Ukraine - Employment, social protection, and social spending in the transition to a market economy

Report No. 11 I7"A Ukraine Employment, Social Protection, and Social Spending in the Transition to a Market Economy April 14, 1993 Europe and Central Asria Departments lIIVN (EC3/4HR) Human Resources Division FOR OFFICIAL sJSE ONLY sG ', ' > , ~~~. vv ' " . , *,^ . . \ . . .A; J ~~~~~~~~~'j,> WR'->4 s'} b -V > i >;~~~~~~~~'3 s|"'s e ? ' 5 <~~~~~~~~~~~~~ e;R ~~~~~~~~~~~~~~~~~~~~~~~~~~~ 0,"T~~~~~  Currency Unit-Karbovanets (Krb) Exchange Raes: KRB $e (End of Period) December 1992 715 March 1993 2000 April 1993 3000 WEIGQH AND MEASS Metric System GLOSSARY OF ABBREVIATIONS AND ACRONYMS AIDS Acquired Immune Deficiency Syndrome BCG Tuberculosis vaccine BMW Bavarian Motor Works CEM Country Economic Memorandum CSFR Czech and Slovak Federal Republic DPT Diphtheria, pertussis, and teanus vaccine EC Europe Community ES Employment Serice FY Fiscal Year G7 Group of Seven (bighly industrialized countries) GDP Gross Domestic Product HIV Virus hypothesized to causes AIDS IAS IndustrW Adjustment Service ILO International Labor Organization IMF International Monetary Fund MOE Ministy of Education MOP Ministry of Finance MOH Ministry of Health MOL Ministry of Labor MOS Ministry of Statistics MSW Ministry of Social Welfare OECD Organization for Economic Coordination and Development R Ruble SDR Standardized Death Rate SSR Soviet Socialist Republic SSUZ Technical colege UN Linited Nations UNDP United Nations Development Program UNFPA United Nations Family Planning UNICEF United Nations International Children's Emergency Fund USSR Union of Soviet Socialist Republics VUZ Universities WDR World Development Report WHO World Health Organization I7ISCAL YEAR Januay 1 to December 31  FOR OMCIJAL Use ONLY Execuve Summary .............1 ntroduction ..1... I CanUkrlne AffordIts PogiramofSocial Protetlon? ...................... I 'heProblemnof Employment . ................................ S Co n o nlg U nem plo ................................. . 6 SOw Protection .................................. 9 PublicSocialSvics ................................. 13 EducadonandTralningServius .................................. 14 Hedth Sevices .................................. 1S 1. Soda Conditons and Sodal Prot^eon . ................................ 21 Introducdon ....................................... 21 Imnlicatios of Demogrhy for Health . .............................. 25 Mortdity ad Health Status ...................................... 25 Health of Mothers and Children . ................................... 26 Morbidity ........................................ 27 =Occuation1Jury and Poution ................................... 29 Labor Force ......................................... 30 The Social Safety Net .... ...................................... 30 Retirement, Disability, and Survivors' Benefit .......... ................. 31 Allowances and Beneft ........................................ 31 Poverty Groups ........ 33 Main sLs forSocWilPrograms .................................. 34 A Bias for Hope .............................................. 35 Souc and Uses of Funds for the Social Sector, 1992 ......... ............. 35 2. The Changng Labor ak ....................................... 39 he Labor Market in a Command Economy . ....... ................... 39 Labor Mart Strcture ................... 40 Open and Hidden Unemployment .................... 41 LaborMobilityanud Migration ................... 43 Wages and lcomes .................... 43 Collective Bar_gnlg and Unions ............ ............... 44 UnemploymentForecast .................... 44 3. PboUcyRsponses to Epoyment Proba .............................. 47 IncomesPolicy .............................. 47 Active Labor lakt Policies ............................... 47 Retaining .............................. 48 Grants for the Unemployed .0..................................... SO Wage subsidies ......................... 50 I This document has a retricted distribution and may be used by recipients only in the performance of their officid duties. Its contents may not otherwise be disclosed without World Dank authorization.  1u licWorks .................... ............................ 51 Employment Services ............................. 51 Unetnploymnent Benefits ............................ 51 Financing Labor Market Policies ............................ 53 Statistical Information ............................................ 