THE EVOLUTION OF FINANCIAL DISCIPLINE 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 market economy must emerge between the state and the firms. The prerequisite for this is the commitment and credibility of the state, which can on ly play its part of an 'insurer' on exceptional occasions and tinder c learly defined conditions. The new private firms must be imbued with t he demand for financial discipline from the moment they are founded; a n alteration in the behavior of state-owned enterprises is also possib le, but not certain. Hungary has moved in the direction of the new ins urance contract, but practical experience suggests that it will be a l ong time before observance of financial discipline becomes incorporate d into enterprise behavior. Both the state and the firms are under a b ig temptation to revert to their habitual behavior. Meanwhile the impo sition of financial discipline poses the bitter dilemma of efficiency versus security. Should the detrimental consequences of tough financia l discipline (economic recession, unemployment) imperil the institutio ns of democracy, the author would recommend a more cautious advance to wards reinforcing financial discipline.