Government Distributional Concerns and Economic Policy During the Transition from Socialism

Abstract

Before the transition governments had strong distributional objectives, which they pursued mainly by direct controls over state enterprise wage rates and hiring decisions, yielding a highly compressed wage distribution. During the reform they maintained similar controls over state enterprises, but had to take into account competition from the new non-state sector that was mostly free from these controls. Based on these distributional considerations alone, we forecast: 1) an immediate and continuing decline in the skills of workers in the state sector as the most able workers leave; 2) higher productivity in the non-state sector, which consists of the most able workers; 3) accounting losses in the state sector, reflecting the transfer of tax revenue to finance payments to the unskilled previously financed within the firm; and 4) restructuring within the state sector to reduce the distortions to relative wage rates. These phenomena are broadly observed across all transition economies.

JEL Classification: H10, H20, H30, O52, P50