The determination of wages in socialist economies : some microfoundations

The authors address the issue of how wages are determined in socialist economies. They distinguish between different types of economic regimes, in terms of how much decentralization is permitted and how extensive are market-based features orrules. Wages are commonly assumed to be exogenously given in socialist systems, regardless of regime. They show that this assumption is not warranted, given the use of incentive-based systems in these economies. Both the classical planned economy and the partially reformed regime face the problem of motivating workers in the absence of monitoring and of such conventional penalties as unemployment. The authors show that in cooperative settings the outcome can be lower productivity than desired and that in noncooperative settings the outcome can be higher wages than warranted. They interpret the partially reformed socialist economy as an attmept to refine the motivational structure by introducing a manager between the planner and the workers. They also present a preliminary treatment of an economic regime such as the one that existed in Poland after January 1990, where market-based rules almost fully predominate. Their objective is to provide coherent foundations for wage equations that can be tested empirically. The authors show wages to be strongly associated with prices and rather less strongly associated with productivity.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Access to Markets,Markets and Market Access

Educational Scores: How Does Russia Fare?

This paper uses two large multi-country datasets on educational scores – PISA and TIMSS – to examine the performance of Russia in comparative light as well as the factors associated with differences in educational outcomes in Russia. Despite the perception of a positive educational legacy, Russian scores are not stellar and have mostly deteriorated. Using an education production function, we distinguish between individual and family background factors and those relating to the school and institutional environment. We use pooled data, as well as cross sectional evidence, to look at the variation across countries before looking at within-country variation in Russia. We find – both in the cross-country estimates as also those using just Russia data – that a number of individual and family variables in particular, such as parental educational levels, are robustly associated with better educational outcomes. Institutional variables also matter – notably student-teacher ratios and indicators of school autonomy – but there are also some clear particularities in the Russian case.human capital, PISA

The macroeconomics of price reform in socialist countries : a dynamic framework

This paper emphasizes the fiscal underpinnings of the inflationary process and those particular dynamics when a dual price system is present. In particular, it explores the links between price controls and decontrols and the government budget, mainly through the flow of subsidies to either consumers or producers. A clear conclusion is that without consistency in macroeconomic policy, price liberalization may simply exacerbate imbalances and ultimately provide a mechanism for sustaining inflation, hencecompromising a basic objective of macroeconomic policy.Access to Markets,Economic Theory&Research,Environmental Economics&Policies,Insurance&Risk Mitigation,Markets and Market Access

Output decline in Hungary and Poland in 1990-91 : structural change and aggregate shocks

The authors try to distinguish between general and national features in explaining the impulse, transmission channels, and path of output decline in Hungary and Poland. It is clear that output losses are massively concentrated in the socialized industrial sectors, but they identify significant differences in the distribution of those losses and their associated employment outcomes; in the timing and degree of synchronization of those losses; and in the two countries'different policy responses to these powerful recessionary pressures. In particular, they try to separate shocks particular to a sudden (Polish) big bang and those attributable to a more gradual path of reform (Hungary). The contrast between Hungary and Poland is less robust than initial impressions led one to expect. By 1991, both economies have open trade regimes, and a practically fully liberalized price system. The magnitude of shocks to both economies and the accompanying macroeconomic policies clearly diverged. The role of macroeconomic policies was easier to isolate in 1990, before the full effects of the CMEA shock could be felt. Interestingly, in 1990, the decline in output was far smaller in Hungary than in Poland, and was of rather a different nature. In 1990, employment declined more rapidly than output in Hungary, but lagged sharply behind output in Poland. So productivity increased, albeit marginally, in Hungary, while declining sharply in Poland. Contrary to expectations, the Polish big bang approach has produced less adjustment than the more gradual approach followed by Hungary. One reason for this could be the lack of progress on microeconomic reforms that have accompanied the drastic shift in macroeconomic policies. But the authors suggest that this result could also be associated with the two different paths to reform, the big bang and gradualism.Environmental Economics&Policies,Economic Theory&Research,Fiscal&Monetary Policy,Banks&Banking Reform,Access to Markets

