Interenterprise Arrears in Post-Communist Economies

Interenterprise Arrears in Post-Communist Economies by Jacek Rostowski

Inter-enterprise debt (IED) is an serious problem for policy makers in
many post-communist economies (PCEs) attempting big bang liberalization
and stabilization programs. In the former Soviet Union, and Romania it has
reached unprecedented proportions. Between January 1 and April 30, 1992,
IED in Russia grew to the equivalent of total GNP generated during the same
period, and in Romania at the end of 1991, IED amounted to about 50 percent
of GNP. In contrast, the ratio of IED to GNP in Czechoslovaka and Poland
was much smaller, and seemed to have increased at a far slower rate--or not
at all--upon initiation of big bang transition programs.

In the former Soviet Union and Romania, the main reason for the
explosion of IED seems to have been the lack of credibility of their
stabilization programs. State-owned enterprises that do not believe in the
durability of the reduction in the rate of growth of nominal credit that
occurs during a stabilization program behave rationally if they extend trade
credit to their customers. Furthermore, in order to protect themselves from
the inflation that can be expected to accompany the loose monetary policy
that will occur when the program collapses, they set prices sufficiently
high to protect the real value of the payment, adding even more to inflation
in the short term.

The best policy is to do nothing to solve the IED problem: moral
hazard is almost sure to result from all multilateral clearing of IED,
particularly because, if stabilization is indeed not credible and if there
is a limit to the possible expansion of IED, a constant money supply
requires repeated rounds of multilateral clearing just to prevent output
from collapsing once IED has reached its maximum. The solution to this
dilemma is to securitize the IED, so that its nominal value can be reduced
to a level consistent with a constant money supply. This means allowing the
market to effectively re-price past sales of goods at new, lower, prices.
It also makes the reduction of prices on new sales of goods easier. Since
total nominal transactions need to fall so that they are in line with the
lower-than-expected level of nominal liquidity (resulting from the
government's unexpected persistence with stabilization), greater downward
price flexibility reduces the share of the adjustment that takes the form of
a fall in output. As a result, securitization also helps to make the
stabilization program more credible.