Hardening of the budget constraint under the postsocialist system

The article examines how postsocialist society, which has been accustomed to a soft budget constraint, can learn the financial discipline characteristic of a market economy. Before there can be financial discipline, a new kind of long-term ''insurance contract'' typical of a market economy must emerge between the state and the firms. The prerequisite for this is the commitment and credibility of the state, which can only play its part of an ''insurer'' on exceptional occasions and under clearly defined conditions. The new private firms must be imbued with the demand for financial discipline from the moment they are founded: an alteration in the behavior of state-owned enterprises is also possible, but not certain. Hungary has moved in the direction of the new insurance contract, but practical experience suggests that it will be a long time before observance of financial discipline becomes incorporated into enterprise behavior. Both the state and the firms are under a big temptation to revert to their habitual behavior. Mean-while the imposition of financial discipline poses the bitter dilemma of efficiency versus security. Should the detrimental consequences of tough financial discipline (economic recession, unemployment) imperil the institutions of democracy, the author would recommend a more cautious advance towards reinforcing financial discipline.