Price - wage dynamics and the transmission of inflation in socialist economies : empirical models for Hungary and Poland

The authors of this paper set up a simple inflation model to analyze the transmission and short-run dynamics of inflation in partially reformed socialist economies. The model has features derived from market economies with few producers and sticky prices. It also tries to capture some attributes of socialist economies, including chronic excess demand in goods markets. Most of the empirical analysis focuses on the period after 1982 when market-related reforms had been implemented. The dynamic price and wage models are simultaneously estimated allowing the authors to explore the role and weight of foreign prices and domestic factors in propagating inflation in Hungary and Poland. They find that cost developments are critical in relating exogenous, policy-determined price adjustments to increases in inflation. In most periods, wages were indexed to prices - but in Poland more complex bargaining games emerged which caused an inability to make centralized wage norms hold. Polish planners relied increasingly on price adjustments to address emerging macroeconomic imbalances, but these only further destabilized the system and failed to address the underlying sources of macroeconomic imbalances. In contrast, the Hungarian experience points to some of the ways administered prices can be used to stabilize the system.Access to Markets,Markets and Market Access,Economic Theory&Research,Environmental Economics&Policies,Settlement of Investment Disputes

Restructuring and taxation in transition economies

One challenge in transition economies has been to avoid being caught between overrapid restructuring (harmful to the private sector) and gradual change (can undermine robust private sector emergence). Empirical evidence suggests thatin most of Eastern Europe and the former Soviet Union, insiders, by exerting decision making control, have materially affected the restructuring rate. Still, shocks to firms have generally led to sharp rises in unemployment. Unemployment benefits, initially generous, combined with lost payroll taxes substantially increased fiscal costs. In the former Soviet Union, both restructuring and unemployment have remained limited and firm subsidies remained high. The private sector expanded, but chiefly in the gray (untaxed) part of the economy. The authors examine the implications of various restructuring speeds, explicitly introducing probabilities of closure and restructuring. They find that when the probability of closure is small, unemployment will peak at a lower level than when the probability of closure is high, although the transition speed will be much slower. They also find that widespread private sector tax avoidance can stimulate that sector's growth and result in a speedier transition. Thus, while a private sector low tax burden can drive unemployment up rapidly by increasing the state sector closure probability, it can also help speed up the transition by provoking a quicker private sector response. The authors show that while the state sector restructuring speed is sensitive to the tax burden, (dependent on unemployment and the ability to tax the private sector) it is also true that the private sectors growth depends on the tax burden it faces. In particular, capturing the private sector in the tax net early in the transition can lead to collapse and hence to the failure of restructuring.Trade Finance and Investment,Health Monitoring&Evaluation,Economic Theory&Research,Public Health Promotion,Environmental Economics&Policies,National Governance,Youth and Governance,Health Monitoring&Evaluation,Economic Theory&Research,Environmental Economics&Policies

Russian unemployment : its magnitude, characteristics, and regional dimensions

Registered unemployment in Russia is now 2 percent; surveys indicate a true rate of between 5 and 6 percent. Until now, flow in and out of unemployment have been quite large, with duration low. This may be changing as the ease with which workers are matched to jobs declines -- in part because of financing constraints on firms. Already there is great regional variation in unemployment -- which, as this model indicates, is likely to persist because of the mismatch in distribtution of jobs and the unemployed.Environmental Economics&Policies,Labor Policies,Public Health Promotion,Health Monitoring&Evaluation,Labor Markets,Youth and Governance,Work&Working Conditions,Environmental Economics&Policies,Health Monitoring&Evaluation,Labor Markets

Do Institutions, Ownership, Exporting and Competition Explain Firm Performance? Evidence from 26 Transition Countries

