The Fiscal Constraint to Restructuring of Firms in Transition Economies

The restructuring process of formerly state-owned enterprises, including dismissal of excess labor, has been slow. Since the recovery of transition economies depends on the restructured sector, a convincing take-off has been delayed. Many arguments have been forwarded to explain the low adaptation speed. This paper focuses on an additional structural barrier at the governmental level. Here the privatization program--leading to restructuring or not--is designed. Transition governments are in a fiscal squeeze: on the one hand restructuring relocates costs from the restructured firms to the public budget, on the other hand--in order to contain inflationary pressures--the public deficit should be kept within narrow limits. This problem is analyzed by means of a stylized, dynamic model