In post-Soviet countries, well-functioning institutions are needed to foster productive entrepreneurial development and growth
Since the collapse of the Soviet Union, the differing impact of institutions on entrepreneurship development is undeniable. Several post-Soviet countries benefitted from early international integration by joining the EU, adopting the euro, and becoming OECD members. This process enabled entrepreneurship to develop within institutional contexts where democratic and free market principles were strengthened. In general, however, post-Soviet economies continue to be characterized by higher levels of corruption, complex business regulations, weak rule of law, uncertain property rights and often, lack of political will for institutional change.
Support for economic liberalization reforms is
essential, but it grows stronger only where societies experience the effects
of reversing these reforms
An extensive program of economic liberalization
reforms, even when it generates positive outcomes, does not automatically
generate support for further reforms. Societies respond with strong support
only after experiencing the effects of reversing these reforms (i.e.
corruption, inequality of opportunity). This point is illustrated through
the example of the post-communist transformation in Eastern Europe and
Central Asia—arguably a context where the end point of reforms was never
clearly defined, and even successful reforms are now associated with a
degree of reform suspicion.
Market changes and limited redistribution
contributed to high income and wealth inequality growth in Eastern
High levels of economic inequality may lead to
lower economic growth and can have negative social and political impacts.
Recent empirical research shows that income and wealth inequalities in
Eastern Europe since the fall of socialism increased significantly more than
previously suggested. Currently, the average Gini index (a common measure)
of inequality in Eastern Europe is about 3 percentage points higher than in
the rest of Europe. This rise in inequality was initially driven by
privatization, liberalization, and deregulation reforms, and, more recently,
has been amplified by technological change and globalization coupled with
relatively ungenerous income and wealth redistribution policies.
Reducing informality requires better enforcement,
more reasonable regulation, and economic growth
In developing and transition economies as much as
half the labor force works in the informal sector (or “shadow economy”).
Informal firms congest infrastructure and other public services but do not
contribute the taxes needed to finance them. Informal workers are
unprotected against such negative shocks as ill-health, but for certain
groups there can be scarce opportunities to enter the formal sector meaning
informal employment is the only feasible option. Reducing informality
requires better enforcement, more reasonable regulation, and economic
Reducing under-reporting of salaries requires
In transition economies, a significant number of
companies reduce their tax and social contributions by paying their staff an
official salary, described in a registered formal employment agreement, and
an extra, undeclared “envelope wage,” via a verbal unwritten agreement. The
consequences include a loss of government income and a lack of fair play for
lawful companies. For employees, accepting under-reported wages reduces
their access to credit and their social protections. Addressing this issue
will help increase the quality of working conditions, strengthen trade
unions, and reduce unfair competition.
Excessive drinking is the main cause of high
male mortality rates, but the problem can be addressed
Eastern European countries, particularly former
Soviet Union economies, traditionally have the highest rates of alcohol
consumption in the world. Consequently, they also have some of the highest
male mortality rates in the world. Regulation can be effective in
significantly decreasing excessive drinking and its related negative
effects, such as low labor productivity and high rates of mortality.
Understanding the consequences of specific regulatory measures and what
tools should be used to combat excessive alcohol consumption is essential
for designing effective policies.
Trade policy is not an employment policy and
should not be expected to have major effects on overall employment
Trade regulation can create jobs in the sectors
it protects or promotes, but almost always at the expense of destroying a
roughly equivalent number of jobs elsewhere in the economy. At a
product-specific or micro level and in the short term, controlling trade
could reduce the offending imports and save jobs, but for the economy as a
whole and in the long term, this has neither theoretical support nor
evidence in its favor. Given that protection may have other—usually
adverse—effects, understanding the difficulties in using it to manage
employment is important for economic policy.
Workers and policymakers may fear that
privatization leads to job losses and wage cuts, but what’s the empirical
Conventional wisdom and prevailing economic
theory hold that the new owners of a privatized firm will cut jobs and
wages. But this ignores the possibility that new owners will expand the
firm’s scale, with potentially positive effects on employment, wages, and
productivity. Evidence generally shows these forces to be offsetting,
usually resulting in small employment and earnings effects and sometimes in
large, positive effects on productivity and scale. Foreign ownership usually
has positive effects, and the effects of domestic privatization tend to be
larger in countries with a more competitive business environment.
State capture and uneven infrastructure development due to foreign direct investment can outweigh productivity gains
Firms in the new EU member states of Eastern Europe are more productive than those in other transition economies, but with a diminishing advantage. The least productive firms benefit the most from membership, although the situation is reversed in the case of foreign-owned firms. Foreign direct investment fails to promote knowledge and technology spillovers beyond the receiving firms. The dominance of multinational enterprises in the new EU member states enhances the threat of corporate state capture and asymmetric infrastructure development, whilst access to finance remains a constricting issue for all firms.
The automotive industry has brought economic
growth, but a developmental model based on foreign capital is reaching its
Central Europe has experienced one of the most
impressive growth and convergence stories of recent times. In particular,
this has been achieved on the back of foreign-owned, capital-intensive
manufacturing production in the automotive sector. With large domestic
supplier networks and high skill intensity, the presence of complex industry
yields many economic benefits. However, this developmental path is now
reaching its limits with the exhaustion of the available skilled workforce,
limited investments in upgrading and research, and persistent regional