55 4. Rehaplug LaborMarket Polides ...................................i.57 Incomes Policies ..57 Active Labor Market Policies ..57 Introduce Flexibility in Retraining Pogra.. . 57 Handling Mass Layoffs ..58 Design of the Unemployment Benefit .59 Pinancing Labor Market Policies .61 Employment Program Administration ..61 Monitoring Labor Market Adjustment ..63 Total Spending on Labor Market Policies ..64 S. CashTrnsfers,USSRtoUkralne .65 How the System Evolved .66 Price Compensation .71 Transition to Ukrainian Independence .71 Conclusion 75 6. Retirenent, Disability, and Survivors' Beneafts ..77 Pensioners and Benefits ..77 Sources of Funds ..78 Uses of Funds ..79 Pension Fund Surpluses and Deficits ..79 Recommendations..80 Normal Retirement Age ..81 7. Allowancesand Benefits ..85 Sources of Funds ..85 Uses of Funds ..85 Reconmmendations ..88 Protecting a Poverty Line ..88 Prerential Treatment for the Poor ..89 Beyond the Crisis ............ 89 8. Educatlon and Tralning ........................................... 93 The Education System: Dimensions and Structure ..... ................... 93 Sector Organization .................. 94 EducationPFinancing and the Use of Resources ....... ........... 100 9. benlthsrvces .................. . 107 Health System Development ....... ........... 107 Health Sector Organization and Management .................. 107 ii  ldwth SyomiR ow . ............... Illt CNurre Jass1. *.*.*.. ..... .... ... ...... .... ........ ........ 112 R bq ..... 119 R.pots Prepare by 1kaUb a,i Consutants for the St* .. . .. .. .. .. . .. .. . ... 119 OtkerSouO ... 120 Chaptw rNot..................... ........ .................. 129 Sta sOcal Amem ................................................. 134 ffl  TABLES Table S.1: Past, Current, Suggested, and Susainable Policy for Public Sodal Spending ... 3 Table S.2: Tecnial and Financal Assistanee Requirements for Exetion of Social Sector Reform Program, 13-19. ................................ 20 Tablel.1: ntena aComprwLsonof,o lIndicators ........................ 21 Table 1.2: IntnmatIonal Comparison of Public Spending on the Sodal Sectors, 1"98 199 . .......................... ............................ 22 Table 1.3: Population Growth Ukraine, 1981-1992 (in lousands) ......... ....... 23 Table 1.4: IJfe Expectancy and Survival by Gender, Ukraine and Selected Countries ..... 24 Table 1.5: Ministry of Health Estimated Demand for Contvceptvs for 1991 ... ...... 27 Table 1.6: Pesioners and leir Benefts, January 1, 1992 ...................... 32 Table 1.7: Income Distribution, 19M1990 ................................. 34 Table 2.1: Employment by Sectr in lternationaPesppectve .................... 40 Table 2.2: An nternatlonalComparLson of Car and Telephone Density .............. 41 Table 2.3: GDP Drop ane, Unemployment Rates in Selected Eastern European Countries and Ukrane, 19..89.. ........ ................. 45 Table 3.1: Sources of Funds for Unemployment-Related Activities, May 1992 Projection for Full Year .............................................. 53 Table 3.2: Uses of Funds for Unemployment-Related Activities ................... 54 Table 4.1: Ratio of Labor Staff to Unemployed Workers In Selected Countries, 1988 ..... 63 Table 4.2: Current and Suested Program for Employment-Reated Activities .... ..... 63 Table 5.1: Socil transfers, select countries, late 1980s, percent of gross income ........ 67 Table 6.1: PensIoners and Thir Benefits, January 1, 1992 ...................... 78 Table 6.2: Projeed Sources of Funds for Pnsons .......... .. ............... 80 Table6.3: UsesofPensiim Funds ....................................... 81 Table 6.4: Changes in Pmson Spending 1991M . . ..83 Table 6.5: Curnt, Suggested, and Sustalnable Policyfor P'enons .84 Table 7.1: Projected Sources of Funds for Allowances and Benefits, 1992 .... ........ 86 Table 7.2: Projected Uses of Funds for Allowances and Benefits, 1992 .... .......... 87 Table 7.3: Curent, Suggested, and Sustnable Poliy for Allowances .... .......... 92 Table 8.1: Student/Teacher Ratios In Ukraine and Other Countries, 1 .... ........ 94 Table 8.2: Enrollment and Teachers in Primary an Secondary Schools, 1991-92 ... .... 96 Table 8.3: Types of lltutions of Hgher L ning in UkrvAne ................... 98 Table 8.4: Enrolmuents and Faculty in Urainin Universities and in Equivalent Infitutons in Selected Countries, 1991-92 ............................. Table 8.5: Ukraine Univesitles, Students, Fculty, and Graduates, 1992 .... ......... 100 Table 8.6: Intational Comparison of Spending on Public Education, 1990, and Ukraine, 192...................................... ........ 