inequality. The paper has demonstrated that inequality is the result of complex interactions between initial conditions, country circumstances and, importantly, policy choices which need careful analysis.

Before turning to the implications of this analysis for policy, it is important to distinguish between equality of opportunity and equality of outcomes. The World Development Report (2006) makes a persuasive case for policies that promote equality of opportunity, defined as opportunities to pursue a life of an individual’s choosing and be spared from extreme deprivation in outcomes. However, it cites the examples of decollectivization of agriculture in China in the late 1970s and wage decompression in Central and Eastern Europe following the onset of transition in those countries as cases where a history of repressed inequality precludes using the resulting inequality of outcomes to infer inequality of opportunities. Indeed, since income differences provide incentives to invest in education, to work and to take risks, any policy that is cognizant of tradeoffs between efficiency and equity will result in inequality of outcomes.

A dominant driver of inequality common to Central Europe, China and Russia has been wage decompression. While the share of wages has declined in the transition economies of Eastern Europe and the former Soviet Union and, more modestly so in urban China, their concentration coefficient, which depends both on how unequally wage incomes are distributed and how closely they are correlated with total income, has increased significantly in all cases. And although wages became less unequally distributed in Russia in the late 1990s and early 2000s, reversing the trend of increasing inequality in earlier years, that reversal is due in part to a reduction of wage arrears which is a onetime phenomenon.

Could inequality in wages increase further in the transition countries of Eastern Europe and the former Soviet Union? There are four points to be made. A recent examination of the evidence [Yemtsov, Cnobloch and Mete (2006)] shows that, while rates of return to schooling are low in the transition countries, they are starting to increase and, furthermore, that there is a positive association between progress with market reforms as measured by EBRD transition indicators and returns to schooling. Hence, **first** , to the extent the evolution of wage inequality is a reflection of the education premium, it is certainly possible to envisage greater inequality of wage outcomes as market reforms fully take hold in lagging reformers.

**Second** , an important issue in the CIS countries is the reduction of the informal economy. While self-employment, including subsistence agriculture, have played the role of a safety net following the deindustrialization and retrenchment that occurred in the early years of transition and, hence, were welfare-improving relative to the potential unemployment that would otherwise have occurred, an important policy issue now is how to create more productive jobs.  That would also, inter alia, mitigate the unequalizing effect of wage decompression.  The creation of new jobs could be accomplished through the removal of those elements in the investment climate which confer a disadvantage on new private sector firms which are important in employment creation [World Bank (2005c)].  Surveys of the business environment [EBRD (2005)] indicate that beyond

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