metadata: authors: 0: author: Fakin, Barbara
1: author: de Crombrugghe, Alain
count: Europe and Central Asia
docna: 0: docna: Field adjustments in transition economies :
            social transfers and the efficiency of public spending - a
            comparison with OECD countries
docty: Policy Research Working Paper
subtopic: Macro-Fiscal Policy,Taxation & Subsidies,Economic Adjustment and Lending,Pensions & Retirement Systems,Public Sector Economics,Employment and Unemployment,Public Financial Management,Public Finance Decentralization and
            Poverty Reduction
teratopic: Finance and Financial Sector Development
abstracts: cdata!: Despite a dramatic shift away from
            subsidies in the early years of transition, the countries of
            Central Europe still show signs of unsuccessful fiscal
            adjustment, insufficient deficit reduction, and loose
            spending policy. High social transfers and low efficiency of
            government spending remain two challenges of fiscal
            adjustment and long-term sustainability of budgetary policy
            choices. A cross-country regression analysis shows that the
            problems with high social-security outlays are largely the
            result of loose eligibility criteria (many pensions go to
            early retirees) under current state pay-as-you-go pension
            systems - and not so much to old populations or high
            replacement rates. The authors suggest that transition
            economies should strive for a real social consensus on the
            reform of future pension rights. The transition to a funded
            pension system could be financed by a combination of:
            government debt; proceeds from privatization; and efficiency
            gains from lowering and/or restructuring government spending
            in favor of infrastructure, retraining, and market-oriented
            tertiary education.
repnme: repnme: Field adjustments in transition economies :
            social transfers and the efficiency of public spending - a
            comparison with OECD countries
display_title: Field adjustments in transition
            economies : social transfers and the efficiency of public
            spending - a comparison with OECD countries
listing_relative_url: /research/1997/07/438829/field-adjustments-transition-economies-social-transfers-efficiency-public-spending-comparison-oecd-countries
topicv3: Public Finance Management m1326316 716,Government Expenditure m1326649 1112,Taxation m1327615 1121,Retirement m1504007 2896,Unemployment m1504051 2747
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 38
model_extractions: POLICY RESEARCH WORKING _PAPER 18 03_

# Summary findings

Despite a dramatic shift away from subsidies in the early years of transition, the countries of Central Europe still show signs of unsuccessful fiscal adjustment, insufficient deficit reduction, and loose spending policy.

High social transfers and low efficiency of government spending remain two challenges of fiscal adjustmient and long-term sustainability of budgetary policy choices.

A cross-country regression analysis shows that the problems with high social-security outlays are largely the result of loose eligibility criteria (many pensions go to early retirees) under current state pay-as-you-go pension systems -- and not so much to old populations or h-igh replacernent rates.

Fakin and de Crombrugghe suggest that transition economiies should strive for a real social consensus on the reform of future pension rights. The transition to a funded pension system could be financed by a combination of: Gove.-nment debt.

-Prcceeds from privatization.

oEPfficiency gains from lowering and/or restructuring government spending in favor of infrastructure, retraining, and rmarket-oriented tertiary education.

This paper - a joint product of the Office of the Senior Nlice Presidents Development Economics and Chief Economist, and Research Support Staff-is part of "Fiscal Reform in Pola-nd (RPO 678-96),'" a study funded by the Bank's Redearclh Support Budget. Copies of the paper are available free fromi -he World Bank, 1818 H Street _NW,_ Washington, DC 20433. Please contact .Mani Jandu, room N7-032, telephlone 202-473-3103, fax 202-522-0304, Internet address mjandu@worldbank.org. july 1997. (48 pages) _The Policy Research Working Paper Series disserninates the findings of work in progress to encourage the exchange of ideas about development iss;es. An objective of the series is to get sh ,findings out quickly, even if the presentations are less than fully polished. The papers carry the narnes of the authors and sb,ould be cited accordingly. The ,fidings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent._ Produced by the Policy Research Dissemination Center
# Fiscal Adjustments in Transition Economies: Social Transfers and the Efficiency of Public Spending A Comparison with OECD Countries

Barbara Fakin Alain de Crombrugghe
# FISCAL ADJUSTMENTS IN TRANSITION ECONOMIES: SOCIAL TRANSFERS AND EFFICIENCY OF PUBLIC SPENDING

Comparative analysis with OECD countries Barbara Fakin* and Alain de Crombrugghe University of Namur, Belgium; & *Ministry for Economic Relations and Development, Slovenia.

# _SUMMARY_

Despite a dramatic shift away from subsidies in the early years of transition, the countries of Central Europe still show signs of an unsuccessful fiscal adjustment, insufficient deficit reduction and loose expenditure policy. Consequently, high social transfers and low efficiency of govemment spending remain two main challenges of fiscal adjustnents and long-term sustainability of budgetary policy choices. The cross-country regression analysis shows that the problems with high social security outlays are largely due to loose eligibility criteria (i.e. to a large number of early retirees) under current state pay-as-you-go pension systems - and not so much to old populations or high replacement rates. It is suggested that transition countries should reach social consensus on the refonn of future pension rights. The transition to a funded pension system could be financed by a combination of: (i) government debt, (ii) privatisation proceeds, (iii) efficiency gains from lowering and/or restructuring of government expenditure in favour of infrastructure, retraining and market-oriented tertiary education.

_Acknowledgement:_ This paper was written as the part of a project, Fiscal Reform in Poland Sponsored by the Research Support Budget of the World bank (RPO 678-96). We benefited from the discussion with Anton Barten, Marek Dabrowski, Robert Deschamps, Alan Gelb, Herbert Glejser, Marvin Jackson, Branko Milanovic, Boris Pleskovic, Jeffrey Sachs, Henry Tulkens, seminar participants at CASE (Warsaw), 10th Congress of European Economic Association (Prague), Workshop on International Economics at Catholic University of Leuven , and International Conference at the 50th Anniversary of Faculty of Economics, University of Ljubljana, Slovenia.

Barbara Fakin is currently a Belgian Government SSTC Scholar from Slovenia at the University of Namur, Belgium.

Alain de Crombrugghe is Professor at University of Namur, Belgium.