101 Table 8.7: Forecast 1992 Education Spending ............................... 101 Table 8.8: Curret, Suggested, and Sustainable Spending on Education, 1993 and Beyond .............................. ..................... 104 Table 9.1: Sources of Funds for leal Care, 1992 ........................... 110 Table 9.2: Uses of Health Cre Funds, 1992 ....... ........................ i09 Table 9.3: Percentage Distribution of Mniy of Healh Spending on Local Health Inputs,1989,1991,and1 ..................................... 111 Table9.4: Currnt, Suggested,andSustanable Pocyfor HealthSpending ........... 115 iv  FIGUS Flgure S.1: Innational Comparison of GDP Dod to Soca Seto Spendeng .... g... 2 Figure S2: Inte onal Comparison of Density of Automobile Ownershlp, 1987 ....... 5 Figure S.3: Internadonal Compadrso of Densty of Main Tdephone L3nes, 1986 ....... 5 Figure S.4: International Comprison of Employment by Econoomc Sector, Late 1980s ... 6 Fgure S.S:Induslal Employees on Leave without Pay1 92 ............ . 7 Figure S.6: Precentage of GDP Spent on Active and Pasdve Labor Market Pblicy In OECD Countries and UkrIne, 199 ...... ................... . 7 1igureS.7: Pesionersand Thr Beneftts,January ,199I ..................... 10 Figure S.8: Effecs of Aternatve Reirement Age PoblUes on Number of Rerd and DependencRatios, 19t89throug 2010 h .............................. 12 Flgure S.9: Potential Yeas of ufe Last by Cause ofDeh ....................... 15 FigureS.10: DistributionofPubllSpendingon lesthSeres ................... 16 Fige 1.1: Percntage Dishibution, Sources and Uses of Flunds in the Soci Secton. 37 Figure 8.1: D ram or Education Financing Flows and Organiation of the School Systae ................................................... 95 Figure9.1: Orgbltonandlnancingofthefleatb Systemn .................... 108 igure 9.2: Heal ExpendlturesofSelected Countries as aPerentofGDP ........... 113 BOXES Box1.1: InicatorsofHospltalResourAlocatedto Aborton1991 .... ........... 28 lox1.2: Keyssues forteShciaoSewrs ............... .................. 33 Box4.1: lheTeory ofIncomes Pobces .................................. 58 Box 4.2: The Practceoflnomes Poicies ................................. 60 Box4.3: FlnaCungLabw oMrketPoliUces ................................. 62 ox 5.1: Old-Age Cash Transfer Payments under the Former Soviet Union, 19.. 19..... 68 Box 5i: USSR Disability Cash Tranfer PAyments, 1956-1990 . ................... 69 BoxS3: NewTrasfer Pyments forFamles withi Clldren ..................... 72 Box5.4: UkrianinSocl WelfareLegislation,1991 .......... .. .............. 73 Box5S:1kralnhanSSocl WelfarePblcy Options ............................ 74 Box6.1: ThePenslonSysten ......................................... 79 v  ACKNOWlIZGMENTS T'his report is based on a World Bank mission on employment and social protection tfiat visited Ukraine from June 29 through July 15, 1992. Contibutors to the report include Mr William McGreevey, Mission Leader, Mr Michal Rutkowski, Deputy Mission Leader; Mr Charles Griffin, sector analysis and performanc; Mr Aril Van Adams, training and active labor market policies; Ms Teri Bergman, unemployment and cash beft aminisaon; Ms Jeanine Braithwaite, cash benefits under the Former Soviet Union; Ms Babara Dabrowska, statistical data; Mr Myroslaw Kohut, population and health; Ms Marisol Ravicz, sector finance; and Mr friag Sirken, education and training. Preparation of this report benefited from cooperaion witb an IMF mission led by Mr Ke-Young Chu, Fiscal Affairs Department. Cooperation of officials of the Government of Ukraine is gratefully acknowledged, especially senior officials and staff of the MinisrS of EducatiGn, Finance, Health, Labor, Social Welfare, and Statistics, and with the Funds for Chernobyl, Pensions, Social Insurance, and Employment. Mission members visited government offices and facilities in Kiev, Kharkiv, Donetsk, and Yenakiyevo (Donbass region). Members had visited Chernihiv, Lviv, Yavoriv, Vinnytsia, and other cities during previous missons. The International Renaissance Foundation arranged for field visits and subsequent seminars and document translations. Regionl employment offices in Zhytomyr and Vinnytsia were especially helpful. During the mission, members participated in a seminar on July 7, 1992, to discuss 15 background reports that had been prepared by Ukrainian consultants. Tites of the reports and their authors are listed in the bibliography. The background reports provide an invaluable base for understanding and analyzing social sector