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The article deals with the phenomenon of the soft budget constraint (SBC). Though originally it was formulated to illuminate economic behavior in socialist economies, this concept is increasingly acknowledged to be pertinent well beyond their realm. The authors have two main objectives: conceptual clarification and survey of formal theoretical literature on SBC. In the first part of the article the accent is made on analyzing the essence of the SBC syndrome, means of its softening and corresponding expectations of organizations. Formal models of SBC in socialist and transition economies are also analyzed.

TheCase o f Poland THE POLITICAL and intellectual leaders of Eastern Europe's revolution of 1989 describe their aim as a "return to Europe." Their overwhelming judgment is that the postwar division of Europe into East and West was artificially imposed by the Soviet Union, at enormous human and economic cost. They underscore the artificiality of the division by referring to their region as East Central Europe (or Middle Europe), rather than Eastern Europe, thereby stressing their countries' place in the mainstream of European history, politics, arts, and economy. The policy dimension of the return to Europe is the creation of political and economic institutions in the style of Western Europe. I In this spirit, these countries are directed toward the creation of multiparty parliamentary democracies and market economies with large private sectors.2 1. The degree of consensus in Eastern Europe in favor of establishing a Western-style market economy certainly exceeds the levels of consensus found in Latin America and other parts of the developing world. In many Latin American countries, such as Argentina, Brazil, and Peru, there are still fundamental battles (even violent war in the case of Peru) about the kind of society and economy to which the nation should aspire. Of course, as the abstract idea of a market economy is put into practice and the pressures of adjustment grow, we will find out whether today's consensus survives. We believe that it will, largely because of the overwhelming attraction of the Western European example.2. Of course, even Western Europe offers a wide array of alternative economic models from which to choose, but in practical terms there is little reason yet for the Eastern European countries to choose among the variants of Western European political economy. Before such choices have to be made, Eastern Europe should work hard to create the common core of market institutions found in all of Western Europe: private ownership protected by a commercial law, a corporate structure for industry, an independent financial system, and so forth. 76 Brookings Papers on Economic Activity, 1:1990With amazing rapidity, the postcommunist politicians of Poland, Czechoslovakia, and Hungary have dropped any support for an economic "third way"-that is, some form of market socialism-and seem intent on moving instead to a full-fledged market economy based on private property.3 So far in 1990, political majorities in East Germany and Hungary have strongly rejected political currents linked to a continuation of socialism.4The intense desire to rejoin the economies of Western Europe reflects both an attraction to the obvious achievements of Western Europe and a revulsion against the failures under communism. The low per capita incomes in Eastern Europe do not fully explain the pervasive sense of frustration in the region. It is one thing to be poor, but it is quite another to have become impoverished needlessly as a result of the failure of the communist system. It is the sense of unnecessary decay, as much as the ...

SUMMARY The ‘softening’ of the budget constraint appears when the strict relationship between the expenditure and the earnings of an economic unit (firm, household, etc.) has been relaxed, because excess expenditure will be paid by some other institution, typically be the paternalistic State. The higher the subjective probability that excess expenditure will be covered by external assistance, the softer the budget constraint. The main focus of the paper is on the firm. There are several ways of ‘softening’ the budget constraint: subsidies, tax‐exemptions, soft credits and so on. The softness weakens price responsiveness, leads to losses in efficiency and under certain conditions may generate excess demand. The paper examines the ‘soft budget constraint’ syndrome in Hungary, Yugoslavia, and China, i.e. in the economies pioneering in the introduction of market‐oriented decentralization reforms. Socialist economies exhibit a rather extreme degree of this phenomenon, which to a lesser degree can be observed in mixed economies as well. ZUSAMMENFASSUNG Die “Aufweichung” der Budgetrestriktionen zeigt sich, wenn der enge Zusammen‐hang zwischen den Ausgaben und Einnahmen einer Wirtschaftseinheit (Firma, Haus‐halt usw.) sich auflockert, weil die Mehrausgabe von einer anderen Institution, im typischen Falle vom paternalistischen Staat gedeckt wird. Je höher die subjektive Wahrscheinlichkeit ist, dass die Mehrausgabe durch eine aussenstehende Hilfsquelle gedeckt wird, um so weicher ist die Budgetrestriktion. Im Mittelpunkt dieser Abhand‐lung steht das Unternehmen. Es gibt mehrere Möglichkeiten zur “Aufweichung” der Budgetrestriktion: Subventionen, Steuerfreiheit, weiche Kredite usw. Die Weiche schwächt die Preissensibilität, führt zu Verlusten in der Wirksamkeit, und unter gewissen Umständen kann eine Mehrnachfrage herbeigeführt werden. Die Abhand‐lung untersucht das Phanomen der “weichen Budgetrestriktion” in Ungarn, Jugosla‐wien und China, das heisst in den Wirtschaften, die in der Einführung von marktorien‐tierten Dezentralisationsreformen bahnbrechend sind. Die sozialistischen Wirtschaften weisen einen ziemlich hohen Grad dieses Phänomens auf, das in geringerem Masse auch in gemischten Wirtschaften zu beobachten ist. RÉSUMÉ L'adoucissement” de la contrainte budgétaire apparaît lors du relâchement de la stricte relation entre les dépenses et les recettes d'une unitééconomique (entreprise, ménage…). Cela survient quand l'excés de dépenses est pris en charge par une autre institution, l'exemple type en étant l'Etat‐Providence. II existe plusieurs façons “d'adoucir” la contrainte budgétaire: les subventions, les abattements fiscaux, les crédits bonifiés, etc. Cet adoucissement affaiblit la capacityé de réponse par les prix, il conduit à des pertes d'efficacité, et, dans certaines conditions, peut engendrer un excès de demande. On peut contempler le stade ultime de ce phénomène dans les économies socialistes, mais les économies mixtes en présentent certains symptômes. L'auteur examine le syndrôme de “l'adoucissement” de la co...