1
# **Contents**

## 1. Introduction

1.1. Comparative budgetary structure: Some statistical facts

1.2. Questions

1.3. Outline

## 2. A brief literature review

3. Structural determinants of social transfers 3.1. General environment 3.2. Early retirement and the generosity of the pension system 3.3. Expenditure policy choices 4. Efficiency of public spending _5._ Pension reform 6. Conclusions 7. Appendix I. Regression estimates I. Non-parametric efficiency analysis III. List of variables and country samples with dummy variables

## 8. References

2
# 1. **Introduction**

Fiscal sector reform is an integral part of medium-term strategies for sustainable growth in the CEC's (i.e. Central European Countries). Governments in transition economies face a difficult task of working both on the quantity and the quality of fiscal adjustments. The quantity of fiscal adjustment corresponds to a need to contain short-term fiscal imbalances. The quality of fiscal adjustment requires the "structural " fiscal sector reform which will reduce the still overwhelming role of the state in the CEC's by reordering expenditure priorities and reorganising the tax system. The study focuses on the structural, market-oriented fiscal reform which can be guided by the following traditional principles of government action: Efficiency, Equity, Macroeconomic stability, taking into account the more specific constraints of feasibility and sustainability in transition countries.

This paper relies mainly on cross-country comparisons to assess budgetary priorities and burdens. Reforms should not necessarily imitate the fiscal structure found in the other parts of the world. Nevertheless, persistent differences should be justified by specific conditions or specific objectives of the CEC in the people's and taxpayers' interests.

3
# **1.1. Comparative budgetary structure: Some statistical facts**

Some stylised facts of comparative budgetary structure (see Table la) are as follows: (1) A very high but somewhat declining share of GDP is redistributed by the general government in a typical CEC.

(2) For the structure of government revenues (see Table 1 a) three facts stand out:

* The reliance on the indirect taxes (including domestic taxes on goods and services or turnover taxes & international trade taxes) was 'low', but is rising.

* The share of social security contributions in government revenue is already higher than in the OECD and is expected to rise.

* Reliance on personal income and property taxes is low, but reliance on profit taxes used to be very high and it declined sharply.

(3) Comparing the structure of expenditures (see Table lb) reveals four key orientations:

* CEC have reached high level of social security outlays , which amounted for 45% of total expenditure in 1992. In* Asian and Latin American countries ( with lower GDP per capita and low government spending), social expenditure is only 14% while some of them experience fast real GDP growth.

4
**Table la. Regional Breakdown of Economic Performance**

|||Regional Unwe|ighed Averages||
|---|---|---|---|---|
|Indicator|||||
||OECD<br>1992|Central|Europe|Asia &<br>Latin America<br>1992|
|||1988/89<br>without Slovenia|1992||
|GDP per capita in current<br>$|19489|n.a.|3379|2356 (without<br>Singapore)|
|Government<br>Expenditure in % of<br>GDP|44.33|54.2|50.8|19.91|
|Government<br>Revenue<br>in % of GDP|42.6|50.7|47.6|19.77|
|Inflation Rate|8.14|n.a.|27.73|14.29 (without<br>Argentina)|
|Unemployment Rate|8.50|0.0|11.90|4.67|
|Direct Taxes in % of<br>Expenditure|33.65|24.78|20.52|30.56|
|Indirect Taxes in % of<br>Expenditure|29.07|29.89|31.10|55.49|
|Borrowing and others in<br>% of Expenditure|14.29|20.85|14.91|5.32|

Source: Fakin & de Crombrugghe (1996), p.<sup>6</sup> .

5
**Table lb. Regional Breakdown of Government Expenditure by Type**

|Type of<br>Government<br>Expenditure by<br>Function<br>in % of Total<br>Expenditure||Regional A|verages||Type of<br>Government<br>Expenditure by<br>Economic<br>Classification<br>in % of Total<br>Expenditure|
|---|---|---|---|---|---|
||OECD|Centra|l Europe|Asia &<br>Latin America||
|||1988/89(*)|1992|||
|Subsidies|2.03|**26**|7|17.96|Subsidies|
|Economic<br>Services|10.59||18.90|16.74||
|Health|12.62||13.20<br>X|<br>7.07l||
|Education|12.35||8.58|15.09||
|Defence|2.54||1.73|11.72||
||13.61|8.08|13.33( )|21.94|Wages|
||6.64|5.62|4.15|17.52|Investment|
|General Public<br>Services &<br>Other|25.33||6.14|7.64||
||43.18|40.52|31.07|18.8|Goods and<br>Services & Other|

Source: Fakin & de Crombrugghe (1996), p.<sup>7</sup> .

Note: (*) Data for Slovenia are non available.

_6_
*Explicit subsidisation remains above the OECD average but has been reduced significantly. Under central planning, subsidies complemented taxes as instruments of the plan . Implicit subsidies (usually not reported) remain widespread. They take the form of tax reductions and in some cases privileged credits.

*CEC devote a higher share of their expenditure on health than on education. The converse applies in Asian and Latin American countries, while OECD countries give about the same share to each (12%). Given the potential contribution of education to growth and even to health, the priorities of the CEC's seem awkward.

UGovernment investment fell quite dramatically under the recent financial pressures on the budget . This might be seen as a missed opportunity for growth, especially in the field of infrastructural investment.' To conclude, **the current situation in the CEC,** with increased transfers and government wages **may indicate** (especially with coalition governments): First, **unsuccessful fiscal adjustment with insufficient deficit reduction and loose expenditure policy29** Second, **the preference for care over opportunities**<sup>**3**</sup> **.**

> 'See also de Crombrughe and Lipton (1994).

> **2** Alesina and Perotti (1995).

> 3Opportunities dominate in Asia, where subsidies are actually lower than in Latin America and targeted towards business development rather than business protection (Rodrik, 1995). See also de Crombrugghe, (1994).

7
# **1.2. The questions**

The dramatic change of macroeconomic policy environment after the beginning of transition in 1989 forced most of transition countries into budgetary retrenchment and structural adjustment. The analysis in section 1.1. appears to suggest that **social transfers and efficiency of government spending represent two main challenges for the long-term sustainability of budgetary and policy choices in transition economies.** From the policy perspective the following questions are extremely important. Does (e big») govermments in the CEC spend efficiently taxpayers' money? If the social transfers are << too high >, what are the structural determinants of social transfers (pensions)? How do the size of the government and the level of social transfers affect intergenerational equity (i.e. equality in current income)? If CEC are to initiate fiscal adjustment in the field of social spending, which pension reforn strategy should they pursue? And last but not least, how to pay for the cost of the pension reform?

# 1.3. **The outline**

The paper is organised as follows. Section 2 briefly reviews the literature. Section 3 uses regression estimates to identify the main determinants of taxes and expenditure across countries. The focus is on the impact of the age structure of population and the retirement policy on social transfers across countries. In section 4 we discuss the results of non-parametric efficiency analysis, and possible avenues for budgetary reform and saving. Section 5 provides a policy 8
recommendation. It stipulates various ways of financing a transition to the multipillar pension system and its implications for the efficiency of public spending. Section 6 concludes. Sample and variable description are given in appendix.

