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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.
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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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The China Shock has challenged economists’
benign view of how trade integration affects labor markets in developed
countries
Economists have long recognized that free trade
has the potential to raise countries’ living standards. But what applies to
a country as a whole need not apply to all its citizens. Workers displaced
by trade cannot change jobs costlessly, and by reshaping skill demands,
trade integration is likely to be permanently harmful to some workers and
permanently beneficial to others. The “China Shock”—denoting China’s rapid
market integration in the 1990s and its accession to the World Trade
Organization in 2001—has given new, unwelcome empirical relevance to these
theoretical insights.
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In transition economies, better property rights
protection and rule of law enforcement can boost job creation and growth
In the transition from central planning to a
market economy in the 1990s, governments focused on privatizing or closing
state enterprises, reforming labor markets, compensating laid-off workers,
and fostering job creation through new private firms. After privatization,
the focus shifted to creating a level playing field in the product market by
protecting property rights, enforcing the rule of law, and implementing
transparent start-up regulations. A fair, competitive environment with
transparent rules supports long-term economic growth and employment creation
through the reallocation of jobs in favor of new private firms.
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Market changes and limited redistribution
contributed to high income and wealth inequality growth in Eastern
Europe
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.
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One-company towns concentrate employment but
their ability to adapt to adverse events is often very limited
One-company towns are a relatively rare
phenomenon. Mostly created in locations that are difficult to access, due to
their association with industries such as mining, they have been a marked
feature of the former planned economies. One-company towns typically have
high concentrations of employment that normally provide much of the funding
for local services. This combination has proven problematic when faced with
shocks that force restructuring or even closure. Specific policies for the
redeployment of labor and funding of services need to be in place instead of
subsidies simply aimed at averting job losses.
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Social disruption, acute psychosocial stress, and excessive
alcohol consumption raise mortality rates during transition to a market economy
Large and sudden economic and political changes, even if
potentially positive, often entail enormous social and health costs. Such transitory costs are
generally underestimated or neglected by incumbent governments. The mortality crisis
experienced by the former communist countries of Europe—which caused ten million excess deaths
from 1990 to 2000—is a good example of how the transition from a low to a high socio-economic
level can generate huge social costs if it is not actively, effectively, and equitably managed
from a public policy perspective.
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A combination of individual self-interest and
good institutions determines the level of public support for market
reforms
Economic self-interest and social considerations
are the key determinants of public support for market reforms in transition
countries. However, political strategies that rely mainly on public support
for pushing through economic reforms have limited relevance if the
prevailing institutional environment is weak or corrupt. Poor governance and
under-developed democracy significantly reduce the level of support. A good
institutional framework allows the potential gains from reforms to be
realized in a beneficial way, while corruption and poor governance deny the
prospect of gains for individuals and for society.
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