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Knowing which workers are displaced in
restructuring episodes helps governments devise the right equity- and
efficiency-enhancing policies
Continuous enterprise restructuring is needed for
the transition and emerging market economies to become and remain
competitive. However, the beneficial effects of restructuring in the medium
run are accompanied by large worker displacement. The costs of displacement
can be large and long-lasting for some workers and for the economy. To
devise the right policy interventions, governments need to fully understand
which workers are displaced and what costs they bear.
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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.
Reducing informality requires better enforcement, more reasonable
regulation, and economic growth.
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Reforming registration might not be enough to
persuade informal firms and workers to formalize—enforcement and other
reforms may also be needed
Informal firms make up a major share of the
economy in most developing countries. Expanding formalization could increase
government tax revenues, boost firm profits and national income, and
increase employee well-being by improving access to social security and
health and workers’ benefits. Reforms to encourage firms to register include
simplifying procedures, reducing the cost and time to register, and making
more information available on registration procedures. Reforms might not
result in higher registration and formalization. In some cases, better
enforcement and wider development policies might be needed as well.
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Although market failures mean employment
protection is necessary, excessive protection can be counterproductive
Employment protection legislation aims to shield
employees against unfair dismissal and earning reductions at the time of job
loss. Theory suggests that employment protection stabilizes employment over
cyclical upturns and downturns without necessarily increasing general
unemployment. However, recent evidence from transition and emerging
economies shows that employment protection legislation tends to raise
unemployment among disadvantaged groups, particularly youth, and may
increase informal work. Employment protection policies thus require careful
consideration of their unintended effects.
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Despite their theoretical benefits, flat taxes
have been tried only in a few formerly socialist countries
The potential economic outcomes resulting from a
flat rate of income tax have been the subject of an ongoing academic and
political debate. Many observers have suggested that the introduction of a
flat tax would be beneficial for a country’s economy, having a positive
influence on the labor market and the gross domestic product by enhancing
incentives to work, save, invest, and take risks. A flat tax also
significantly simplifies income taxation which increases tax compliance and
reduces tax planning, avoidance, and evasion. However, despite flat taxes
being on the political agenda in many countries, in practice their
implementation has mostly been restricted to the transition economy
countries of Eastern Europe. There is no one single flat tax system in place
in these countries though; one rate does not fit all.
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Some entrepreneurs and would-be entrepreneurs
face financial and bureaucratic barriers to starting a business
Because entrepreneurial activity can stimulate
job creation and long-term economic growth, promoting entrepreneurship is an
important goal. However, many financial, bureaucratic, and social barriers
can short-circuit the process of actually starting a business, especially in
transition economies that lack established institutional systems and
markets. The main obstacles are underdeveloped financial markets,
perceptions of administrative complexity, political and economic
instability, and lack of trust in institutions. Gender disparities in the
labor market are also reflected in less entrepreneurial activity among women
than men.
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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.
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Getting the incentives right for firms and
workers should be the priority in the labor formalization agenda
A large share of the population in emerging
market economies has no pension coverage, exposing them to the economic
risks arising from socio-economic and individual shocks. This problem, which
arises from having large informal (unregulated) sectors, affects not only
poor workers, but as many as half the newly or nearly middle class in some
emerging market economies. With very little social protection coverage
today, these workers will also be vulnerable in the future unless tax,
labor, and social policies change to encourage formalization. While
formalization would require substantial resources in the short-term, it
seems financially sustainable.
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