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Who gains from restructuring the post-Soviet transition economies, and why?

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Post-Soviet restructuring has produced mixed economic results. In general, the more advanced countries, which have now joined the European Union, have fared better, while those further East in the CIS have seen a combination of rapid falls in measured gross domestic product and wages, followed by prolonged recession, while the large gains to a wealthy minority who gained from privatisations have largely been reinvested abroad, following capital flight. I set up a series of theoretical and numerical simulation models, based upon a batting order approach where reform means closure of inefficient capacity. In the presence of significant costs to new firm entry and international capital mobility, restructuring and privatisation can lead to falls in GDP and real wages, while capital is transferred abroad. This situation can occur even under perfect competition, but is worse when industrial production is concentrated and trade costs are high. By contrast, workers can gain when costs of establishing new firms are low, and/or when the inefficient industries are capital- intensive. For countries with high costs of firm setup and of trade, capital controls may be justified to protect wages.

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Bibliographic Info

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2004-16.

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Date of creation: Jun 2004
Date of revision: Jun 2004
Handle: RePEc:lbo:lbowps:2004-16

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Keywords: Transition; wages; general equilibrium;

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  1. Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-22, November.
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  7. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 88(351), pages 488-510, September.
  8. Vivek Ghosal, 2003. "Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics," CIG Working Papers SP II 2003-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  9. Branko Milanovic, 1999. "Explaining the increase in inequality during transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 299-341, July.
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