Model results suggest the importance, in the transition from central planning to a market system, of the government's continuing to provide basic public goods and services, removing barriers that prevent the participation of the poor in the new private sector, and ensuring that suitable safety nets are in place.
Using a model of wealth distribution dynamics and occupational choice, Ferreira investigates the distributional consequences of policies and developments associated with the transition from central planning to a market system.
The model suggests that even an efficient privatization designed to be egalitarian may lead to increases in inequality (and possibly poverty), both during the transition and in the new steady state.
Creating new markets in services that are also supplied by the public sector may also contribute to an increase in inequality. So can labor market reforms that lead to a decompression of the earnings structure and to greater flexibility in employment.
The results underline the importance of retaining government provision of basic public goods and services, removing barriers that prevent the participation of the poor in the new private sector, and ensuring that suitable safety nets are in place.
This paper—a product of the Office of the Chief Economist for East Asia and Pacific—is part of a larger effort in the department to understand the effects of economic transition on the poor. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Michael Geller, room N7-101, telephone 202-473-1393, fax 202-522-0056, Internet address fferreira@worldbank.org. (44 pages)
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