# 2. **A brief literature review**

Although of extreme policy relevance in the periods of structural reforms, changes in the composition of a government's budget are usually omitted from standard macroeconomic analysis. A comprehensive theory of public expenditure is still missing; the existing literature is mainly empirical. Our paper draws from four strands of this literature. The first is the comparative analysis of patterns of government expenditure (and taxation ). Heller and Diamond (1990) observed in developing countries a marked change in expenditure priorities away from fixed assets and capital transfers toward interest, subsidy and transfer payments. Burgess and Stern (1993) studied tax structure in developing and industrial economies to uncover patterns of taxation most suited to different types of countries. Studies of transition countries focus on the relation between budget balance and budget composition (Transition Report, 1994; Barbone and Marchetti, 1995; Barbone and Polackova, 1996; Dabrowski, 1995, Fakin and de Crombrugghe, 1996; Sachs, 1995; World Development Report, 1996). They all note a fast expansion in social welfare expenditure. A second source is the work on fiscal adjustments in OECD countries especially, the observation by Alesina and Perotti (1995) that countries which did not restructure the expenditure were less able to maintain fiscal equilibrium. Our third source is the literature on non-parametric efficiency analysis (Tulkens, 1993), more specifically the cost-efficiency 9
approach which was applied to the Belgian municipalities by Vanden Eeckaut, Tulkens and Jamar (1993). Fourth, the policy implications of our empirical analysis can be related to a vast policy-oriented literature<sup>4</sup> on: (i) the choice of a tax system (Musgrave & Musgrave, 1984; Newbery, 1993 & 1995), on the design of a social security system (Feldstein, 1974; Hombug, 1990; Breyer and Stroub, 1993; Averting the Old-Age Crisis, 1994; Gruner, 1995;), and on the growth-diminishing effect of distortionary taxes and growth-enhancing effect of productive government services (Barro, 1990 & 1991; Barro and Sala-i-Martin, 1995; Cashin, 1994; de Long and Summers, 1991; Sachs and Warner, 1996).

# **3. Structural determinants of social transfers**

# **3.1. General environment**

Social transfers have been identified as a major and growing item of total government expenditure in transition countries. Moreover they appear as a distinctive feature compared to the other countries. A first step in the analysis is to try to find the structural determinants of social spending as a part of the overall tax and expenditure policy of a broad sample of countries.

In Table 2, the main components of public revenue and expenditure are regressed on the key constraints identified in the literature: income per capita (at purchasing power parity) and the oldage dependency ratio (number of people younger than 65 years). Regional Dummnies are added for Central Europe (Dummy 1), Latin America (Dummy 2) and Western Europe (Dummy 3). The base Detailed discussion of this source would exceed the purpose of our study.

10
year for cross-country regressions is, given the availability and comparability of statistical data, the year 1992.

The seemingly unrelated regression (SUR) method has been used. It exploits more efficiently the information contained in the residuals. The SUR estimation (Zellner, 1962) deals with the unobserved country specific determinants of expenditure across equations which may be the same. Indeed there is some correlation between the residuals for some countries across single equations. In addition, we effectively deal with shares of different categories of govermnent spending in GDP. The following results are relevant to the social security transfers.

(1) **Income per capita is a significant determinant** of the share of social spending in GDP as of the shares of total, health and education expenditure in GDP. On the revenue side income per capita explains wealcy the share of social security contributions in GDP. It has a significant positive effect on direct taxes an a negative one on indirect taxes. 5 (2) **The age structure of population,** i.e. old-age dependency ratio (DDO is the ratio of workingage population and the old people), **has no significant effect** on (total and) social spending once the << European Effect >> (i.e. the oldest populations in the sample) is taken into account. It still has a marginally significant effect on health expenditure.

5 The positive relation between income per capita and total spending (EXPGDP is total public expenditure in % of GDP) is especially significant when purchasing power parity adjusted GDP (GDPHS) is used rather than the current dollars (GDP$WB, see Table on p.33 in Fakin and de Crombrugghe, 1996). A positive relation can be explained by a high cost of a number of public goods and social provisions included in public spending. It is also difficult to tax poorer and rather informal economies. The estimated regression coefficients are higher with GDPHS than with GDP$WB (compare Table 2 with Table on p.33 in Fakin and de Crombrugghe, 1996). This is in line with the emparical observation that rich countries have a lower GDP in purchasing power parities than in current $, while the contrary is true for poor countries.

11
It is interesting to note, that another structural variable, the share of population living in cities turned out to be globally insignificant, while it was itself strongly correlated with GDP per capita and the Latin American dummy. In addition, the acceptance of inequality could have played a role. But the ex-post measures that we have (like the share of income in the richest decile), performed poorly in this broad sample, while showing some negative correlations with GDP per capita, the Western and Central European dummies and a positive correlation with Latin America.

(3) In addition to the income per capita effect there is an even **stronger o European Effect o in social spending and in social security contributions 6.** The coefficients for the CEC Dummy are even larger than those for the European Union. It means that experiences and policy solutions from the OECD are of direct relevance for reforms in the CEC.

> 6 Speaking of regional effect, the positive correlation of subsidies of Latin America (Dummy 2) is noteworthy. Subsidies are relatively difficult to explain with structural variables. They are discretionary and despite some succes stories in Asia, their contribution to the economic performance remains uncertain.

12
# **Table 2. SUR Estimates** for Taxes and Functional Expenditure (GDPHS)

