Evaluatinge Government Policy in Transition Countries

Abstract

A view of a government’s macroeconomics policy versus what is known as “microeconomic reform” is that the former shifts around the burden of the problem while the latter solves the problem. In economic terms, if there is a distortion in incentives, the first-best solution is to eliminate the distortion. Such macroeconomic problems with microeconomic solutions may be a disincentive to work that raises long-term unemployment because of moral hazards problems arising out of an unemployment insurance system that subsidizes not working. Or it may be incomplete insurance across states of nature because of a “free” national health care system that induces substitution towards low-quality health care. Or it may be incomplete consumption smoothing intergenerationally because of a government pension/social security scheme that inefficiently creates moral hazard by inducing early retirement. Or it may be incomplete smoothing of consumption intertemporally because of a lack of integration into international capital markets, because of unenforceable property rights, high and varying inflation rates, or high and accelerating government debt.