HARDENING OF THE BUDGET CONSTRAINT UNDER THE POSTSOCIALIST SYSTEM

The article examines how postsocialist society, which has been accusto med to a soft budget constraint, can learn the financial discipline ch aracteristic of a market economy. Before there can be financial discip line, a new kind of long-term ''insurance contract'' typical of a mark et economy must emerge between the state and the firms. The prerequisi te for this is the commitment and credibility of the state, which can only play its part of an ''insurer'' on exceptional occasions and unde r clearly defined conditions. The new private firms must be imbued wit h the demand for financial discipline from the moment they are founded : an alteration in the behavior of state-owned enterprises is also pos sible, but not certain. Hungary has moved in the direction of the new insurance contract, but practical experience suggests that it will be a long time before observance of financial discipline becomes incorpor ated into enterprise behavior. Both the state and the firms are under a big temptation to revert to their habitual behavior. Mean-while the imposition of financial discipline poses the bitter dilemma of efficie ncy versus security. Should the detrimental consequences of tough fina ncial discipline (economic recession, unemployment) imperil the instit utions of democracy, the author would recommend a more cautious advanc e towards reinforcing financial discipline.