||Const|DUMMY<br>_ I|DUMMY<br>2|DUMMY<br>3|_DDO_|GDPHS|R<sup>2</sup>|F|
|---|---|---|---|---|---|---|---|---|
|.SCAL|-4.31<br>(0..6>|14.73<br>(519"*)|1.47<br>(0.86)|7.69|**_-4#2_**<br>**_:(.0.?_**|3.89E4<br>(1.93+.|71.6:|-16.<br>|
|DIRECT|__~<br>-4.87<br>(-0.94)|~~~~~~~~~~~~~~<br>5.56<br>(1.88+)|~~~~~~~~~~~~~~<br>-1.03<br>(-0.56)|~~~~~~<br>5.79<br>(2.76**)|**_0.58_**<br>_(1.83+)_|9.45 E4<br>(4.35**)|58.1|.<br>.... ....._::-_,,-,.I<br>8.89|
|TTAXGDP|13.70<br>(4.44**)|3.72<br>(2.04*)|-0.97<br>(-1.68)|3.94<br>(3.13**)|_-0.26_<br>_(-1L3)_|2.72 E-4<br>(-2.03*)|56.6|9.1|
|EXPGDP|17.28<br>(2.77**)|25.38<br> <br>(6.80**)|-3.27<br>(-1.36)|17.37<br>(6.67*t*)|-0.01<br>_(-O 03)_|11.97 E4<br>(4.44**)|87.1|47.2|
||SUBSIDY|_-0.51_<br>(-014)|2.53<br>(1.21)|3.20<br>(2.54*)|1.37<br>(0.92)|_0.33_<br>_(1.49)_|2.30 E-5<br>_(0.15)_|34.5|3.5|
|BEALT'HGDP|3.95<br>(1.83+)|-0.10<br>(-0.08)|-0.28<br>(-0.36)|0.41<br>(0.48)|_-0.25_<br>(-1-91+)|3.76 E-4<br>(4.06**)|77.5|23.4|
|EDUGDP|2.39<br>(1.49)|1.17<br>(1.29)|-0.50<br>(-0.91)|1.01<br>(I.57)|**_aoos5_**<br>**_(0.05)_**|_1.77_E-4<br>(2.65*)|57.2|8.0|

Legend: highly significant ... ** < 0.01 significant ... * < 0.05 marginally significant ... + **< 0.10** + or -denotes the sign of estimated regression coefficient Method of estimation: SUR i.e. seemingly unrelated regressions (Zellner, 1962). See Appendix III for variable descriptions and rules of presentation.

Source: Fakin and de Crombrugghe (1996), p.9; see also pp.33-34.

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# **3.2. Early retirement and the generosity of the pension system**

Apart from **the** global significance of GDP per capita, the aggregate analysis identified a strong << European Effect >> for social transfers, total expenditure, and for social contributions. The CEC have a low income per capita, but seem to follow West-European patterns in social transfers, rather than take their place on the income line. This section tries to see whether this 'European specificity' can be explained (see Table 3 below) in a 'narrow sample' of OECD and CEC.

**Table 3. Social Transfers, Government Wages and Effective Dependency Ratios**

||._<br>.|DDO|GLABOUR|SOCWAGE|UNEMPLOY|R<sup>2</sup><br>F<br>Obs.|Missing/<br>Residuals|
|---|---|---|---|---|---|---|---|
|ADR||-0.25<br>(-445**)|-0.02<br>(-3.83**)||0.03<br>(4.80**)|60.3<br>10.1<br>24|None/<br>SIo. -0.2<br>Po. -0.2|
|ADR||-0.25<br>(-3.97**)|-0.02<br>(-3.57**)|-0.002<br>(-0.97)|0.03<br>(4.84**)|64.7<br>227|None/<br>PCR. -0.1|
||GDP$WB<br>(* OE-4)|DDO|GLABOUR|SOCWAGE<br>_ _ _**_**_<br>_ _<br>_|TRANSFER<br>_ _ _ _ _ _ _ _ _|R<sup>2</sup><br>F<br>O bs.|Missing/<br>Residuals|
|SOCEXP||-3.23<br>_(-1.51)_|-0.53<br>(-2.44*)|0.38<br>(5.16**)||62.6<br>10.0<br>22|None/<br>Cz.R.-10.8<br>Po. -8.0<br>Sbo. +8.2|
|SOCGDP||-2.33<br>(-2.90**)||0.28<br>(8.53**)||78.4<br>36.8<br>23|None/<br>Cz.R. -5.2<br>Po. -4.0|
|WAGESEXP|-6.32<br>(-3.31**)|1 1|1|1|-0.25<br>(-3.55**)<br>1<br>|61.7<br>15.3<br>1~~~|Slo./<br>Hu.. -6.6<br>~~~~~~~~~22<br>Cz.R. -8.3|

Note: In the regression for WAGESEXP, GDPHS as well as DUMMYI were significantly negative, the latter being accompanied with stronger income effect. ADR was marginally significant and positive. GINVGDP was significantly positive. Regressors GINVEXP, POPULATION and UNEMPLOY were nonsignificant. Regressors DUMMYI, GDPHS, POPULATION, INEQUAL, UNEMPLOY, ADR, GINVGDP, GINVEXP were never significant in the regressions for SOCEXP and SOCGDP. In ADR regressions INEQUAL, INVGDP, SOCGDP were never significant. DUMMYI was highly significant in combination with UNEMPLOY and GLABOUR, where GLABOUR turned out to be insignificant and R<sup>2</sup> was only 46.3.

See Appendix III for variable description and rules of presentation.

14
First, we try to explain the actual number of retirees, measured by the actual dependency ratio (ADR). Second, we examine the relation between shares of social expenditure in total public spending and in GDP (SOCEXP & SOCGDP) with demography and income policy choices.

The actual dependency (ADR) is largely explained by the demographic dependency ratio (DDO), as could be expected. The generosity of the benefits, measured by the wage replacement rate (SOCWAGE) seems however to have no effect on the actual number of retirees of the countries in the sample. Other variables nevertheless have a small but significant effect: the share of government employment in total employment (GLABOUR, negative effect) and the unemployment rate (UNEMPLOY, positive effect). This last variable indicates that early retirement is a way to deal with unemployment, but not to eliminate it. Job security in government reduces the cases of early retirement and may actually be a substitute for it in case of labour market problems. These observations point to the eligibility rules in the determination of the number of retirees.

Social expenditure as a share of government expenditure (SOCEXP) or as a share of GDP (SOCGDP) depends upon the number of retirees as expected, but also and very significantly upon the generosity of the benefits (SOCWAGE). Given the previous observation on the number of retirees, simultaneity problems in the econometric estimation can be expected to be minimal. Nevertheless we preferred to use the demographic dependency ratio DDO as a regressor here rather than the actual one (ADR).

15
Our observations have important retirement policy implications: The absence of relation between the number of retirees and the benefits they earn gives governments two independent policy instruments: eligibility rules and the generosity of the benefits. With a given social security budget it would thus be possible to raise pensions and tighten access, or the converse. It should also be possible to reduce the relatively large burden of social expenditure by raising the effective retirement age, keeping benefits constant.

The absence of relation between income per capita and retirement or retirement spending is noteworthy. In the larger sample of Table 2, there was a positive relation but also a strong European effect. In fact most of the European countries of the OECD and the Central Europe were above the income line. It is thus normal that the relation vanished in the smaller sample. The purpose of Table 3 is to explain the determinants of the European effect.

