Who gains from restructuring the post-Soviet transition economies, and why?
2005-08-02T14:47:06Z (GMT) by
Post-Soviet restructuring has produced mixed economic results. In general, the more advanced countries, which have now joined the European Union, have fared better, while those further East in the CIS have seen a combination of rapid falls in measured gross domestic product and wages, followed by prolonged recession, while the large gains to a wealthy minority who gained from privatisations have largely been reinvested abroad, following capital flight. I set up a series of theoretical and numerical simulation models, based upon a batting order approach where reform means closure of inefficient capacity. In the presence of significant costs to new firm entry and international capital mobility, restructuring and privatisation can lead to falls in GDP and real wages, while capital is transferred abroad. This situation can occur even under perfect competition, but is worse when industrial production is concentrated and trade costs are high. By contrast, workers can gain when costs of establishing new firms are low, and/or when the inefficient industries are capital-intensive. For countries with high costs of firm setup and of trade, capital controls may be justified to protect wages.