Cheryl W. Gray

Worldwide experience highlights public finance policies that promote economic growth while meeting the need for fundamental public goods. Macroeconomic stability is essential, as large budget deficits retard growth, followed by moderate levels of public spending - around one-third of GDP or less - especially when governance and public administration are weak; that in turn requires efficiency, particularly in areas such as infrastructure, health, education, and social protection; finally, lower income and payroll tax rates can spur investment and employment. The Eastern European and Central Asia countries pioneered flat income taxes without generally suffering revenue losses as a result, but they have not addressed the problem of high payroll taxes and still face many hurdles in improving the efficiency and effectiveness of public spending and revenue generation.

Controlling corruption is an essential part of good governance and poverty reduction, and it poses an enormous challenge for governments all around the world. Anticorruption in Transition 2 analyzes patterns and trends in corruption in business-government interactions in the transition economies of Central and Eastern Europe and the former Soviet Union. It points to some encouraging signs that the magnitude and negative impact that corruption exerts on businesses may be declining in many countries in the region. It also shows how some types of firms - most notably small private ones - encounter more corruption than others, and it underscores the importance of policy and institutional reforms in achieving long-term success in the fight against corruption. The longer-term sustainability of recent improvements is not certain, however, and the challenges ahead remain formidable.