It is also interesting to point to two variables which tend to reduce government wage expenditure: income per capita and social transfers. The negative relation with income per capita was also present in the larger sample for the SUR regressions of the economic classification of expenditure (Fakin and de Crombrugghe, 1996, Table 2b). Rich countries seem to have found a way to master their wage expenditure despite usually higher wage levels and higher relative wage costs. For any given level of income per capita, the possibility to substitute government wage expenditure for social transfers seems to be present as it is for government employment as a substitute for early retirement.

16
To conclude generally on pensions and government employment: It seems that **national preferences dominate price and income effects.** Some governments just choose to retire more people, other to employ more of them. Most governments choose retirement when they also face unemployment. The total cost of high unemployment and abundant retirement is usually high. But the generosity of the individual transfers (SOCWAGE) can vary, and so explains the cost of the policy, given the number of beneficiaries.8 The number of beneficiaries is indeed controlled administratively by the design of the pension system - and is, assuming that pensions are usually attractive, the result of an independent policy choice. Specifically, **the problems with high social security outlays in the CEC are largely due to** the excessive number of early retirees, i.e. **to loose eligibility criteria for early retirement** under the current pensions systems.

# **3.3. Expenditure policy choices**

Finally we note (see Table 4) that total government expenditure in the OECD and CEC's tends to be independent of income per capita - as is social expenditure - but to be related to specific policy choices. Unequality, measured by the share of income of the 1 0 percent richest, appears as a key determinant for low government spending in the sample.<sup>9</sup> Egalitarian countries tend to spend more as do countries with a large government payroll or with generous pension benefits

> 7 For the unemployment problem in Europe compared to the United States a similar idea is expressed in CEPR (1995).

> 8 It is important to clarify that pensions are not too high in the sense that they would attract a lot of people into early retirement out of the labour force. 'The incentive effect' of pensions is in fact ruled out by the institutionalized eligibility criteria (under pay-as-you-go systems). Rather, in some countries pensions may be too high because, given the number of pensioners, the replacement rates (SOCWAGE) are too high.

> 9 We could not find the same relation between social spending and unequality. Other elements of total spending play an egalitarian role, possibly government employment. Social spending depending on the way it is targeted and the way it raises the income of the insiders at the expense of the outsiders could also contribute to unequality. Further research would be needed.

17
(SOCWAGE). The high government expenditures are also linked with a low share of investment spending in the total (GINVEXP).

The low investment of high spenders may be a cause of a slower growth of income per capita in the long run. We have not been able to test this growth effect, especially given the limited significance of any recent growth figures for Central Europe. Nevertheless referring to the literature quoted in the section 2, it can be expected that low investment and large tax distortions are harmful for growth. Social security can be efficiency enhancing in the few cases where it raises the productivity of the labour force by selecting the most productive workers but its financing on a pay-as-you-go basis can have negative effects on investment and hence on growth.

**Table 4. The Size of Public Redistribution**

|3|GDPHS<br>(*OE-3)|INEQUAL|GLABOUR|GINVEXP|1TAXREV|SOCWAGE|R<sup>2</sup><br>F<br>Obs.|Missing/<br>Residuals|
|---|---|---|---|---|---|---|---|---|
|EXPGDP|I|-0.99<br>(-2 26*)|0.54<br>(2.69*)|-0.91<br>(-2.62*)||0.12<br>(1.90+)|82.4<br>16.4|Cz.RJ<br>Hu. -5.3|

## Note:

Regressors DUMMYI, DDO, ADRDDO, ADR were not significant. DEBTGDP was marginally significant in a regression with INEQUAL and GLABOUR.

See Appendix III for variable description and rules of presentation. Source: Fakin and de Crombrugghe (1996), p.<sup>12</sup> .

The regression analysis of total and social expenditure thus shows that **the CEC's and many of**

**the other European countries** are off the income line and **have opted for generous and/or**

# **easy accessible social transfers, large government payrolls and egalitarian distribution of**

**income.** They face nevertheless high unemployment and low investment rates. We leave the

18
growth effects of these choices to the other branches of the literature. We now turn to another type of evaluation of these policy choices: the efficiency analysis. This is necessary to see whether the high spenders dominate the low spenders in a number of performance indicators related to government action and public welfare or should learn from countries which perform as well at a lower cost.

# **4. Efficiency of public spending**

The medium-term strategy for the reform of the budget should include elements for monitoring the efficiency of government performance. Non-parametric efficiency analysis (Tulkens, 1993; Vanden Eeckaut, Tulkens, Jamar, 1993) is just an example of how the efficiency of government spending can be tested.'<sup>0</sup> It compares a number of outputs (government services) with the input cost (represented by the aggregate governnent expenditure). The output indicators used in the illustrative test were: patents, university entry, infant mortality, life expectancy, old-age demographic dependency ratio and telephone mainlines. This list includes two important parameters of the pension system namely demographic dependency ratio and life expectancy. Each output indicator is a full variable and it is never weighted. A country is identified as inefficient only if there is another country which does better in all output indicators with no more government expenditure. A better performance than the lower spenders in any single indicator saves a country from inefficiency. The results are summarised in Table 5 below.

"O For the conceptual framework, and its application to the poverty problems and corresponding social expenditure policies see Cornia et.all. (1987), and Pleskovic & Sivitanides (1993).

19
**Table 5. Summary of Cost-Inefficiency Cases**

|Inefficient|EXPGDP|Potential<br>revisions of<br>spending in<br>the sample|Expenditure<br>per capita in<br>PPP|Potential<br>revisions of<br>spending in<br>the sample|Expenditure<br>in current $ per capita|Potential<br>revisions of<br>spending in<br>the sample|
|---|---|---|---|---|---|---|
|B1lg.um|_i55.2_||10024|1J|||
|Hungary|54.5|7|||||
|Poland|50.7|15|||||
|StQvem|....|10..35.|2.||||
|Czech<br>Republic|48.5|7|||||
|Greece|47.1|2|||||
|Portugal|39.3|1|||.||

Note: See Appendix II for details.

Source: Fakin and de Crombrugghe (1996), p.<sup>2</sup> 3; 22-25 for detailed description of results.

Judged by the sample of the OECD and CEC's, the striking result is that a transition economy can find between 7 and 15 countries" which spend a lower share of current GDP, and reach better results on all the performance indicators selected for the test. It may seem that the private sector in CEC can contribute to the satisfaction of our performance indicators. This doesn't invalidate our indicators at all. On the contrary, it reminds especially transition countries that the welfare objectives of the society require a government intervention only where there is a The list of countries is given in appendix III.

