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Unleashing Prosperity: Productivity Growth in Eastern Europe and the Former Soviet Union

Health Sector Review Note, Vol. 1

The countries of Eastern Europe and the Former Soviet Union experienced a productivity surge over 1999–2005 that drove up living standards and reduced poverty. Productivity growth is probably the single most important indicator of a country’s economic progress.It is only through increases in productivity that firms may enjoy good prospects for higher profits so they may invest in new technologies, create jobs, pay more in wages and dividends, and apportion wealth. The efficiency of labor and capital rose rapidly in the Region, especially in the middleincome countries of the Former Soviet Union.

This report integrates an impressive array of data sets to assess the macro, sectoral, and micro underpinnings of productivity growth in the Region. It builds on aggregate estimates of productivity comparable across countries and over time. t then explores industry and firm-level heterogeneity to understand more clearly the roots of observed aggregate economic performance.

1. Patterns of Aggregate Productivity Growth

The Region shows great diversity in productivity performance and progress in reform. Two broad groups of countries emerge from the analysis: the more productive, early reformers (the EU-10 and Turkey) and the less productive, late reformers (most of the CIS and the SEE).

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2. Sectoral Patterns of Productivity Growth

The economic transition from central planning brought gains in efficiency throughout the Region. Many countries saw a dramatic shift of resources toward the service sector, which was underdeveloped under centralized regimes. This shift increased labor productivity in agriculture and manufacturing partly because of labor shedding.

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3. Firm Productivity Growth

The analysis of cross-sectoral shifts hides substantial firm dynamism within industries. Faced with the radical transformation of the economy, firms in all countries were forced to adapt their behavior. Some firms increased productivity through defensive restructuring, while others did so through strategic restructuring. New firms entered the market, occupied emerging niches and displaced obsolete firms that had been forced to exit the market.

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4. The Future Role of Public Policy

In late reformers, there is still a large misallocation of resources across firms, industries, and locations. This ongoing economic distortion calls for policy reforms to accelerate the pace of reallocation so that resources flow from less- to more-productive uses.

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