During 1992, the recorded retail price level in Ukraine grew more than twenty fold, strongly suggesting that the Soviet-style repressed inflation had been transformed into an open process. Yet, to an important extent, Ukraine remained a shortage economy. Consumers were unable to obtain goods at posted prices in the still-dominant state stores. Similarly, the output of many enterprises was apparently constrained by lack of inputs rather than by insufficient demand for their products at going prices.
The analysis of price policies during 1992 indicates that, despite a whole range of government interventions, many enterprises--particularly those supplying non-food consumer goods--were substantially free to set market-clearing prices for their output. The evidence on persistent shortages of goods with free prices, therefore, suggests that in 1992, at least some producers may have deliberately chosen to maintain excess demand for their goods.
The paper focuses on the role of continued central allocation of key inputs at below-market prices. If central allocators supply inputs in response to perceived “need”--that is, excess demand--it may be rational for enterprises to set their output prices at less than what the market would bear in order to obtain a greater proportion of inputs centrally. Under plausible circumstances, the reduced costs of inputs through this strategy would outweigh the direct loss of revenue associated with below-market-clearing prices. The main conclusion is that, at least in some sectors of the Ukrainian economy during 1992, continued central allocation of key inputs created incentives for enterprises to perpetuate excess demand despite formal price liberalization.
The analysis in this paper is of direct relevance to those economies in transition that retain central allocation structures. First, an economy in transition that liberalizes prices but continues to allocate some inputs is likely to remain mired in a web of price distortions. While compulsion is removed, strong incentives remain for non-equilibrium pricing. Central allocation mechanisms produce a conduit through which price controls that continue to be applied in some markets spill into liberalized markets. Second, while the retention of central allocation is frequently justified by the authorities as a way of maintaining output of the state sector, it in fact creates incentives for enterprises to reduce production. In order to signal “need” to the authorities, enterprises appear to restrict both quantity and prices.