20
demonstrated market failure. Furthermore, such an intervention doesn't always take the form of direct provision of services but also (above all) the form of regulation 12 An additional output indicator, which has not been used to set up Table 5 is the degree of income inequality. If the income inequality is measured by the share of income of the 10 percent richest, the CEC's and Belgium would become efficient because all the countries whose government spends less have a more unequal income distribution. The share of income of the 40 percent poorest is probably a better indicator of the social role of the state. Using this indicator, it is still possible to find a few countries where the poor get more while the government spend less than in Belgium and the CEC's. This discussion of income redistribution also shows the price at which it comes: huge government expenditures and poor performances in all other indicators of public action. Newbery (1993 and 1995) also suggests that the reforming CEC's could tolerate some increase in income unequality in order to achieve a better overall performance.

It thus seems plausible that **CEC could lower their government expenditure and/or restructure in favour of infrastructure, retraining and market -oriented tertiary education.** Such fiscal adjustment can be expected to improve their medium-term performance in efficiency indicators, and to enhance long-run economic growth. The question is, how to shift government spending away from social transfers?

12 As for instance, an old-age income insurance under a funded pension system rather than state pensions on a payas-you-go basis.

21
# **5. Pension Reform**

The CECs' governments are facing the problems of: (i) high social security outlays due to loose eligibility criteria under the current state pay-as-you go pension system, and (ii) given the structure of government expenditure, relatively low efficiency of public spending. To solve these problems the CECs should **reach social consensus on the reform of future pension** '3 **rights.** In other words, they should introduce a multipillar pension system , which would recognise the diversity of national circumstances and operationalise the introduction of a country-specific combination of the two pure pension systems: capitalisation system and pay-asyou-go-system. It is important to note that: First, the introduction of a (partially) funded system creates an extra cost, as when a pay-as-you-go system was introduced the first generation of retirees was made strictly better-off. Second, if the transition from the present state pay-as-yougo system is successful, the pension reform would be growth enhancing. Third, selective generosity and in particular, eligibility criteria are much less of a financial problem under a funded pension system.'<sup>4</sup> The crucial question therefore is: Which tax instruments are to be used to finance transition?

Based on the theory a transition from a pay-as-you-go to capitalisation system can be financed by different tax instruments: (1) lump-sum contributions (Breyer and Stroub, 1993) in the form of

> 1 Following the proposition made by International institutions (Averting the Old-Age-Crisis, 1994), the pension system would have three pillars: Pillar I is a mandatory, tax financed, public pay-as-you-go system; Pillar 2 is mandatory and fully funded pension system; and Pillar 3 is private owned and fully funded.

> 14 We demonstrated (see Table 3) that one of the main factors of excessive social transfers is selective generosity. Pensions in the funded system are unequal because savings are unequal and not because of unequal expenditure. Furthermore, eligibility criteria are not such a problem under the funded system as the retirement date is a function of savings. To the contary, under the state pay-as-you-go system retirement date is uniformly legislated.

22
an uniform ceiling of maximal pensions, (2) consumption tax (Feldstein, 1994), (3) external or public government debt (Hombug, 1990), (4) state assets (International Institutions), and (5) inheritance (wealth) taxation or taxation of bequests (Gruner, 1995). There are however a few practical limitations which has to be taken into account. Further increases of indirect taxation (i.e. introduction of environmental taxes and/or increased sales taxes) would indeed improve the efficiency of the tax system and increase public income generating capacity<sup>15</sup> , but might be detrimental to the intergenerational equity (i.e. equality in current income). Inheritance taxation doesn't seem to be a practically viable solution, as the share of wealth taxes in government revenues in most of developed countries account for less than 3% of GDP. Similarly, lump-sum contributions can not be practically implemented. We therefore propose that **CECs finance the pension reform by a combination** **_of:_ (i) external or public government debt (ii) state assets canalised from privatisation programmes, and given the results of our analysis, (iii) efficiency gains**<sup>**16**</sup> **from lowering and restructuring of public spending,** and possibly, by further increases in sales taxes and introduction of environmental taxes.

# **6. Conclusions**

In summary, the main findings of comparative analysis of patterns of government expenditure and taxation in CECs vs. OECD countries are as follows. First of all we found a strong << European Effect )), which indicate that CEC are not so much different from OECD countries for social security contributions and outlays. Consequently, experiences and policy solutions

> 15 Measured as a share of revenues in GDP.

16 Expenditure management is most likely growth-enhancing and increases the amount of fiscal revenue given the share of taxes in GDP.

23
from the OECD do matter for the CEC. Second, regression analysis demonstrate that the problems with social security spending is largely due to loose eligibility criteria for early retirement, i.e. to a large number of early retirees. Third, non-parametric efficiency analysis reveals (< cost-inefficiency >> of transition governments. It seems that CEC the could enhance their efficiency by lowering and restructuring their government expenditure. The reform of future pension rights would contribute to this end. Fourth, it is recommended to introduce a countryspecific multipillar pension system . The transition from current pay-as-you-go to capitalisation system need to be financed by a combination of: (a) government debt, (b) state assets derived from privatisation, (c ) efficiency gains from expenditure management.

24
# 7. **Appendix**

## **L. Regression Estimates**

a) A NOTE ON THE REGRESSION TABLES 2,3,4.

_The tables always contain the following irdormation._ Equations are in rows. Independent variables (regressors) are on top of each column.

R<sup>2</sup> is the determination coefficient.

T-statistics are in parenthesis.

Significance levels are indicated as follows ** < 1%, * _< 5%,_ +< 10%.

Symbols for variables with description are given in the table "List of Variables and Country Samples and Dummy Variables", below.

**_Single regressions_** were estimated for an alphabetically ordered sample of OECD and Transition countries. Missing observations and residuals are explicitly named for transition countries only.

(Abbreviations: Cz.R. for Czech Republic, Hu. for Hungary, Po. for Poland, Slo. for Slovenia) Residuals are given for transition countries when they exceed the one-standard-deviation band.

_b)_ **_Seemingly Unrelated Regressions_** were estimated for an alphabetically ordered sample of OECD, Transition countries, Latin American and East Asian Countries.

