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also often be misused, whether they are privadzed or not. A local heating plant that is privatized, for example, but remains a (local) wratural monopoly obviously raises regulatory problems: who deals with these problems, and how? What should be done with the proceeds of asst sales? Under what (very limited) circumstance **s** hould such proceeds be used to finance current local expeitur ? If an **asset** is not privatzed, but is used to geneote ongoing revenues for the local govemment (and perhp some forign partnr, with the municipality using its ownership of land or assets as its contribution to equity), the temptation to sustain and sttengthen any monopoly position is obviously again a problem, as is that of regulation. Even more damaging is the high pwbability that more speculative ventuu - examples include tourist lodge and bakeries - are likely to fail. Equally damaging may be the dissipation of scare local managerial skills on trying to squeewz money out of such entrepreneurial gambits rather than focusing on tho more essenal task of trying to provide local public services efficiently.

24. A special problem arises with reap' t to the prices cbrged by those local public enterprises to be retained in tho public sector. In the past, central governments in the socialist countries used low and fixed prices (including rents and other urban user fees) and wage controls, as part of their distributional tool kit. The now governments in these countries ar now being asked, in a reformenvironmet, to get the prices ight and to use tax policies and targeted gubsidies instead. There are two important dimensions in the transition economies: First, changes in public sector prices L.rugc ) clearly need to be coordinated with wage reform on the one hand and with more general price reforms on the other hand, in order to avoid undue impact on income and major distributional shifts (as well as on profits and hence government revenue). Second, central government price mandates -prices were typically centrally administered - need to be devolved to the subnational level.

25. Finally, in somn countries, (Russia, China, and others) price reform and other structural shifts wiU continue to bave effects on the tax base and its distribution across regions. Coal and energy price changes, for example imply potentially large shifts in the vadous tax bases, both vtilbin a tier of government in the tax bases of differet regions within a country (e.g. a gain in value added in a primary-product producing area after price libealization and a corresponding loss in the consuming jurisdiction) and botwoe levels of government depending on how taxes have been assignec or shared. Such shifts must be taken into account when designing the intergovemmental fiscal system: they may well constrain the reform of intergovernmental relations, eliminating options that might be feasible in other countries. At the very least, greater flexibility is needed than in countries where economic structures are more fixed. Intergovernmental fiscal reform clearly must be viewed as an ongoing Rrocss in countries in trnsition.

# Oreanization of the Paper

26. This paper addresses these issues of intergovenmental finance in transitional economies. It argues that a broader framework than is customary is needed to analyze decentralization and intergovernmental fiscal issues in such economies. This framework must incorporato such elements as the likelihood of continuing structural changes in the economy and continuing political shifts, t4e need to undertake intergovernmental reforms while coping simultaneously with stabilization pressures and the increased importance of the social safety net, the likelihood of continued (local) public ownership on a significant scale, the financial implications of such ownership and its possible conflicts with the overall privation objective, and continued vestiges of price and wage controls and other rigidities. A comprehensive and atcurate analysis of decentralization must take these elements into account.

27. The analysis in this paper is based on detailed recent studies of local and intergovernmental finance in Hungary, Poland, Russia, Romania, and China, and on less detailed information for the Czech and Slovak Federal Republic (CSFR - especially the Czech Repub!ic), Bulgaria, and Vietnam. Salient characteristics of the local and intergovernmental system in each of these countriesa' are presented in the main text for illustrative purposes.

21See also the following working papers: Bird and Wallich, 'Financing Local Government in Hungary, No. 869, March 1992; Bahl and Wallich, 'Intergovenmental Finance in China," No. 863, February 1992; and Wallich, Christine, 'Fiscal Decentralization: lnteraovernmental Finance in Rus&iia' Additional source materials are cited in the bibliography at the end of the paper.