Local governments’ fiscal balance and privatization in transition countries


  •  I thank Anna Bordon, Mariana Colacelli, Luc Eyraud, Davide Furceri, Christoph Klingen, Esther Perez Ruiz, Bahrom Shukurov, two anonymous referees and the editor Sergei Guriev for helpful comments. I am grateful to Kia Penso and Kadia Kebet for excellent editorial work. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board or its management.


Several transition economies have undertaken fiscal decentralization reforms over the past two decades along with liberalization, privatization and stabilization reforms. Theory predicts that decentralization may aggravate fiscal imbalances, unless the right incentives are in place to promote fiscal discipline. This study uses a panel of 20 transition countries over 19 years to address a central question of fact: Did privatization help to promote local governments’ fiscal discipline? The answer is clearly ‘no’ for privatization considered in isolation. However, privatization and subnational fiscal autonomy along with reforms to the banking system – restraining access to soft financing – may prove effective at improving fiscal balances among local governments.