Decentralization, privatization, and the solvency of local governments in reforming economies: the case of Budapest

In many reforming socialist economies like Hungary, the ownership of previously state-owned assets has been transferred to local governments as part of the decentralization and privatization reforms. The authors discuss these recent reforms in Budapest, and examine their impact on the solvency of local governments there. The analysis suggests that a continuation of the current pricing policies now in place in Budapest will pose serious long-run solvency problems for the new local governments that have been given ownership of the assets, effectively decapitalizing many of them. Even so, the privatization is unlikely to lead to a change in these pricing policies, and it may well lead the local governments to undertake actions that adversely affect the broader stabilization program.