This paper was presented at the conference on “The Macroeconomic Situation in Eastern Europe”, organized by the IMF and the World Bank, which took place in Washington, D.C., on June 4-5, 1992. We wish to thank, without implicating, Gerard Belanger, Mark Gertler, George Kopits, Josef Tosovsky and the European I Department at the Fund for useful comments.
Mr. Coricelli is an Economist at the World Bank.
It should be noted, however, that incomes policies have also been tried in RCPEs, so they cannot be listed as a major innovation of PCPEs.
It should be noted that in CPEs interenterprise credit was forbidden by law.
This is only a very partial account of the inflationary mechanism in RCPEs. As pointed out by Blejer and Szapari (1989) and Kopits (1991), for example, RCPEs appear to have a tendency for developing higher fiscal deficits than under strict central planning due to the greater difficulty of collecting taxes in a more decentralized environment. This point has been further developed by McKinnon (1991).
Under the present assumptions, the real interest rate would also be zero.
Notice that in Table 1 we deflated credit by the wholesale price index, which likely underestimates the increase in input prices (i.e., the relevant price index for estimating B/Pi).
Furthermore, Table 2 assumes that previous liquidity/sales or output ratios reflect normal liquidity needs and, thus, apply to the period after the transformation programs were implemented.
It should be noted that the fall of inventories in Czechoslovakia reported in the text is an estimate of the authors. It has been calculated by assuming that the revaluation of the stock of inventories on January 1, 1991, does not include January inflation.
In Czechoslovakia firms were taxed on such capital gains independently of whether or not inventories were actually spent on production. It is estimated that revenue from this tax amounted to about 3 percent of GDP in Czechoslovakia, and to more than 10 percent of GDP in Poland (see Barbone (1992).
It is still an open question whether the after-reform positive association between bank and interenterprise credit persisted after the first quarter of 1990.
It is worth noting that- -in contrast with the sharp declines In the other four countries–real wages in Hungary increased by about 2 percent during 1990.
For Bulgaria, Czechoslovakia, Poland and Romania wage behavior partly explains the high profitability of enterprises in the face of large increases of non-labor input prices. However, the share of wages in total costs is relatively low in these countries, which are characterized by high energy and material intensity of production processes. Consequently, the liquidity that can be generated by borrowing from the workers is limited.
Credit dependence is measured by the ratio of bank credit for working capital and total costs.
Regressing proportional wage changes against proportional credit increase (first quarter of 1990) for 85 branches of industry in Poland (as described in the following section) we obtain a credit coefficient equal to 0.33, with a t-statistic equal to 1.9.
This would be the proper deflator if input prices were highly correlated with output prices.
A linear version of this equation is reported in Berg and Blanchard (1992). Using the same sample, they show that point estimates predict a negligible (although statistically significant) impact of credit on output. However, the linear restriction is not warranted by the underlying model that is being tested (see Calvo and Coricelli (1992 a and b)).
This would be the proper procedure if input prices across sectors moved up at about the same rate.
The collapse of the CMEA could also be seen as partly reflecting the absence of credit markets across Eastern Europe and the former Soviet republics. Thus, one possible way to help the recovery of CMEA trade (but not necessarily of domestic trade) would be to expand international credit–an outcome that requires the cooperation of all countries concerned, but cannot be achieved by expanding domestic credit.
For the sake of brevity, the following discussion will stay away from structural issues like privatization and cancellation and socialization of enterprise debt, which are discussed in Calvo and Coricelli (1992b) and Calvo and Frenkel (1991 a and b).
See Calvo and Coricelli (1992b) for an application of this argument to Poland in the second semester of 1990
Argentina in the early 1980s is a case in point. In 1976 Argentina’s authorities announced a gradual phasing out of import, subsidies. The program was discontinued in 1981 and tariffs remained high until very recently.