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A decade of fiscal transition

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  • Alam, Asad
  • Sundberg, Mark
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    Abstract

    Transition literature has emphasized stabilization and enterprise restructuring. Both cross-country analyses and country-specific studies have tended to focus on fiscal stabilization and its indicators, highlighting the importance of quantitative fiscal adjustment to stabilization outcomes. Less attention has been paid to the qualitative dimensions of fiscal adjustment in transition. The authors take stock of the extent to which fiscal adjustment has occurred during the first decade of transition in both qualitative and quantitative dimensions. They define quality as the extent to which: (1) pro-growth expenditure essential for creating future economic and social assets are maintained; (2) pro-poor expenditure, such as poverty-targeted transfers, necessary to ensure income for the poor and vulnerable are adequately provided; and (3) fiscal risks, impinging on both expenditure and revenue, are managed through transition. The authors conclude that while the quantitative magnitude of the fiscal adjustment was dramatic, the quality of this adjustment has compromised the social and economic objectives of transition, particularly in the Commonwealth of Independent States (CIS). They draw four main conclusions: Investments in public services fell in both absolute and relative terms. Reduced spending on government transfers contributed to a sharp increase in income inequality in the CIS. Fiscal risks increased during the transition. Initial conditions allowed Central European and Baltic countries to maintain higher expenditures, which may have contributed to their faster economic recovery and political support for the reforms. The authors argue that the challenge today for fiscal policy in these countries is to facilitate the transition-particularly in reallocating resources from large state-owned enterprises to new small and medium-size firms, and providing priority public services and targeted transfers to assist those adversely affected by transition and reverse the deterioration in social outcomes. The interplay between fiscal policies and institutional arrangements is increasingly important as transition economies embark on their second decade of reforms. In particular, incentives embedded in the institutional arrangements for fiscal management needs to be strengthened so that policies, resources, and outcomes can be better aligned, and the fiscal adjustment is consistent with qualitative considerations.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2835.

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    Date of creation: 31 May 2002
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    Handle: RePEc:wbk:wbrwps:2835

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    Keywords: Decentralization; Health Systems Development&Reform; Health Economics&Finance; Environmental Economics&Policies; Economic Theory&Research; Health Economics&Finance; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; National Governance;

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    1. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, vol. 39(3-4), pages 771-779, April.
    2. Stanley Fischer & Ratna Sahay, 2000. "The Transition Economies After Ten Years," IMF Working Papers 00/30, International Monetary Fund.
    3. Burnside, C. & Eichenbaum, M. & Rebelo, S., 1998. "Prospective Deficits and the Asian Currency Crisis," RCER Working Papers 458, University of Rochester - Center for Economic Research (RCER).
    4. Cavalcanti, Carlos B. & Zhicheng Li, 2000. "Reforming tax expenditure programs in Poland," Policy Research Working Paper Series 2465, The World Bank.
    5. Stanley Fischer & Ratna Sahay, 2000. "The Transition Economies After Ten Years," NBER Working Papers 7664, National Bureau of Economic Research, Inc.
    6. Liam P. Ebrill, 1999. "Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 182, International Monetary Fund.
    7. International Monetary Fund, 2001. "Transition Economies," IMF Working Papers 01/55, International Monetary Fund.
    8. Brixi, Hana Polackova & Papp, Anita & Schick, Allen, 1999. "Fiscal risks and the quality of fiscal adjustment in Hungary," Policy Research Working Paper Series 2176, The World Bank.
    9. Martinez-Vazquez, Jorge & McNab, Robert M., 2000. "The Tax Reform Experiment in Transitional Countries," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 273-98, June.
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    Cited by:
    1. Aleksander Aristovnik, 2005. "Twin Deficits Hypothesis And Horioka-Feldstein Puzzle In Transition Economies," International Finance 0510020, EconWPA.
    2. Manoj Atolia, 2003. "Public Investment, Tax Evasion and Welfare Effects of a Tariff Reform," Working Papers wp2003_10_01, Department of Economics, Florida State University, revised Oct 2008.
    3. Lev Freinkman & Gohar Gyulumyan & Artak Kyurumyan, 2003. "Quasi-Fiscal Activities, Hidden Government Subsidies, and Fiscal Adjustment in Armenia," World Bank Publications, The World Bank, number 15074, October.
    4. Carmignani, Fabrizio, 2008. "The impact of fiscal policy on private consumption and social outcomes in Europe and the CIS," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 575-598, March.

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