The role of the state in transitional economies: Selected microeconomic issues

An examination of the role of the state (government) in the economy is a ve ry frequent issue at numbers of public economics and public finance discuss ions. However, no common agreement on economic functions of the state in th e developed market economy has yet been achieved. There exist several, from some points of view contrary, approaches - we could mention the classical theory, based on ideas of Adam Smith, and the activist approach, characteri sed by the theories of John Maynard Keynes, among many others. Because of t his, and because of the extremely specific environment of transitional proc esses in countries of Central and Eastern Europe, the examination of the ro le of the state in transition is a necessary, if very complicated, issue. The role of the state in transitional economies is in some principles simil ar, but in others quite different, from what standard theory describes in t he case of developed market (mixed) economics. The transitional state has t wo very important functions in the process of socio-economic transformation - to be manager of the transformation process and to transform itself into a modern 21. century state. From these, management of transition from a ce ntrally planned to mixed economy is something new, never described in theor y and never realised in practice. The second, reform of systems of public a dministration, is the,,theme of the day" in each developed economy, but wit h limited concrete improvements and no patterns that may simply be transfer red to the conditions of the transitional state. Because of this, realisati on of the functions of the state during transition is very complicated proc ess with uncertain results. The specific environment of transitional countr ies, where all most important players of the "transition game" do not "play " as expected (compared to western patterns and models), may cause a number of different and unexpected solutions and results. What are the basic specific features of the transitional economy? To descri be them, we may analyse the behaviour of the main "players" - the bureaucra cy, politicians, entrepreneurs and citizens. Behaving economically rationally (at least from a short-term perspective) p roducers try to maintain their monopolistic position, as the best way to ma ximise profits. Politicians and the bureaucracy very frequently use their m onopolistic powers (as described by standard theory) to increase the level of centralisation in the economy and society, to gain more tangible and int angible benefits from executing their powers. Citizens do not perform their roles (as expected from western conditions) connected with market competit ion (as consumers) and political competition (as voters). In average, produ cers, politicians and bureaucrats behave rationally fi om an economic point of view, and benefit from tho existing situation. Citizens are worse-off, because unable to protect their rights in business and political markets fo r several reasons - we could mention tradition, cultural background, lack o f information and risk - avoiding behaviour. Very much could be done to increase the role of citizens in transition proc esses, one of the mast (if not the most important) precondition of successf ul transformation. From the economic point of view more information about p ossible benefits of individual actions could be given to each citizen, in o rder to include a full scale of costs and benefits that may occur as a resu lt of individual activities, into his economic and political behaviour. In the last part of this article, some general issues on the role of the st ate and its relations to private markets in the transitional economy are ex pressed. As mentioned, the state is responsible form management of transfor mation processes. According to standard economic theory, the main basic req uirements for the transformation are price reform and free market pricing, labour market change, imposition of hard budget constraints, stabilisation and decentralisation of economic decision-making. Besides these general management functions, according to our point of view, the most important function of the state in transition is tp guarantee ind ividual ownership rights - to create a functional legal base for market com petition. The role of the state in redistribution (social policy) processes should co ntinuously change. Redistribution activities should become an instrument of selective social (redistribution) policies, to stop (limit) subsidisation of the richer social strata through public expenditures programmes. The state should undertake a limited scale of activities in order to correc t the allocative failure of market forces. However, because of its non-expe rienced and unstable structures, its allocative activities may very frequen tly be ineffective. This is to be taken into the account whenever any decis ions on allocative action is prepared. To limit the possibility of large "g overnment failures" connected with realisation of allocative programs, allo cative activities of the state should be based on pluralistic ownership, pl uralistic financing of public services and decentralisation of state and it s management.