FISCAL CONSTRAINTS AND THE SPEED OF TRANSITION

This paper develops a model of the process of reallocation of resource s from a declining state sector to an expanding private sector. The tr ansition is shown to be costly in that it entails unemployment and a d eterioration of the fiscal balance. The interaction of fiscal constrai nts with the transition process is examined. It is shown that fiscal c onstraints may induce the government to maintain the state sector, slo wing the speed of transition, and could jeopardize the eventual outcom e of the process of restructuring.