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It may be noted that all the countries that are or might end up in the first three groups discussed above are those that pursued slow or gradual economic reform.

Finally, the threat of excessive state intervention is balanced by another problem, which might be seen as a possible solution. The whole of the New Independent States is seeing a steady decline in state revenues of about 5 percent a year. Average state revenues as a share of GDP plummeted to 29 percent in 1993, and the share is continuing to decline (Citrin and Lahiri, 1995:78). In 1996, most members of the Commonwealth of Independent States collected no more than 20 percent of GDP in tax revenues, and no shift toward higher revenues is noticeable as yet. The states that collected most taxes were Ukraine, with 35 percent of official GDP, and Russia, with 31 percent. As little financing is available, and most governments are determined to keep inflation under control, they have no choice but to cut expenditures to limit the budget deficit. The liberal response to this problem is to cut tax rates while broadening the tax base, abolishing tax exemptions, demanding that all liable for taxation actually pay their taxes, and accepting that public revenues should not be more than 20-25 percent of GDP. This would imply a minimization of subsidies, which would reduce state intervention to a more tolerable level. Social transfers would have to be capped, and pension reform would be required, increasing the role of savings and private pensions. The statist approach is to try to collect taxes by whatever means available, reinforcing the arbitrariness of state powers. Yet the shortfall of tax revenues is so great that it is likely to have a primarily liberal impact.

The leaders of the transition are facing the opposite problem. Their apparent threat is the entitlement trap (Sachs, 1995). The four Visegrad countries have public expenditures of around 50 percent of GDP. In particular, Hungary had public expenditures of as much as 62 percent of GDP in 1992 and 1993 (Banerjee et al., 1995:8). Worldwide, only Sweden and Denmark exceed this level. The dilemma is multiple. High public expenditures mean high taxes, but often a big budget deficit as well, which easily leads to an excessive debt burden, as is the case in Hungary. Large social transfers—23 percent of GDP in Hungary in 1993—weaken the incentives to work. The combined effect is that people work less productively than in a more liberal economy, and no economy with public expenditures as high as those of Hungary has been especially dynamic. By comparison, the economic lions in East Asia spend only a few percent of GDP on social transfers (Sachs, 1995). Countries in the New Independent States, however, are not very likely to fall into the entitlement trap because of their limited state revenues. Hence, the former Soviet republics have the possibility and challenge to opt for a much more liberal model than Central Europe has adopted. Estonia stands out as the country that has done so, but the Kyrgyz Republic, Moldova, Georgia, and Kazakstan seem to have embarked on a similar course.



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