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Local Governments’ Fiscal Balance, Privatization, and Banking Sector Reform in Transition Countries

  • Ernesto Crivelli

Several transition economies have undertaken fiscal decentralization reforms over the past two decades along with liberalization, privatization, and stabilization reforms. Theory predicts that decentralization may aggravate fiscal imbalances, unless the right incentives are in place to promote fiscal discipline. This paper uses a panel of 20 transition countries over 19 years to address a central question of fact: Did privatization help to promote local governments’ fiscal discipline? The answer is clearly ‘no’ for privatization considered in isolation. However, privatization and subnational fiscal autonomy along with reforms to the banking system - restraining access to soft financing - may prove effective at improving fiscal balances among local governments.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/146.

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Length: 27
Date of creation: 01 Jun 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/146
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  1. Douglas Sutherland & Robert W.R. Price & Isabelle Joumard, 2005. "Fiscal Rules for Sub-central Governments: Design and Impact," OECD Economics Department Working Papers 465, OECD Publishing.
  2. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  3. Fabian Gouret, 2007. "Privatization and output behavior during the transition: Methods matter!," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00203398, HAL.
  4. António Afonso & Luca Agnello & Davide Furceri, 2008. "Fiscal Policy Responiveness, Persistence and Discretion," Working Papers Department of Economics 2008/50, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  5. Ernesto Crivelli & Klaas Staal, 2006. "Size and Soft Budget Constraints," CESifo Working Paper Series 1858, CESifo Group Munich.
  6. Saul Estrin & Jan Hanousek & Evzen Kocenda & Jan Svejnar, 2009. "The Effects of Privatization and Ownership in Transition Economies," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 699-728, September.
  7. Bilin Neyapti & Nida Cakir, 2007. "Does Fiscal Decentralization Promote Fiscal Discipline?," Working Papers 0708, Department of Economics, Bilkent University.
  8. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
  9. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
  10. Céline Bignebat & Fabian Gouret, 2008. "Determinants and consequences of soft budget constraints," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(3), pages 503-535, 07.
  11. J Alm & R M Buckley, 1994. "Decentralization, privatization, and the solvency of local governments in reforming economies: the case of Budapest," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 12(3), pages 333-346, June.
  12. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
  13. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
  14. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, vol. 45(9), pages 1573-1599, October.
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