Financial Control in the Transition from Classical Socialism to a Market Economy

Two problems in the transition from a socialist to market economy are the endemic loss of macroeconomic control and appropriate monetary and fiscal measures for controlling inflation during liberalization. Under classical sQcialism, all the means of production are state owned, and output targets are set by a Stalinist system of central planning while wages and prices are also centrally determined. • If liberalization from classical socialism is to succeed, moves to dismantle the apparatus of central planning, decontrol prices, and to privatize property need to be supported by a proper sequence of fiscal, monetary and foreign exchange measures. On the fiscal side, at the outset of liberalization, an organized internal revenue service, a major government bureaucracy for collecting taxes from households and liberalized enterprises, should be in place. In privatizing the financial sector, reliance on self-finance is the simplest technique for imposing financial restraint on liberalized enterprises while simultaneously • increasing the productivity of physical capital. When the price level has been stabilized and the sums the government must borrow from the banking system are much reduced, the financial system could enter a second stage where commercial banks begin limited and fully collateralized short-term lending to liberalized enterprises according to the "Real Bills Doctrine." Finally, financial arrangements governing the foreign exchanges should parallel and complement these domestic tax and monetary arrangements.