issues in Ukraine. Mr. Basil Kavalsky, Director, Europe and Central Asia Department IV, led discussions of che draft report with govnment officials, February 1-5 1993. Mr. Mykola Zhulinsky, Vice-Premier, 'umanitarian Affairs, coordinated the governmentes response. Bank staff, which included Ms. Michelle kiboud, staff economist, and Mr. William McGreevey also met with members of Parliar..nt and the press. The report was prwared under the geneWal direction of Robert Liebenthal, Chief, Human Resources Development Division, Europe and Cend Asia Department mI. Russell J. Cheetham was the deparument director when work began; Mr Kavalsky became director prior to discussion of the report with govermment Otilia Nadora, Susa S. Sebastian, and Wendy Cagen prepared the manuscript for duplication. Mariou Ablera, Jeffrey Gauer, Rozena Ochoco, and Suman Rajpal, EC3HR support staff, contributed stily to the report preparation. Nicholas Burnett, Estelle James, Bruno Laporte, Mareen Lewis, and Alexander Preker were the peer reviewers. vi  ACRIONYMS An AinaviAlNs AIDS Acquired Immune Deficlency Synidrome BCG Tubercuosis vaccine BMW Bavarian Motor Works CEM Cwntry Economic Memorandum CSFR Czech and Slovak Federl Republic DPr Dipheia, pertssis, and tetanus vaccine EC European Community ES Employment Service FY Fiscal Year G7 Group of Seven (higly industrialized countries) GDP Gross Domestic Product HIV Virus hypothesized to cmses AIDS LAS Indus'uial Adjustment Service ILO Interiational Labor Organzation IMP Ifernational Monetary Fund MOE Mistry of Education MOP Ministry of Finance MOH M nistry of Health MOL M nistry of Labor MOS Ministry of Statistics MSW i inistry of Social Welfare 9,ECD Crganization for Economic Coordination and Development R Ruble SDR Stadardized Death Rate SSR Soviet Socialist Republic SSUZ Technical college UN United Nations UNDP United Nations Development Program UNFPA United Nations Family Planning UNICEF United Nations Itrationd Childrenas Emergency -und USSR Union of Soviet Socialist Republics VUZ Universities WDR World Development Report WHO World Health Ornizaton vii  EXECUIE SUMMARY P,TRODUMON shift of the labor force from a command to a market economy; second, it examines the 1. Tbe purpose of ftis report is to assess advantages of convertg the current system of how well Ukine's economy, society, and social protection to a poverty-focused, government are dealing with the challenge of sustable safety net apprcitc, including adjustment to market determinaon of prices and support for labor-force reassignment; and third, production. Can labor-market policies see it explores opportunities for enhancement of the workers through the transition to a economy efficiency and quality of social service, based on private production without their first education, and health programs. Key elements descndlng into povety? Is there an adequate of these programs must be maintained through se^ial safety net to protect the poor, the the transition as part of a safety net and as a disabled, and pensioners? Will public social cornerstone of policies encouraging economic saervices of education and health survive in a growth investments and in human capital. market economy, offering basic support to all citizens, regardless of their success or falure 3. The introduction of effective under competition? The answers to these macroeconomic policies, reform ofthe enterprise questions will affect policy makers' atitudes and sector, price reform, and financial restructuring actions on virtualy all aspects of economic all require an effective social safety net. Social policy. Without adequate security, the process policies, the subject of this report, are an of economic change, insofar as it requires integral part of any economic reform in Ukraine positive action by government, will be slowed and cannot be neglected or deferred. National and distorted by fear of the unknown. economic leadership must ensure that the social Decisionsmakers need to know what to expect, costs of adjustment are anticipated and to the what policies can ease the transition, and what extent possible provided for, and that the decisions will promote economic development implementation of policy changes minimizes the while assuring an enhanced level of well-being socW pain of conversion. for all. CAN UKRAINE AFFORD mU PROGRAM OF 2. This report lays out a strategy for SOCIAL PfOTEcION? Ukraine to make the transition to a market economy in the social sectors, taking into 4. The cost of the overall package of social account the widespread system of