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This paper was presented at the Conference on “Economics for the New Europe,” Venice, November 1–3, 1990, organized by the International Economic Association and the Italian Minister of Foreign Affairs. It will be published in the conference volume, Economics for the New Europe, edited by Anthony B. Atkinson and Renato Brunetta (McMillan Press Company). I would like to thank Sheetal Chand, Richard Hemming, Dubravko Mihaljek, and Jim Prust for comments and/or assistance.
Throughout the paper the term East European countries will cover former socialist countries of Eastern and Central Europe.
At the moment wage differentials are too low to promote efficiency. The difference between the lowest and the highest paid is about 1 to 3.
As high as 15 to 30.
On the other hand, stocks of finished products are very low compared to market economies (see Kornai, 1982, p. 137).
In the U.S. housing market a similar problem is dealt with by buying a special insurance against the possibility that the deed is an invalid one.
In many of these countries the power of workers’ councils will be a major obstacle to privatization.
On this issue I have some difficulty with Kornai’s view that “there is no need to make the tax system progressive” (Kornai, 1990, p. 122) although I agree with him that a country should not end up with “Hungarian wages minus Swedish taxes” (ibid, p. 117).
For example, many contacts are implicit rather than explicit but they still need to be observed.
For example, the need to stand in line for hours to obtain scarce goods has made shopping during working hours an accepted practice. It has been reported that East German workers who migrated to the West have found strange the fact that they could not shop during working hours.
One must not ignore the fact that future policymakers will also come from the same background as the average citizen. Thus it would be a mistake to assume that they will not, as a group, reflect some of these attitudes.
Compared to the West, the individuals, qua individuals, have claims on only a very small portion of the countries’ total wealth.
In this situation the average individual is not expected to save. It is the state that determines the level and the use of the country’s savings. What effect will this attitude have on the future propensity to save of individuals is uncertain.
The so-called “dividend tax” that exists in some of these countries validates this point. It is a tax estimated as a given rate of return on the capital provided by the state.
For rural cooperatives there may also be complex problems.
In Poland this process seems to have been a particularly painful one. However, Lipton and Sachs have forcefully argued that the outcome so far is not as bleak as official statistics indicate because the growth in output in the parallel economy is not measured and the value of time spent in line waiting for goods is not imputed. (See Lipton and Sachs, 1990.)
Some economists have at time questioned the efficiency of this process. See, for example, Stiglitz (1989).
Since prices are controlled, the effect of inflationary finance has been goods scarcity in the shops and long lines.
In China, for example, government revenue fell from 34.4 percent of GNP in 1978 to 20.4 percent of GNP in 1988 (see Blejer and Szapary, 1990).
For a discussion of the reasons why tax revenue is likely to fall during the period of transition, see Blejer and Szapary, op. cit. In Poland, the share of tax revenue to GDP has fallen from 39.0 percent in 1982 to 27.4 percent in 1989. During the transition, public expenditure will remain high because of (a) unemployment compensation for the growing number of unemployed; (b) the establishment of safety nets; (c) the assumption by the government of the social security function of state enterprises; (d) the need to adjust public sector wages; (e) the need to increase spending for health and education; (f) the need to support the financial system (i.e., to increase the capitalization of banks); (g) the need to provide subsidies to restructuring enterprises, etc.