Fiscal Constraints, Reform Strategies, and the Speed of Transition: The Case of Central-Eastern Europe

The paper analyses the pressures on the pace of reform that can arise through fiscal constraints. A simple analytical framework is used to illustrate the relation between the budget deficit and the pace of restructuring, unemployment, and the relative dynamics of state and private firms. It is shown that fiscal pressures become stronger while the transition progresses. Demands on governments to slow down restructuring mount, as well as demands for compensating transfers to groups affected by reforms. Thus governments face an important trade-off between fiscal targets and restructuring objectives. Together with pressures arising from increasing income inequality and lobbying from specific interest groups, such as pensioners, fiscal constraints have probably played a major role in the reform cycle observed in many Central and East European countries. They have been particularly influential in determining the asymmetry between economic and political cycles. An example of the changing speed of reforms is the continuing delay to privatization. More generally, the widespread electoral successes of parties originating from former communist organizations testify to the pressure to change the pace of reforms.