We analyze a large stratified random sample of firms that provide us with measures of performance and each firm’s top manager’s perception of the severity of business environment constraints faced by his/her firm. Unlike most existing studies that rely on external and aggregated proxy measures of the business environment, defined to include legal and institutional features, we have information from each surveyed firm. Specifically, we use the 2005 and 2002 Business Environment and Enterprise Performance Survey (BEEPS) to assess the effect on performance of ownership, competition, export orientation and the business environment of the firm. We employ a variety of approaches to deal with the problem of omitted variables, errors in variables and endogeneity that plague studies in this area. We find that foreign ownership and competition have an impact on performance – measured as the level of sales controlling for inputs. Export orientation of the firm does not have an effect on performance once ownership is taken into account. When we analyze the impact of perceived constraints, we show that few retain explanatory power once they are introduced jointly rather than one at a time, or when country, industry and year fixed effects are introduced. Indeed, country fixed effects largely absorb the explanatory power of the constraints faced by individual firms. Replicating the analysis with commonly used country-level indicators of the business environment, we do not find much of a relationship between constraints and performance. Our analysis brings into question an important part of the conventional wisdom in this area. It indicates that country fixed effects, reflecting time-invariant differences in the business environment but also other factors, matter for firm performance, but that differences in the business environment observed across firms within countries do not. Moreover, the limited firm and country-level variations in the business environment over time do not appear to affect performance either. This suggests that the effect of business environment on performance and the analysts’ ability to identify this effect are more limited than has been assumed to date.firm performance, productivity, competition, institutions, business environment, export orientation, firm ownership, subjective data

Why is unemployment low in the former Soviet Union? : enterprises restructuring and the structure of compensation

The authors explain why in the Former Soviet Union (FSU) - especially Russia - unemployment has remained low and employment in state and privatized firms has remained high, while at the same time the informal or unofficial economy has grown swiftly. They trace this development to a combination of factors, including the control regime of state and privatized firms, the nature of worker compensation, and privatized firms, and the nature of subsidies or financial supports that firms continue to receive. Firms have remained the primary site for social protection. Subsidies for social benefits have effectively been a subsidy to employment and have promoted the workers'continuing attachment to these firms. Partly because the subsidies still flow and partly because of the firms'internal control structure, firms have held back on shedding labor. Firms typically work at low capacity. Instead of laying workers off, they significantly cut hours and wages, sometimes through wage arrears. The share of worker compensation that is nonmonetary had grown during the transition, and is significant. So workers search for additional sources of income, either moonlight or get involved in the informal economy. Why has this happened? Privatization has so far failed to keep firms from behaving as if they have important social responsibilities. Managers may have more discretion in decisionmaking, but seem tobe reluctant to fire workers. This reluctance reflects various pressures, including insider coalitions and pressure from local and federal governments to limit the flow to unemployment. One factor may be the need to keep workers cooperative and possibly repel outsider interest. And in the FSU, many firms continue to operate under soft budget constraints, so they are under less pressure to reduce employment levels than firms in Eastern and Central Europe. The authors show that under certain conditions if the subsidy to insider-dominated firms disappears, those firms will scale down employment and the provision of benefits. In a firm with two divisions - one that produces and one that provides benefits - the dominant (producing ) division will tend to close down the benefits-providing division if the firm assumes a simple majority decision rule.Economic Theory&Research,Municipal Financial Management,Decentralization,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Health Monitoring&Evaluation,Banks&Banking Reform,Municipal Financial Management

Institutions and economic performance: What can be explained?

Institutions are now widely believed to be important in explaining performance. In this paper, we analyse whether commonly used measures of institutions have any significant, measurable impact on performance, whether of countries or firms. We look at three ‘levels’ of institutions and associated conjectures. The first concerns whether the political system affects performance. The second concerns whether the business and investment environment affects the performance of countries and the third concerns whether perceived business constraints directly affect the performance of firms. In all instances, we find little evidence of a robust link between widely used measures of institutions and our indicators of performance. We consider why this might be the case and argue that mis-measurement, mis-specification, complexity and non-linearity are all relevant factors.