Transition to Market
Front Matter

Front Matter

Vito Tanzi
Published Date:
June 1993
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    International Monetary Fund


    © 1993 International Monetary Fund

    Design and production: IMF Graphics Section

    Library of Congress Cataloging-in-Publication Data

    Transition to market : studies in fiscal reform/edited by Vito Tanzi.

    • p. cm.

    • Includes bibliographical references and index.

    • ISBN 9781557752758

    1. Fiscal policy—Europe, Eastern. 2. Capitalism—Europe, Eastern. 3. Fiscal policy—Former Soviet republics. 4. Capitalism—Former Soviet republics. 5. Fiscal policy—Developing countries. 6. Capitalism—Developing countries. I. Tanzi, Vito. II. International Monetary Fund.

    HJ1023.7.T73 1993




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    Over the past couple of years, membership in the International Monetary Fund has increased sharply as many new countries have found it in their interest to join this institution. Most of these new member countries had centrally planned economies. Their interest in becoming members of the IMF reflected their desire to move from central planning to an economic system relying on market forces. Since this transition requires fundamental change, these countries have been in urgent need of assistance and advice from the rest of the world.

    The countries in transition have been experiencing the consequences of four gaps: an information gap, a conceptual gap, a skills gap, and a financial gap.

    Because of the past isolation of these countries from the market economies, little was known about their institutions. And these countries knew little about the institutions of market economies. Therefore, before assistance could be given to them, those providing the assistance had to fill this information gap. The second gap to be filled could be called the conceptual gap. Economists had no experience of and no literature on countries moving from central planning to market economies; in the past, the movement had generally been in the opposite direction. Thus, those working on these countries, both domestic experts and those coming from the outside, were confronted by difficult problems in institution building, in the sequencing of reforms, in the interaction of different policies, and in the interpretation of variables and statistics. It soon became clear that simply transplanting institutions or even policies from the market economies to these countries, without proper adaptation, could lead to serious difficulties. But, determining what the “proper adaption” would be was not easy. The third important gap could be referred to as the skills gap. This gap is essentially the lack in centrally planned economies of legal, accounting, financial, and other related skills indispensable for the smooth functioning of a market economy. Despite the high level of literacy and general cultural sophistication of the population of these countries, this lack of those technical skills has slowed the transformation to a market economy. In a way, the situation is comparable to that of being trained to play tennis and then being asked to play golf. This skills gap will take time to fill. Finally, many of these countries would need to fill financial gaps since the breakdown of their economies has, in most cases, sharply reduced output and incomes and has made it difficult for them to provide the necessary resources for new investments, new infrastructure, and other requirements. If the necessary savings cannot be generated domestically, the need for foreign assistance will be great.

    From the beginning, the IMF has been willing to play a large technical and, in some cases, even a financial role. Technical assistance has been provided both by the many Fund missions that have visited these countries to discuss general economic policy and by more specialized missions sent to assist the reorganization of institutions in the financial and fiscal sectors, as well as in other areas. Starting with very little knowledge, Fund staff participating in these missions have had to accumulate new information at a very fast pace. After several missions, the participants had accumulated a considerable amount of knowledge about the countries that they had visited that was probably not available elsewhere. Much of the information accumulated was contained in technical reports, which for the most part were confidential. In the fiscal area, the staff of the Fiscal Affairs Department of the IMF carried out a good deal of work.

    A couple of years ago, I had the idea that it might be useful if this knowledge became more widely available to policymakers and others in universities, research institutions, ministries of finance, central banks, and other places. I then planned to publish two books, both dealing with fiscal issues.

    The first would deal with analytical issues in taxation, in public spending, in the creation of safety nets, in budgeting, and so forth, as these issues applied to economies in transition. This volume would constitute a basic guide to those providing technical assistance and would also be useful to officials trying to implement changes in their countries. It would focus on issues and not on countries. This first volume was published in early 1992 as Fiscal Policies in Economies in Transition. It proved a useful and popular book. I have been happy to receive many positive comments on the book from officials in the transition countries and to learn that highly placed individuals in these countries often consult it. A Russian language edition of this book will become available in 1993.

    The project also contemplated a second volume that would contain case studies in fiscal reform in many of these countries. Even though this book would deal with issues, it would do so within the context of specific countries. This is the subject of the present volume. The information contained in these country studies is difficult to acquire since it is often unpublished or, when published, is available only in languages inaccessible to most people. The IMF is probably the only place where this book could have been assembled.

    The book covers 15 countries and contains 19 chapters. It is divided into four main parts. Part I deals with general issues of fiscal reform in five Central and Eastern European countries. Part II deals with specific fiscal issues or experiences in Central and Eastern European countries. The issues discussed in these chapters range over privatization, fiscal federalism, social safety nets, and, even, the net worth of the Soviet Union. Parts III and IV deal with fiscal reform in Asian and African countries. These sections cover, in Asia, countries such as China, Viet Nam, Mongolia, and Kazakhstan, and, in Africa, Algeria, Angola, and Ghana. The first chapter tries to provide a simple introduction to public finance and financial markets in the transformation process.

    As already mentioned, the book contains a wealth of information not available elsewhere. For this reason, it should prove useful to researchers and academics, as well as to those directly involved in the practical side of the transformation process. The authors share two characteristics: they were very busy carrying out their normal heavy duties and they were directly involved with, and thus very knowledgeable about, the countries on which they were writing. A more leisurely pace in the drafting of these chapters would have produced a more refined product, but time has been an extremely valuable and scarce commodity in the IMF during this period, especially for these authors.

    All the authors are staff members of the IMF, with the exception of Professor Bös, who wrote the chapter on privatization in east Germany while he was a Visiting Scholar in the Fiscal Affairs Department. It is essential to emphasize that in their writing the authors have expressed their own opinions, which may not necessarily reflect those of the IMF. It is also necessary to add that references to the Soviet Union, Czechoslovakia, Yugoslavia, and east Germany concern those states as they existed before they were replaced by their successor states.

    I express heartfelt thanks for the extremely valuable assistance I have received from David Driscoll, who has chased authors to make deadlines, has checked chapters to see that these were presented in a standard format, and has organized contact with the External Relations Department of the IMF to facilitate the production of the book. Without his assistance, it would have taken much longer for this project to be completed. I am grateful to Esha Ray and Leo Demesmaker of the External Relations Department for their editorial comments and for seeing the book through to publication. The authors sacrificed much of the little time they had available to spend with their families to write these chapters. They all did this with enthusiasm: I am happy to record my admiration and gratitude here.

    Vito Tanzi


    Fiscal Affairs Department


    The following symbols have been used in this book:

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    —to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

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    / between years (e.g., 1992/93) to indicate a crop or fiscal (financial) year.

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    Minor discrepancies between constituent figures and totals are due to rounding.

    The term “country,” as used in this book, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

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