Hardened Budget Constraints in Romania: An Approach by CGE Modeling

Rodica Sandu-Loisel

Post-Communist Economies, 2007, vol. 19, issue 1, 93-115

Abstract: This study estimates the effects of hardened budget constraints on the Romanian economy and tests a market price-based policy by removing state subsidies. As most subsidies are granted to and through the energy sector, the analysis focuses on energy issues. A general equilibrium approach is used for the empirical application. The results fit the theory and show that removing subsidies contributes to eliminating distortions: energy intensity declines, the Gini coefficient drops and general welfare improves. The main effects of applying a cost recovery policy are the improvement of agents' self-financing capacity and of their investment structure. Surprisingly, production cost falls in all sectors, since cross-subsidies are removed.

Date: 2007
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DOI: 10.1080/14631370601163269

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