Shortages Under Free Prices: the Case of Ukraine in 1992


WP/94/10-EA

Shortage Under Free Prices: the Case of Ukraine in 1992
by Alexander Sundakov, Rolando Ossowaski, and Timothy Lane

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.