Old debts and new beginnings : a policy choice in transitional socialist economies

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Abstract
The authors examine the decisions policy-makers in transitional socialist economies must make: how to define the asset liability structure of state owned enterprises and banks as they are privatized. They conclude that the many loans issued by state-owned enterprises under socialism are impeding the transition tothriving market economies. The heavy stock of debts is slowing the privatization of enterprises and banks, hindering the efficient operation of firms and the financial sector, encouraging ad hoc government intervention, and reducing government credibility. The authors argue that governments should often assume enterprise debts to banks on a case-by-case basis so they can sell enterprises to the private sector. Application of this policy would improve efficiency by depoliticizing and speeding up the privatization process, improving the viability and profitability of newly privatized enterprises, increase government credibility, and improving the efficiency of the financial sector. They also explain that privatizing banks will tend to make financial intermediation more efficient and speed up the economic transition, governments should seriously consider assuming enterprise debts to state-owned banks as they privatize enterprises because of the ensuing great gains in efficiency and the relatively low fiscal costs.
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