A decade of fiscal transition

Abstract

The emphasis in transition literature has been on stabilization and enterprise restructuring. Both cross country analyses and country-specific studies have tended to focus on fiscal stabilization and its indicators, highlighting the importance of quantitative fiscal adjustment to stabilization outcomes. Less attention has been paid to the qualitative dimensions of fiscal adjustment in transition. Alam and Sundberg take stock of the extent of fiscal adjustment that has taken place during the first decade of transition in both qualitative and quantitative dimensions. They define quality along three inter-related dimensions---the extent to which (i) progrowth expenditures that are essential for the creation of future economic and social assets are maintained or protected, (ii) pro-poor expenditures, such as poverty-targeted transfers, necessary to ensure income streams for the poor and the vulnerable are adequately provided for; and (iii) fiscal risks, impinging upon both expenditures and revenues, are managed or contained through transition. The authors conclude that while the quantitative magnitude of the fiscal adjustment was dramatic, the quality of this adjustment has compromised the social and economic objectives of transition, particularly in the CIS countries. They draw four main conclusions: (i) investments in public services fell in both absolute and relative terms; (ii) reduced spending on government transfers contributed to a sharp increase in income inequality in the CIS countries; (iii) fiscal risks increased during the transition; and (iv) initial conditions allowed CEB countries to maintain higher expenditures, which may have contributed to their faster economic recovery and political support for the reforms. The authors argue that the challenge for fisc...