets held in cash or real estate

[2] Higher scores indicate lower rankings for corruption

[3]https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Social_protection_statistics_-_early_estimates&oldid=620050

[4] https://www.ubs.com/global/en/family-office-uhnw/reports/global-wealth-report-2023.html

[5] the change in output as a result of an additional unit of input being added to output

[6] a set of shared values or resources that allows individuals to work together in a group to effectively achieve a common goal

[7] https://ourworldindata.org/grapher/gdp-per-capita-vs-economic-inequality