The fiscal constraint to restructuring firms in transition economies
Restructuring transition enterprises has been slow. Many firms remain unprivatized and the new owners (of privatized firms) take inadequate measures. Various arguments often have been brought forth to explain this sluggish adjustment. This paper identifies a structural barrier at the governmental level: The government designs the privatization program which leads to restructuring. However, transition governments are in a fiscal squeeze because restructuring relocates costs from firms to the public budget. Nevertheless, the deficit should be kept within narrow limits. This problem is analyzed within a stylized dynamic model. This paper finds that the fiscal constraint can delay or halt privatization. Careful sequencing of policy and a low ratio of wage-to-profit taxes can remedy the problem. Copyright International Atlantic Economic Society 2000
Volume (Year): 28 (2000)
Issue (Month): 1 (March)
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