This paper also relates labor market developments to the welfare of workers, the recent evolution of welfare, and its distribution. Over the period examined in this paper, the aggregate poverty headcount is unchanged but the poverty risk has evolved differently for selected sub-groups. Where averages wages have sharply increased— mostly in the formal sector—the poverty risk has fallen. Where wages have remained broadly unchanged and where the relative share of total employment has expanded— mostly in the informal sector—the poverty risk has increased. Those who are not in the labor force or unemployed constitute the biggest share of the poor. Of women in poverty, those who are not in the labor force account for two-thirds of the total. In contrast, only a little over a quarter of men in poverty are out of the labor force. There are also clearer links between men’s employment outcomes and their transitions out of poverty. Of the men initially out of the labor force or unemployed, a large share subsequently moved into employment and also moved out of poverty as a result.

In this difficult labor market, there are good reasons for reviving the privatization and enterprise restructuring program. The long drawn-out processes of privatizing and restructuring public enterprises have merely postponed the necessary reforms and unnecessarily prolonged the lives of non-viable, loss-making enterprises and, in the process, it has constrained private-sector led development and the more productive use of resources for employment-generation. Enforcing financial discipline, quickly implementing privatization, and facilitating bankruptcy and closure can instead effectively compress the labor adjustment period and can possibly move forward strategic restructuring processes that subsequently lead to job creation in the medium-term. In the short-term, however, this strategy faces a number of critical challenges. We know, for example, that only about a third of those who left the SOE sector have since found employment in the formal sector. Instead, many of them fell into inactivity or unemployment, or joined the informal sector, facing elevated poverty risks as a result.

Thus, renewed enterprise privatization and restructuring will also require complementary policies that create an enabling environment for job creation. The likely poverty and social impact of labor retrenchment following privatization and restructuring will depend in large part on how quickly affected enterprises rebound, or their ability to invest, adopt new technologies and hire new staff. Policies that promote competition, facilitate the entry of new firms, create the conditions for a level playing field, attract strategic foreign investors<sup>16</sup> (who enjoy some advantage in access to finance, new technologies, and new production processes) can ease the transition from defensive restructuring that leads to job destruction to strategic restructuring that leads to job creation (World Bank 2005b, World Bank 2005c). To remove barriers to entry and stimulate further enterprise creation, the CEM (World Bank 2005a) emphasizes the need to fully implement the new business registration system, streamline business inspection, and enforce competition policy.

> 16 There is evidence that foreign privatization is associated with increased employment and wages in a sample of countries (Hungary, Romania, Russia, and Ukraine), though these effects are not always statistically significant (World Bank 2005b).

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