Inter-Enterprise Arrears in a Post-Command Economy - Thoughts from a Romanian Perspective


WP/94/54-EA
Inter-Enterprise Arrears in a Post-Command Economy:
Thoughts from a Romanian Perspective by Daniel Daianu

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.