25
# **II. Non-Parametric Efficiency Analysis**

# **Table. Efficiency Analysis**

|Inefficient|EXPGDP|<br>Degree|Comparator|EXPPP|Degree|EXPS|Degree|
|---|---|---|---|---|---|---|---|
|BELGIUM|55.2|95.8|NORWAY|10024|95.2||||
|Hungary|54.5|64.2<br>70.3<br>72.8<br>81.5<br>83.9<br>89.0<br>97.1|Switzerland<br>Spain<br>United Kingdom<br>Germany<br>Austria<br>France<br>Norway|-<br>-|-<br>---<br>-|-||<br>|<br>|<br>-|
|ITALY|51.3|89.1|AUSTRIA|9095|92.2|10496|97.4|
|Poland|50.7|50.1<br>69.0<br>71.8<br>72.2<br>73.2<br>75.5<br>(77.5<br>78.3<br>82.6<br>87.6<br>90.1<br>(92.9<br>94.5<br>95.7<br>(97.4|Japan<br>Switzerland<br>USA----<br>Australia<br>New Zealanid----<br>Spain<br>Portugal)<br>United Kingdom<br>Ireland<br>Germany<br>Austria<br>Greece)<br>Canada<br>France<br>Slovenia)|-<br>-<br>-|-<br>---<br>-|-|-<br>|<br>|<br>|<br>|<br>|<br>|<br>l<br>|<br>||
|SLOVENIA|49.4|51.4<br>70.9<br>74.9<br>75.1<br>80.4<br>84.8<br>89.9<br>92.5<br>97.0<br>98.2|JAPAN<br>Switzerland<br>Australia<br>New-Zealand<br>United Kingdom<br>IRELAND<br>Gertnany<br>Austria<br>Canada<br>France|5335<br>-<br>-<br>-<br>-<br>-|96.0<br>-<br>-<br>94.8<br>---||l<br>l<br>l<br>_|
|Czech Republic|48.5|72.2<br>75.1<br>79.0<br>81.9<br>91.5<br>94.2<br>100.0|Switzerland<br>USA<br>Spain<br>United Kingdom<br>Germany<br>Austria<br>France|-<br>----<br>-<br>-<br>-<br>-<br>-||||
|Greece|47.1|74.3<br>97.0|Switzerland<br>Austria|-||||
|**Portugal**|**39.3**|87 1|Switzerland|-|-|||

26
Note: EXPPP = EXP$/$PPP where EXP$ = (EXPGDP*GDP$WB)/100. and $PPP = GDP$WB/GDPPPWB where: EXPPP ..... government expenditure per capita in 1992 purchasing power dollars, EXP$ ..... government expenditure per capita in 1992 US$, $PPP .the dollar price of one unit of PPP, PPP .purchasing power parity of I US$.

Source: Fakin and de Crombrugghe (1996), pp.30-3 1.

27
# **III. List of Variables and Country Samples with Dummy Variables**

# **Table. List of Variables with Symbols**

|SYMBOL|VARIABLE|
|---|---|
|ADR|actual dependency ratio<br>(RETIREES/EMPLOYED)|
|DDO|old age demographic dependency ratio (i.e. working age population (I 5-64)/old people<br>(65 and 65+))|
|DIRECT|direct taxes in % of GDP (direct taxes = corporate taxes + individual taxes)|
|DIRTAX|direct taxes in % of taxes, fees and contributions (DIRECT/TAXES* 100)|
|DUMMY 1|transition dummy|
|DUMMY 2|Latin-American dummy|
|DUMMY 3|European union & Norway dummy|
|EDUGDP|public expenditure on education in % of GDP|
|EMPLOYED|employees in thousands|
|EXPGDP|total public expenditure in % of GDP|
|EXP$|the 1992 US$ total government expenditure per capita (EXPGDP*GDP$WB/100)|
|EXPPP|the 1992 purchasing power parity dollar total government expenditure per capita<br>(EXP$/$PPP)|
|GDPPPWB|GDP per capita in the 1992 purchasing power parity dollars|
|GDP$WB|GDP per capita in current international $|
|GDPHS|Heston-Summers gross domestic product in purchasing power parities per capita|
|GINVEXP|government investmnent in % of total public spending (GINVGDP/EXPGDP * 100)|
|GINVGDP|government investment in % of GDP|
|GLABOUR<br>|government employment in % of total employment employees in public administration and<br>defence, education services, medical and health services, and other in % of total<br>employment<br>|
|LHE|LTHEXP<br>health expenditure in % of total public spending|
|HEALTHGDP|health expenditure in % of GDP<br>(HEALTHEXP*EXPGDP/1 00)|
|INDIRECT|indirect taxes in % of GDP (indirect taxes = domestic taxes on goods and services +<br>international trade taxes +'other')|
|INEQUAL|inequality (percentage share of income or consumption in the highest 10% of income<br>distribution)|
|INFANTM|infant mortality per 1000 of live births|

28
# continued

|SYMBOL|VARIABLE|
|---|---|
|INFL|inflation rate (average ) in %|
|1NTAX|indirect taxes in % of taxes, fees and contributions (INDIRECT/TAXES* 100)|
|LIFE|life expectancy at birth in years|
|LIQUID|liquidity (quasi money for 1992 divided by GDP in current prices for 1992)|
|PATENTS|total patent applications per 100.000 of population|
|POPULATION|total population in thousands|
|REVGDP|total public revenues in % of GDP|
|RFTIREES|POPULATION-labour force (employed+unemployed) - young (age group of 0-14)|
|SOCEXP|social transfers in % of total public expenditure (SOCGDP/EXPGDP* 100)|
|SOCGDP|social transfers in % of GDP|
|SOCIAL|social security contributions in % of GDP|
|SOCTAX|social security contributions in % of taxes, fees and contributions<br>(SOCIAL/TAXES* 100)|
|SOCWAGE|replacement rate or pension-wage rate (SOCGDP/WAGEGDP* 100)|
|SUBSIDY|share of subsidies in % of GDP|
|TAXES|Taxes, fees and contributions in % of GDP (TAXES =indirect taxes + direct taxes +<br>social security contributions + compulsory fees, fines and penalties)|
|TAXGDP|total tax receipts & social security contributions in % of GDP|
|TELEPHONES|telephone mainlines per 1000 of inhabitants|
|TERTIARY|university education rate (proportion of age-group concerned per thousand of age-group<br>entering tertiary education)|
|TRANSFER|subsidies and current transfers in % of total expenditure and lending minus repayments|
|TTAX|turnover tax (taxes on goods and services) & tariffs in % of TAXES|
|TTAXGDP|turnover tax (& tariffs) in % of GDP (TTAX * TAXGDP /100)|
|TTAXREV|turnover tax (& tariffs) in % of total public revenues<br>(TTAXGDP/REVGDP * 100)|
|UNEMPLOY|unemployment rate|
|WAGESEXP|share of wages in government expenditure|
|$PPP|the dollar price of one unit of purchasing power parities (GDP$WB/GDPPPWB)|

