On the Speed and Boundaries of Structural Adjustment When Fiscal Policy is Tight

Governments of transition economies are subject to a fiscal constraint (e.g. credit constraints). However, exaggerated fiscal discipline might feed into the structural adjustment process. The government designs and times the privatisation programme yet may find itself in a fiscal squeeze, because, restructuring moves costs from firms to the public budget. This paper models this problem in a simple dynamic setup. Several distinct reform strategies, that differ in the speed and level of structural adjustment, are identified. Tight fiscal discipline in early stages of transition may delay or halt privatisation. A different sequencing of policy or different taxation, benefits, and privatisation sales rules, can rectify this problem