Market-Oriented Reform and Fiscal Policy

Abstract

One of the most prominent economic developments of this decade—a development with perhaps a modest immediate impact on the world economy but with the potential to have a substantial impact in the future—is the spreading and deepening of market-oriented economic reforms in centrally planned economies (CPEs). Initiated in Yugoslavia and Hungary, boldly pursued in China, and now also being experimented within the Soviet Union, Poland, and elsewhere, these reforms carry the potential to dramatically increase the efficiency of these economies and expand their role in the global economy.2Recognizing that the rigidities inherent in central planning have seriously inhibited the efficient allocation and use of resources and have not provided adequate incentives for productivity gains, CPEs have moved to enhance freedom of choice for economic agents in the decision-making process and strengthen the role of market forces through the gradual removal of administrative controls and the fostering of competition. Even when basic structures, such as widespread state ownership of productive factors, have not been radically changed, reforms have aimed at introducing elements that replicate free-market conditions, inducing economic agents to behave and react as they would in a competitive environment. As a result, the role of central planning has diminished and, in the design of economic policy, more emphasis is being given to the use of indirect levers of macroeconomic management to regulate the behavior of increasingly autonomous economic agents.