benefits and protection amounted to over 40 percert of GDP the high spending on education and healtL and twothirds of consolidated spending by inherited from the former Soviet Union. A Ukraine's state, social funds, and oblast budgets central pat of the strategy is the need to protect in 1992. This share of GDP assigned to vulnerable groups during the transition but pensions, allowances, subsidies and social within a financially sustainable framework. services far exceeded the estimated level of 25 After a description of social conditions and percent of GDP allocated to social spending in socW protection in Chapter 1, it considers the 1989190. Virtually no other government in the  2 ExecXIve Summay 6. The data in Table S.l, and in other PaIv tables on which it is based, provide a framework in which to analyze the problem of aggregate am,"- social spending. These data express public Uk10tC9 S= social spending as a share of GIDP, which Is a Wii Kur= measure of economic output that can be expected _b to chand e substantially over the next several years. Between 1990 and 1991, for example, Mubo - - I _GDP declined by about 15 percent, and there a * iS a_ was aufrther 14 percent decline between 1991 s WO *Mk M and 1992. Thus the denominator of this ratio, Figure .1: Intemational Compadson of becau.e it is not a constant, complicates the GDP Devoted to Social Sector Spending interprettion of aggregate social spending. For example, if the economy contracts further in 1993, social sector, then spending, for pensions, allowances, and wages for education and health workers, among other things, would all have to world bears such a burden (see Figure S. 1). eontract even more than does the economy as a lTis high share is the result of the several whole. Otherwise, the goods-and-services negative changes. Most significant has been the producing sectors of the economy, which are the collapse of output in stateepris since 1989, source of current wages and current thus lowering the denominator, which is GDP. consumption, would have to contract relative to Another factor was the effort to protect the real the system of social protection. It is difficult to value of pension benefits paid to 13.5 million imagine how the pressing needs of current recipients, stipends and in-kind assistance for consumption, exportable products that can pay 11.4 nillion students, and salaries paid to the for imports, and expansion of the private sector nearly 6 million employees from state and oblast could occur with so heavy a burden of taxaVon budgets, over half of whom deliver education to pay for social protection. Looking further and health services as part of the social safety ito the future, once the phase of output net. The burden of providing benefits or wages expansion begins, resources for the social safety to nearly two-thirds of the population, with only net can grow with the rest of the economic one-third working on directly- productive system. activities has come to, exceed any possibility of the economy and government to finance itL 7. In 1992, there was a notable increase in the share of public resources allocated to social 5. This report seeks to identify a basic prowtection and social services (Fable S.1); if this safety net that can protect those most in need level is unsustainable, as is argued later in this and to find ways to reduce public outlays among summary and in this report as a whole, some those current beneficiaries who can get along principles must govern the means by which the without subsidy, at least until the transition to a obligations of the state are trimmed back to a market economy is well along and the economy level that can oe fnanced. A principle that has has been stabilized. In the near term, however, guided analysis in other countries of Eastern even the best prepared safety net will fail to Europ and the former Soviet union is that those protect Ukraine, absent a sound macroeconomic who are poor, or are likely to be made poor by enmronment wift price stability and balance the events associated with the collapse of output, between revenues and expenditures in the public must be protectedfidly against erosion of their accounts. levels of living with adequate subsidies and social services. A first step in articulation of  Ewecatlve Sunmay 3 this principle is stablishment of a realistic T'is step would require that government have poverty line, which may be considerably lower available some means to identify poor and than a level of living at the govenment might vulnerable groups, building on demographic