29
# Table. Country Samples and Dummy Variable

|COlUNTRY<br>NAME|Sarnple|DUMMY|DUMMY<br>12|DUMMVy|COUNTRY<br>NAME<br>(cont.)|Samrnple<br>(cont)|DUMMY<br>I2|DUMMY|DUMMY<br>3|
|---|---|---|---|---|---|---|---|---|---|
|Argentina|||]||Japan|||||
|Australia|*||||Rep.Korea|||||
|Austria||||I|Malaysia|||||
|Belgium|*|||1|Mexico|||||
|Brazil|||1||Netherlands|*||||
|Canada|||||New<br>Zealand|*||||
|Chile|||]||Norway||||1|
|Columbia|||I||Pakistan|||||
|Costa Rica|||||Philippines|||||
|Czech Rep.||1|||Poland|*||||
|Denmark||||I|Portugal|||||
|Finland||||I|Singapore|||||
|France|*|||1|Spain|*||||
|Gennany|*|||I|Slovenia|*||||
|Greece|*||||Sweden|||||
|Hong Kong|||||Switzerland|||||
|Hungary|*|1|||Thailand<br>|_||||
|India|||||Turkey|||||
|Indonesia|||||U.K.|*||||
|Ireland||||I1|U.S.A.|*||||
|Italy|*||||Venezuela|||I||
||TOTAL|||______|______|42|26|4|7|15|

Legend:

* a country belongs to the small sample (used for single-regression estimates) with OECD countries and Transition economies All countries belong to the large sample (used for seemingly unrelated regressions).

Legend for Regional Dummies: DUMMY I Transition or Central European countries DUMMY 2 Latin American countries DUMMY 3 the European Union Countries & Norway Note: The table indicates when a country dummy takes value 1, for all other countries the dummy has zero values.

30
# **8. References**

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Barbone, L. and Marchetti, D. Jr. (1995). 'Transition and the Fiscal Crisis in Central Europe', _Economics of Transition._ Barbone, L. and Polackova, H. (1996). "Public Financees and Economic Transition". MOCT-MOST, nO. 6, PP 35-61.

Barro, R.J. (1990). 'Government Spending in a Simple Model of Endogenous Growth', _Journal of Political Economy._ Barro, R.J. (1991). 'Economic Growth in a Cross-Section of Countries', _Quarterly Journal of Economics._ Barro, R.J. and Sala-i-Martin, X. (1995). _Economic Growth,_ Mac-Graw-Hill, New York.

Breyer, F. and Stroub, M. (1993). 'Welfare Effects of Unfounded Pension Systems when Labour Supply is Endogenous', _Journal of Public Economics._ Burgess, R.S. and Stem, N. H. (1 993). 'Taxation and Development', _Journal of Economic Literature._ Cashin, P. (1994). 'Government Spending, Taxes and Economic Growth', IMF Working Paper, WP/94/92, August 1994.

CEPR (1995). _Unemployment: Choices for Europe: Monitoring European Integration,_ CEPR, London.

Comia, G., Jolly, R., Stewart, F., eds. (1987). _Adjustment wiith a Human Face,_ Clarendon Press, Oxford.

de Long, B. and Summers, L.H. (1991). 'Equipment Investment and Economic Growth', _Quarterly Journal of Economics._ de Crombrugghe, A. (1994). 'The Polish Government Budget: Stabilisation and Sustainability' in K. Mizsei (ed.) _Developing Public Finance in Emerging Market Economies,_ Institute of East-West Studies, New-York.

de Crombrugghe, A. and Lipton, D. (1994).'The Government Budget and the Economic Transformation of Poland', in O.J. Blanchard, O.J. Froot and J.D. Sachs (Eds.), _The Tr,ansition in Eastern Europe: Volune 11: Restructuring,_ NBER & University of Chicago Press, Chicago.

Dabrowski, M. (1995). 'Fiscal Crisis in Transformation Period: Trends, Stylised Facts and Some Conceptual Problems', Center For Social and Economic Research, Warszaw.

Fakin, B and de Crombrugghe, A. (1996). 'Patterns of Government Expenditure and Taxation in Transition vs. OECD Economies', Facultes Universitaires Notre-Dame de ia Paix, No.162, Namur.

Feldstein, M. (1974). 'Social Security, Induced Retirement and Aggregate Capital Accumulation', _Journal of Political Economy._ Gruner, H.P. (1995). 'Redistributive Policy, Inequality and Growth', _Journal of Economics._ 31
Heller, P.S. and Diamond, J. (1990). 'International Comparisons of Government Expenditure Revisited: The Developing Countries, 1975-1986', IMF Occasional Paper.

Hombug, S. (1990). 'The Efficiency of Unfounded Pension Schemes', _Journal of Institutional and Theoretical Economics._ Musgrave, R.A. and Musgrave, P.B. (1984). _Public Finance in Theory and Practice_ (4th Edition), McGraw-Hill, NewYork.

Newbery, D. (1993). 'Tax and Expenditure Policy in Hungary', _Economics of Transition._ Newbery, D. ed. (1995). _Tax and Benefit Reform in Central and Eastern Europe,_ Center for Economic Policy Research, London.

Pleskovic, P. and Sivitanides, P. (1993). 'Priorities for Poor: A Conceptual Framework for Policy Analysis', _Journal of Development Areas._ Rodrik, D. (1995). 'Getting Interventions right: How Korea and Taiwan Grew Rich', _Economic Policy._ Sachs, J. (1995). 'Post-Communist Parties and the Politics of Entitlements', _Transition_ (World Bank).

Sachs, J. and Warner, A. (1996). 'Achieving Rapid Growth in Transition Economies of Central Europe', Harvard Institute for International Development, Development Discussion Paper, No.544, July 1996.

_Transition Report,_ EBRD, London, 1994.

Tulkens, H. (1993). 'On FDH Efficiency Analysis: Some Methodological Issues and Applications to Retail Banking, Courts and Urban Transit', _The Journal of Productivity Analysis._ Vanden Eeckaut, P., Tulkens, H. and Jamnar M.-A. (1993). 'Cost-Efficiency in Belgian Municipalities' in H.O. Fried, C.A. Knox-Lovell and S.S. Schmidt (eds.), _The Measurement of Productive Efficiency: Techniques and Applications,_ Oxford University Press, Oxford.

Zellner, A. (1962). 'An Efficient Method of Estimnating Seemingly Unrelated Regressions and Tests for Aggregation Bias', _Journal of the American Statistical Association._ _World Development Report: From Plan to Market,_ World Bank, Washington, 1996.

32
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