Eastern and Central Europe
Rapid decentralization, early over-extensions, and a slow econo- my lead to tighter controls and reduced borrowing.
Hungary’s experience illustrates how myriad institutional and
macroeconomic issues can converge to confound early efforts to
make local governments more accountable and self-supporting.
After a decade of adjustment, prospects for subnational borrow-
ing in private capital markets are improving, but for most local
governments the capacity to raise capital remains uncertain.
In the euphoria of the early transition from a command to a
market economy, Hungary created a highly decentralized and
fragmented government structure. Decentralization appeared to
give local governments significant potential to raise own-
source revenues. However, a high-tax central government and
a slow-growth environment left them with little will to raise lo-
cal taxes and dependent on central transfers. After an early
burst of activity, municipal infrastructure spending declined
through the 1990s.