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Three Challenges For Transition Nations

Washington, April 18 (RFE/RL) - Most of the former communist countries of eastern Europe and the former Soviet Union must improve tax collection, reduce government subsidies and establish sound social safety net programs if they are to sustain transitions to free market economies, the International Monetary Fund (IMF) says.

The recommendations are contained in the IMF's latest World Economic Outlook, which is published twice a year. The report, an overview of developments and prospects, was released Wednesday in Washington in advance of the spring meetings of the IMF and World Bank.

In general, the IMF says the nations in transition -- its term for economies that formerly were centrally planned -- continued to make progress on the march to free market economies. The institution also predicts continued rates of growth in the four to five percent range for most of the countries.

The Czech Republic, Poland, Slovakia and Slovenia have come the farthest and are expected to enjoy continued improvements in prosperity, the IMF says. This is because they started their transitions earlier and have practiced fiscal discipline and trade liberalization, the report says.

While other central and eastern European countries and most of the states of the former Soviet Union have also made progress, the IMF classifies them as less advanced in the transition process. And it says the challenges of taxation, subsidies and social programs apply most directly to them.

"The problem of weak tax administration -- compounded in some cases by corruption -- is common to most transition countries," the IMF says. "Poor tax administration can frustrate efforts to generate additional revenue and result in higher collection costs."

The IMF does not suggest raising old taxes or imposing new ones. It says nations in transition should do a better job of collecting the taxes in existence now. One problem cited was the use of barter, payment in kind and debt accumulation to facilitate deals. These kinds of transactions escape taxation, says the IMF.

The report also says that corruption and abuse of authority by poorly paid civil servants is "one of the unfortunate consequences of the sharp decline in real public sector wages since the start of the transition process."

The IMF says government subsidies are also an obstacle to continued economic growth. It says there is a need "to substantially reduce the continued efforts to shield sectors of the economy from the working of market forces."

The usual reason for subsidizing unprofitable sectors of the economy is a desire to keep people employed, the IMF says. However, the report says this really reduces incentives for enterprises to restructure, and is a misallocation of resources. The end result, says the IMF, is not much different from what happened under central planning. Losses continue to accumulate, loans go unrepaid and taxes remain uncollected.

Subsidies undermine financial stabilization and long term growth, the IMF says.

The third challenge is to strengthen social safety nets such as health insurance and unemployment insurance, the IMF says. These steps are necessary to ensure that social programs are fair and accessible to all who need them and that the state is able to meet its obligations now and in the future.