Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät, Universität Hannover 237
One decade ago the formerly socialist, east-European economies collapsed. They are facing the diffcult and complex task to transform and to modernize their economic structures. In the beginning, many economists believed that the process of transition could be done fast and easily. Liberalization, privatization and macro-economic stability (so called Washington consensus) seemed to be the appropriate means to establish western style market economies. But now it becomes clear that not only the economic structures, but also the whole society including norms and social values have to change. In many east-European transition countries only small parts of the population could benefit from the economic reforms. Inequality of income and wealth increased rapidly between various groups in the society. In such dual societies conflicts appear that have to be solved in order to sustain a stable and lasting economic growth. Social security measures in form of transfers and regulations can be conflict-reducing and conflict-solving. In this point of view safety nets can be regarded as effciency and growth enhancing. Especially, since traditional networks break down with changes in the institutional structure. But one has to consider that a social sector needs resources reducing the possibility to produce output. An expansion of the social sector enhances growth through increasing social security, whereas a reduction frees resources to produce human capital and output. To analyze this trade-off the Lucas (1988) growth model is enhanced by the introduction of a social sector. Now the optimal input of resources in the human capital sector and the input in the social sector can be identified. It can be shown that the optimal level of social security depends from the productivity in the social and the human capital producing sector.