currently wish to protect. lhe Plan of Action characteristics, such as family size, structure, for 1993 of the Government of Ukraine and composition, and including features of wognizes that "payments are made even to the residence, disability, and dependency on friends wealthiest strata of society." Concentrating or relatives outside the household, as wel; as resources on the poor and vulnerable groups is economic means that inciude the ability to work even seen as an essential policy decision, and to earn from past savingr. The Financing difficulties led the govement, early identification of those poor and vulnerable in 1993, to propose cutting the nber of enough to require public assistance will change, family-allowance recipients down to two million perhaps dramatically, over time if unemployment families from what had been 20 million families. strikes specific regions or singleindustry towns, Table S.1: Past, Current, Suggested, and Sustainable Policy for Public Social Spending Percent of GDP under Alternative Approaches Spending Actual Ex- Current Sumested Sustainable Policy Actions Required Category perience In Policy Program for Program 1989/90 1992 1993 Beyond 1993 _ _ Employment Expand active policies by and Labor - 0.8 2.4 37 strengthening Employment Market Policies Service; all cash benefits at single rate near minimum wage Flat-rate pension for 1993 near minimum wage; introduce Pensions 8 13.9 11.3 7.7 rso saving accounts in 1994; gradually raise retirement age beginning in 1993 Family Target on Single Parents and Allowances 1 8.8 6.2 3.4 families with three or more Allowances___ .________ ._________ . children, and elderly living alone Consumer Reduce in . 993 then eliminate all Subsidies 8.1 untargeted subsidies after 1993 Reduce unnecessary staff by attrition; eliminate stipends for Education 5 7.8 7.0 6.0 foreign students; reform vocational training to support _________ ________ ___________ _________ active labor policies Reduce hospitalizations and staff with out- patient care; cut Health 3 7.7 7.0 6.0 numbers of new medical students; expand pharmaceuticals Imports and production for selected essential drugs Total 25.0 44.1 36.9 26.8 introduce budgeting by objective Total__ _ 25.0 36.9 26.8 in selected ministries Source: See Tables 4.2, 6.4, 7.3. 8.8, and 9.7 for sectoral details for 1992 .mr' beyond. Estimates for 1989/90 based on IMF. World Bank, OECD and EBRD (1991).  4 *xecutive Swmwwy so goverment twst have the capacity to workers, acriculum development In monitor continuously and reshape its policies to technical training, and stengthening of addresi~ 'tew needs. The groups and their needs basic maternal and child health services; once identified, govermeat must :hen establish benefit levels necesr to keep those at risk out M Reduce public spending on food of poverty. As prices continue to rise, benefits subsidies, pensions for persons that would of course have to be adjusted periodically remain in the work force, stipends for to assure respect for the principle that those at sty dents who can finace their own risk be protected fully. education, and general family allowances given irrespective of need; 8. A second principle as that all benefits above the poverty line should be continued only * Seek efficiences in social-services to the extent that resources permit. The collapse spending by reducing unnecessary staff, in output, should it continue Into 1993 and introducing innovative approaches such beyond, wUi severely limit the capacity of the as outpatient treatment in health and state to make its principad transfer payments to computerized learning in education, and retirees, the disabled, and other pensioners, as expanding the role of private providers well as to Chernobyl victims, workers on sick who can cut costs but maintain quality. leave, fmilies with minor children, and, most notably, the unemployed, displaced workers. The strategic vision cannot be one principally of Available resources may be driven down, for a expenditure reductions but rather of shifting time at lost, to a level that would permit no resources to priority tasks of government. One payments, even those representng clear and means to assure that programs improve social ctain obligations of government, beyond social conditions and provide social protection is to protection for the poor and vulnerable. At that introduce a systematic budgeting arrangement point, government must make hard choices that for all social spending. Budgeting by objective distnguish falling into poverty frommaintenance is one approach to consider. Such a technique of a reasonable standard of comfort. Inaction, requires that all users of public social funds or lack of a clear policy choice in favor of present their program goals and intended protecting those at greatest risk, would probably approaches for central budget review, usually by result in acute misery for a significant share of the Ministry of Finance. Allocations then the poorest, particularly the rural elderly living depend on the importance of the goals and the alone and children in single-parent households. cost-eectiveness of the approaches offered. 