Aizenman, Joshua and Peter Isard, “Resource Allocation During the Transition to a Market Economy: Policy Implications of Supply Bottlenecks and Adjustment Costs,” International Monetary Fund, Working Paper WP/93/6, February 1993.
Azariadis, Costas and Allan Drazen, “Threshold Externalities in Economic Development,” Quarterly Journal of Economics 105 (May 1990), pp. 501-26.
Becker, Gary S., “A Theory of Competition Among Pressure Groups for Political Influence,” Quarterly Journal of Economics 98 (August 1983), pp. 371-400.
Mussa, Michael, “Imperfect Factor Mobility and the Distribution of Income,” Journal of International Economics 12 (February 1982), pp. 125-41.
For example, inadequate communication and transportation networks, an incomplete legal code governing property rights and business practices, and a financial system in which payments are settled slowly and credit allocation is based to a large extent on administrative discretion.
In this breakdown of the fiscal accounts, transfer payments to unemployed workers and pensioners are viewed as part of the wage bill in the state sector, and spending on medical care, education, and other human capital investments are implicitly treated as part of infrastructure investment. A residual category is included in the formal analysis for completeness, but is taken to be exogenous.
A dynamic extension of the analysis would strengthen this argument, recognizing that it is mainly older workers who lack the attributes to find productive employment in the private sector, so that the share of workers that must be subsidized to maintain political support will decline naturally over time.
See Azariadis and Drazen (1990) for an analysis of threshold externalities in the accumulation of human capital.
That is, wℓi>rei if and only if ℓi>Ψ.
Specifically, (1-s)Nf(ℓ)dℓ is the “mass” of agents whose endowments of labor, ℓi, fall within the interval ℓ≤ℓi≤ℓ+dℓ.
Note that: ∂E/∂(w/r)=-(1-s)N(1-Ψ)f(Ψ)[∂Ψ/∂(w/r)]; ∂L/∂(w/r) = -(1-s)NΨf(Ψ)[∂Ψ/∂(w/r)]; ∂Ψ/∂(w/r) = -1/(1+w/r)2; and dE/dL = -(∂E/∂Ψ)/(∂L/∂Ψ) = -(1-Ψ)/Ψ = -w/r.
Relaxing this assumption would result in a more complicated expression for the intertemporal consumer surplus but would not alter the qualitative nature of the analysis.
It would be preferable conceptually to make political influence a function of the present discounted value of the expected change in the stream of aggregate income over time, but the task of adding an explicit intertemporal dimension to the analysis (beyond that which applies to private investors) is an extension that we leave for another paper.
In extending the analysis to an intertemporal framework, the economic forces leading to changes in relative prices over time would need to be modeled.
The analysis can alternatively be developed for the case in which these workers are productive but have no employment opportunities outside the state sector. The main difference between the two cases lies in their implications for the size of the net fiscal surplus from, or subsidy to, the state sector.
In restricting attention to outcomes consistent with budget balance, we preclude the possibility of inflationary monetary financing of government spending. Non-inflationary monetary financing, while not incorporated explicitly into the model, could easily be included by adding an exogenous component of government revenue representing the level of seignorage associated with accommodating the expansion of real money demand in a non-inflationary manner. Government borrowing could also be included in the model as competing with private investment for the use of private savings, but we chose to leave this to a more extensive effort to add intertemporal dimensions to the analysis. Inflationary monetary financing is precluded on the grounds that an inflation tax leading to macroeconomic instability would discourage private investment and defeat the transformation effort regardless of the level of public infrastructure investment. We thus concentrate on analyzing the feasibility of the transformation for the case in which private investors base their ex ante decisions on the assumption that policy choices will maintain fiscal balance.
The designation of t as a policy instrument is arbitrary. Policymakers could equivalently treat w or r as a policy instrument, but only one of the triplet (t,w,r) can be set exogenously.
In general,, the positive slope of the MM curve is seen by differentiating w=H’(L(w/r)) to obtain dr/dw = (r/w)-(r2/wHʺL’) where Hʺ<0, L’>0. Thus, dr/dw>r/w.
It should be noted, however, that properly designed subsidies can raise productive efficiency in the state sector. See Aizenman and Isard (1993) for an analysis of production bottlenecks in the state sector and the appropriate role of subsidies in mitigating negative externalities and increasing productive efficiency.
The expressions for ÛN and ÛR would be altered if the initial stocks of savings and private domestic capital--i.e., the stocks in the absence of the transformation process--were not zero. However, the logic of the analysis and the qualitative nature of the conclusions would not be altered.