Transition Economies Need to Reform Social Safety Nets

The former centrally planned countries undergoing economic transition have experienced a sharp decline in output, income and employment in recent years. This has resulted in severe hardships for many households, particularly the elderly, young children, and the unemployed.

In this adverse climate, tansition countries now face the challenge of securing adequate resources for social protection. But the ability of governments to help identify the poor or administer targeted social protection programmes is undermined by severe financial and administrative constraints.

Unemployment and Underemployment. The collapse of output has drastically reduced labor demand, increasing open unemployment in some countries and underemployment in others. While registered unemployment throughout the region is low, total employment has declined. In Russia, for example, total official employment dropped to about 6.7 million by 1995, from 7.4 million in 1991.

The absence of normal labor market adjustment mechanisms in transitional economies further complicates the employment situation. For example, despite diminishing work opportunities in the formal sector, large numbers of employees choose to stick with their traditional employers in order to hold onto company-provided housing, education, and health benefits; an additional incentive to stay put is the inadequacy of unemployment compensation.

Financial Constraints. Prior to the onset of the reforms the governments of centrally planned economies controlled virtually all prices and wages; guaranteed employment for all, at least in principle; and provided universal public pensions, child allowances, and other benefits for sickness, maternity, and childbirth. But since the early 1990s, outlays for social protection in transition countries have come under increased financial pressure since revenue from payroll taxes – traditional source of funding for such programmes – began to fall.

Besides-, the low statutory retirement ages for men and women have further reduced the number of working-age individuals.

On top of that the authorities have so far been unable to improve the distorted benefits structure. They still provide generous services with loose eligibility requirements, running from housing benefits to subsidized vacations. Paradoxically, welfare benefits are distributed among all instead of being given to the most needy.

Since the above trends have affected both the revenue base of social protection programs and the ability of these countries to target social benefits, international experts believe that to find a solution of the social protection problem the transition economies will have to:

• reform eligibility and benefits standards governing the distribution of social benefits;

• raise statutory retirement ages;

• require individuals to vacate their last job on reaching retirement age;

• establish a more equitable distribution of social adjustment burdens across different population groups;

• broaden the tax base to include presently untaxed elements of labour compensation; increase the efficiency of expenditures in government programmes, including outlays for social protection, and prioritize them.

• work out effective targeting mechanisms for the provision of benefits.

Words you may need:

targeted program целевая программа

to stay put оставаться на месте; (зд.) не менять место работы

onset n начало

child allowance пособие на ребенка

maternity n материнство

payroll taxes налог на заработную плату

statutory adj установленный законом

eligibility и применимость (льгот), попадание (под льготы)

retirement age пенсионный возраст, возраст выхода на пенсию

vacate v освобождать

Ex. 19. Look through the article and find the answer to the following question: What can help improve the lives of people in transition economies?

Decentralizing Fiscal Systems in Transition Economies

Since 1989, extensive political and fiscal decentralization has been under way in almost all countries in Central and Eastern Europe, Russia, and the other countries of the former Soviet Union. The trend toward fiscal decentralization and the transfer of some revenue-raising and expenditure authority from central to lower-level and subnational governments is, in part, a political reaction from below against the long years of extensive central control. Its economic motivation relates, on the one hand, to efforts by the center to ease its own strained finances by reducing transfers and shifting spending responsibilites and, on the other hand, to a widespread recognition that public funds need to be used more efficiently.

Since the transition, "local self-government" legislation has been enacted in virtually every former centrally planned economy in the region, giving subnational governments major responsibilities for expenditures in key areas.

However, the new legislation in these countries has generally not assigned clear responsibility to different levels of government for particular expenditures. Efforts to ease fiscal strains at the center seem to have shifted important spending responsibilities to subnational governments without sufficiently expanding their revenue sources. Recent legislation in Hungary and Poland, for example, has given local governments expenditure responsibilities in education, transportation, the environment, and housing without including specific plans for how they will be financed.

This shift in expenditure responsibilities, however, has created serious budget pressures for subnational governments, risking the crowding out of important expenditures, including those for health care and education.

The transition economies are in the midst of decentralizing their fiscal systems. But it is obvious even at this stage that the fiscal reforms should include increasing subnational governments' own revenue sources, assigning them the necessary tax instruments, and designing transfers and sharing arrangements that can provide them adequate revenues to meet their spending needs. Each level of government must know what its fiscal responsibilities are. Well designed decentralization policies will help improve the lives of those undergoing one of the major upheavals of our time – the move from a command to a market economy.

Words you may need:

decentralize v децентрализировать

to be under way быть в процессе осуществления

from below снизу

ease v облегчать

strained adj напряженный

self-government n самоуправление

assign v передавать

upheaval n переворот