Local finance and economic reform in Eastern Europe1

Abstract. Extensive decentralization, both political and fiscal, is taking place in many of the countries newly emerging from behind the socialist veil. Decentralization represents both a reaction from below to the previously tight political control from the center and an attempt from above to further the privatization of the economy and to relieve the strained fiscal situation of the central government. Although there are of course many variations in this process from country to country, some important common elements arise from the similar institutional starting point in all countries and the common transitional problems most of them are facing. The on-going reforms of subnational finance in the transitional economies arc more important than seems generally to be recognized. The design of a well-functioning intergovernmental fiscal system is key to many of the major reform goals of the transition economics—macroeconomic stability, privatization, and the social safety net. The end of the beginning? One of the most important characteristics of the process of decentralization now taking place in the transitional countries of Eastern and Central Europe is how very recent it is. In Poland and Hungary, for instance, the local governments wer