DP1662 Government Distributional Concerns and Economic Policy During the Transition from Socialism

Author(s):	Roger H Gordon, David Daokui Li
Publication Date:	June 1997
Keyword(s):	Economic Transition, Government In Transition, labour productivity in transition, policy during transition, Redistribution, Wage Structure
JEL(s):	H10, H20, H30, O52, P50
Programme Areas:	Transition Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1662

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.