The Budget Constraint in Transition Economies

Abstract

In the 1970s, Janusz Kornai, a Hungarian economist, outlined for the first time the concept of “soft budget constraints”.¹ He pointed out that their prevalence was one of the key distinctions between centrally-planned, socialist economies and market economies. Subsequently, his concept became widely accepted, was empirically documented and has featured prominently in discussions of transition economics. This chapter sets out to describe the little theory there is, touch on some of the earlier empirical work done on Hungary and Yugoslavia and discuss in a fair amount of detail earlier work which was done on the hardening of the budget constraint in the transition economy this study is most concerned with: Poland.