of 67 for Mongolia to 40 percent of GDP for Romania and the former Yugoslavia. This compares with an average OECD expenditure of 51 percent of GDP (55 percent for the West European countries).

As it is well known, there have been multiple reasons for these high expenditure ratios. On average, some 15 percent of GDP was devoted to subsidies to enterprises and households, ranging from the high of 20 percent for Czechoslovakia to moderate 4 percent for Yugoslavia.<sup>3</sup> The high subsidy ratios went hand-in glove with high revenue ratios, as a result of the duplications created by the distorted set of relative prices typical of socialist economies (Barbone and Marchetti, 1995). This engendered high profitability, and therefore high profit taxes, for a number of 'favored" sectors, which was however counterbalanced by large losses in some sectors and the required subsidies from the budget. With the advent of economic liberalization and of market-based pricing, much of this "duplication" has disappeared, and with that both sides of the government budget's income and loss statement have been scaled down.

Prior to transition, most of the socialist countries had already developed a social safety net system, generally comprising a pay-as-you-go pension scheme, sick pay, generous maternity benefits and family allowances, retraining/labor funds, as well as specific welfare schemes. Social security transfers usually absorbed some 25 percent of total expenditures. These did not include any unemployment benefits as unemployment, with the exception of Yugoslavia, was by definition non-existent. Similarly to the West European countries, however, large transfers were assigned to the provision of pensions.<sup>4</sup> Government expenditure on pensions ranged from about 6 percent of GDP in the FSU, where pensions were conditioned 2 It should be noted that in 1993/94, the highest OECD spender Sweden, at 72 percent of GDP, far surpassed the most profligate RESEs. In 1988-89, Sweden's general government expenditure accounted for about 62 percent of GDP, but rose by 10 percent of GDP thereafter.

3 In addition to enterprise subsidies, government also carried cost of settling inter-enterprise arrears and non-repaid loan from the state-owned banks. The financial burden of this soft budget was quite heavy also on the government of Yugoslavia (Corricelli and Rocha, 1991). Also invisible in the budget figures, there used to be some implicit subsidies financed by tax offsets and negative real interest.

4 The proportion of social transfers in the government budget was lower than in many OECD countries on account of the fact that many social functions were performed by the state enterprise system. For example, in the former Soviet Union, a large amount of goods and services, including day care, was provided through the social consumption funds of the SOEs. SOEs were also in charge of allocating the social security benefits as well as of collecting tax and social security contributions. Thus, most of the transition countries had developed neither strong social security administration nor historical records of individual contributions and benefits. Later, creation of new sovereign states required building of their public administration systems from virtually a zero base.

4