Investment Wages and Capital Market Imperfections

Abstract

The restructuring of firms in Eastern Europe still requires massive amounts of investment. At the same time, the process of restructuring is creating high unemployment. The problems of raising capital and fighting unemployment would have to be faced even if the transformation process were functioning organically and smoothly. They are, however, aggravated by the fact that there hardly existed a financial infrastructure in Eastern Europe. Capital markets needed to be built up at the same time. In the communist regime, private investment and private savings were operating only to a very limited extent. Private firms could not borrow to finance investment, and the main means of savings by households had been either stockpiling of goods or money deposits. The liberalization of financial markets was likely to promote private savings. As long as capital markets were not well established, however, the channeling of savings to the most efficient forms of investment would have been impeded, limiting expected efficiency gains.