A) Fiscal Policy in Transition Economies: a Major Challenge

Russian: It is recognized that fiscal policy has been at the centre of the economic reform programs pursued by economies in transition.

Foreigner. Yes, practically all programs that they followed in their initial stage included a fiscal component. The transition economies needed to create basic market-based institutions and practices in the fiscal area like taxation and budget process first of all.

R.: What were their first steps towards market economy?

F.: They began to reform the budget process, to reorder expenditure priorities, to revamp the tax system, to restructure and privatize the state-owned enterprises and the banking system.

R.: It seems to me that in the process they have faced tasks similar to those of market-oriented economies.

F.: Well, if you mean the need to tame high inflation and balance-of-payments deficits, to eliminate structural distortions, to reverse poor investment performance and economic stagnation, then you are right. But the implementation of fiscal adjustment programs started in Eastern European countries in a peculiar economic situation, when they embarked on the reforms.

R.: Yes, the process of fundamental institutional change has brought about severe economic and social dislocation and macroeconomic imbalances. As a result, the high inflation, the dramatic fall in economic activity and the deterioration in revenue performance were unprecedented in modern times.

F.: It should be said in all fairness that most countries accomplished a relatively successful correction of the initial fiscal imbalance, which helped to dampen inflation expectations and solve other problems.

R.: What are they working on now?

F.: The economies in transition are engaged in a major effort to redefine the functions of government. The all-encompassing role of the state as regulator of economic activity is being cut back drastically. But the role has yet to be finalized.

R.: Thus, an effective system of public expenditure and its monitoring has still to be established.

F.: I fully agree with you. Besides, the state enterprise sector presents an increasing challenge. Enterprises have accumulated payment arrears to other enterprises and banks, and for the government tax payments.

R.: Oh, we in Russia understand the problem only too well. And how do they go about the problem?

F.: The solution to the problem is being sought through a combination of measures, such as bank recapitalization operations, debt restructuring, implementation of bankruptcy legislation.

R.: Eastern European countries have nearly completed the initial stage of the transformation to a market system. What tasks remain for them to accomplish?

F.: They are many. As the major ones I'd single out the need to complete the social security reform, to step up infrastructure investment, to overhaul local government finances, to deal with the difficult trade-off between the need to contain the fiscal imbalance and the need to pursue structural reform.

R.: And finally, the most important question. Do the people support the reforms?

F.: You have really raised the most important question. Sentiments are different, you know. The government's success of overhauling fiscal institutions and eliminating the fiscal imbalances depends on the broad-based support for the reforms.

R.: In this situation it's important to develop measures to shield the poor from the adverse effects of adjustment.

F.: I see you agree with me that designing and implementing fiscal policy is a major challenge for countries in transition.

Words you may need:

reorder v изменять порядок

revamp v исправлять

to tame high inflation (зд.) обуздать высокую инфляцию

dislocation n нарушение

dampen v смягчать

all-encompassing аdj всеохватывающий

finalize v окончательно определять

arreas n pl задолженность

recapitalization n изменение структуры капитала

overhaul v (зд.) осуществить перестройку

trade-off n компромисс

contain v сдерживать

sentiments n pl настроения

shield v защищать