From Output Collapse to Sustainable Growth in Transition Economies. The Fiscal Implications

The paper considers the issues of severe breakdown of production and the causes of persisting fiscal deficit in the economies in transition from a centrally planned to a market system. Although these events are due to a legacy of the previous system and to macroeconomic stabilization policies, it appears that the excessive tightness imposed upon the state sector and some policy measures implemented out of sequence have led to unnecessary contraction and caused the perverse effect of fiscal adjustment. Taking into account different composition of expenditure and revenue at the second stage of structural adjustment, it is even more difficult to get rid of the current deficit. This aim can be accomplished only on the path of long-lasting growth and requires proper reorientation of financial policies as well as enhanced foreign assistance, especially a technical one. However, in the transition economies a fiscal deficit, accompanied by a threat of inflation acceleration, will persist for some time--even after the phase of growth is achieved. Therefore, a special policy effort has to be carried out in favor of fiscal stance improvement, recovering output and sustaining growth in the long run