Wasted Sacrifices: Real Wages and Reconstruction in Eastern Europe

In the voluminous discussion of the transition of East European countries from centrally planned to market economies there has been little discussion of the appropriate level of real wages. This is surprising since the level of real wages has played a decisive role in the course of events. The very large cuts in real wages which have generally accompanied liberalisation provided opportunities for rapid reconstruction. But this potential could only be realised by buoyant investment or public expenditure. The uncertainties of the transition made an investment boom most implausible, leaving a crucial role for public expenditure. But the ideology of transition governments, stiffened by advice from the IMF and other authoritative sources, favoured as rapid as possible a reduction in the role of government. Our conclusion is that financial orthodoxy has introduced a fundamental macroeconomic contradiction into the transition process as the sacrifices of living standards incurred by the mass of the population are frittered away in slumps.