Institutions, policies, and labor market outcomes

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.

Examining the implications of changes in public sector wage-setting arrangements due to privatization is a relatively new area of economics research, with few studies having analyzed the effects of public sector restructuring on relative wages in developed countries. There is, however, a growing empirical literature that measures the effects of transitioning from central planning to market-based systems on public–private sector wage differentials. Policymakers can learn from this evidence about the ways in which ownership transformation affects the distribution of wages in both the public and private employment sectors.

The future growth of Central and Eastern Europe (CEE) depends on upgrading technology, exporting and coupling domestic technology efforts while improving their position in global value chains. Current policies in the region are not geared to these tasks, despite the availability of huge financial opportunities in the form of EU structural funds. Existing policies are overly focused on research and development (R&D) and neglect sources of productivity growth, such as management practices, skills, quality, and engineering. The challenge is how to design industrial and innovation policies so that they promote modernization and drive structural change.

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.

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.

Since 1989, post-communist countries have undergone profound changes in their political, economic, and social structures and institutions. Across a range of development outcomes—in terms of the speed and success of reforms—transition is an “unhappy process.” The “happiness gap,” i.e. the difference in average happiness levels between the populations of transition and non-transition economies, is closing, but at a slower pace than the process of economic convergence. Economic growth, as the determinant of a country’s collective well-being, has been superseded by measurements of institutional quality and social development.

The privatization of state-owned enterprises (SOE) in transition economies has often been found to improve employment and productivity of privatized SOEs, despite policymakers’ fears regarding possible job cuts. This positive effect can be enhanced if privatization also promotes firms’ exports. A recent firm-level analysis of China reveals that privatization has indeed a positive effect on export propensity, employment, and productivity in both the short and long term. The effect mostly stems from changes in firms’ attitudes about profits and risks due to competitive pressure.

Job polarization can pose serious problems for emerging economies that rely on worker reallocation from low-skilled to middle-skilled jobs to converge toward advanced economies. Evidence from Central and Eastern European (CEE) countries shows that structural change and education expansion can prevent polarization, as they enable a shift from manual to cognitive work and prevent the “hollowing out” of middle-skilled jobs. However, in CEE countries they have also led to a high routine cognitive content of jobs, which makes such jobs susceptible to automation and computerization in the future.

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 inequalities.