Working Paper Summaries 94/54: Inter-Enterprise Arrears in a Post-Command Economy: Thoughts from a Romanian Perspective
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Economic systems undergoing transformation have come under tremendous strain because of internal reforms and external shocks. This paper argues that this strain is the main source of inter-enterprise arrears in post-command economies. The strain may be linked with the structure of the economy and the size of resource misallocation.

Inter-enterprise arrears “soften” markets and make reform even more difficult to enforce. At the same time, they can dangerously slow down the speed of restructuring and adjustment by relaxing financial discipline. As temporary quasi-inside money, arrears fuel inflation: they enable firms to raise prices and wages without fear of the immediate consequences. Paradoxically, arrears also have the potential to counter hyperinflation.

In response to the strain of arrears, transforming economies have developed an internal economic logic that entails using the inflation tax and real interest rates as implicit subsidies. The extent of the arrears problem in each of the various post-command economies is linked with the capacity of their enterprises to adjust, which in turn depends on the economy’s structure and the size of the required structural change. The problems of policy credibility in undertaking structural adjustment are emphasized.

Export growth may be a consequence of arrears. Arrears tend to restrain the growth of enterprises, so that they try to escape the real liquidity constraint by pushing exports. Even when exports seem unprofitable, the premium on liquidity can more than compensate for the value differential. Dollarization is mentioned in this regard, and the size of the economy is seen as affecting the relationship between arrears and exports.

An operational framework for containing arrears would include breaking up the structure of enterprises by inducing a strategic alliance among creditors and insulating the major offenders (debtors); imposing a “straitjacket” by modifying rewards and penalties so that agents optimize in congruence with the thrust of transformation; using industrial policy as a “damage-control device” (“picking losers among losers”), to allow the breathing space needed to cope with the high degree of uncertainty and fuzziness about property rights and to mitigate the costs of resource reallocation; and targeting external assistance.

Containing arrears cannot be a one-shot goal of policy, instead it is a process that is concurrent with the evolving environment.

Working Paper Summaries (WP/94/1 - WP/94/76)
Author: International Monetary Fund