9. The 1989-1990 program, which required 10. The central economic authorities can 25 percent of GDP, was barely susinable, and help the line ministries increase their it left many of the rural poor uncovered while effectiveness by challenging them to use still permitng inefficiencies and overstaffing in resources more efficiently toward very specific the area of social services. 'he 1992 program program objectives. Reorganization of the more required more than two-fifths of GDP and is a than sixty family allowances and other benefits source of macroeconomic destabilization. A will require direction from a central authority; strategy to reduce social-sector spending reshaping labor-market policies to get a more subsntially in 1993, and to return to a effective response from training programs sustainable level by the following year would offred by the Ministry of Education will also include three key features: require inter-ministerial coordination that would be difficult to achieve without central direction. * Shift resources to favor cash benefits for vulnerable groups, training for displaced 11. Private sector development in support of  Executive Summaiy 5 a public social safety net will depend on the therefore better off with its full employment? creation of a sound legal framework, which does The answer is no: The command economy, not currendy exist. The government must create based on state orders, did not force high-cost both laws and detailed regulations that clarify the producers to cut costs to be competitive or rules of the game for such complex new tasks as respond to consumer demand by combining low tax accountancy, privately-provided training, and price and high quality that could win markets. a strucre of fees and prepayments for health- On two measures of consumer demand, the care services. Progress will be slow until the availability of private automobiles and framework for private initiative is in place. telephones, the USSR was far below both Western and Eastern European countries (see Figure S.2 and Figure Figure S.3). With the swuiea lIE ~ - change to cnsumer-demand-driven production, iw, _ I U I - ~ I the structure of output and the demand for labor Noray" .mun will change dramatically as well. As they move ,_. .,Soo into new productive activities, especily in the _ _bodwMk private sector, some periods of unemployment B_%Wm for millions of workers is almost inevitable. From Command to Market Economy a mo sooa0 400 Noo Smm bC ha 13. The command economy operates like a Figure 8.2: Intemational Comparison of single firm; exchange between departments is Density of Automobile Ownership. 1987 carried on with orders for physical balances, and central decision makers cause each branch or TUE PROBLEM OF EMIWYMENT state entprise to operate as part of a fully- itgrated unit. Enterprises deliver specified 12. On the day in December, 1991, ta quanties of outputs but are left to acquire Ukrainians voted for the nations independence, inputs, especially labor, with no requirement to there was virtually no open unemploymant - the minimie costs or to achieve cost-effcdve recorded rate was less than 0.2 percent. In that strategies in production. Without the price same month unemployment ranged between 2 signals of a market economy, enterise percent (Japan) and 11 ercent (Canada and managers acquire all the labor they can: By France) in the G7 countries. Was Ukraine construction of whole cities, as with new mining or manufacturing enterprises located outside exisdng urban centers; provision of education, c = " day care, health services, vacation centers and o *j**w*j* j other nonwage remuneration that could attract >_tuwEIEI.EI workers when direct wages were fixed by cental authorities. The command economy produces o_ uSIS_uIh wholesale hoardig of labor to assure aequate aE Whmo spncks to meet ihe onay goel of the cep ea m-fs planicng authorities, nlmelyg to produce a _OW specified quantity of output from the firm,