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% 20 Output -Demand ------1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/Fig. 27. Change in Demand and Output, Cleared from Seasonality and Random Fluctuations (Balance= % of growth % of decline) RUSSIAN ECONOMY in trends and outlooks The quarterly monitoring of constraints to the production growth shows that the Rus sian industrial sector sees the mergence of a new structure of constraining factors. While the frequency of quotation of most traditional obstacles continues to decline and some of them have reached record breaking low values, other ones, on the contrary, begin to pose problems to an increasingly greater number of enterprises (Fig. 28). Interestingly, such a seldom referring to some impediments that were not so widespread before, can be ex plained by a certain inertia in assessing their constraining effect. Perhaps, management still finds it hard to get used to the idea that in the upcoming years their enterprise would lack capacities (which have always been in abundance) an qualified staff (that earlier have not left their jobs even being paid poorly and with delays), rather than solvent consumers and accessible credits.

An insufficient domestic effective demand in the 4th quarter 2004 hampers the output at just 38% of enterprises, which forms the best (minimum) value since early 1994. At the time, the respective index was 84%. The most cited constrain in late 2004 was the lack of liquidity (42%), but this particular value also appears nearly minimum for all the surveys (with the absolute 39% minimum registered in January 2004). This impediment is most outspread in machine engineering (in 2004 it was cited by 50% of enterprises on average), followed by the light industry (49%), and the sector for chemicals and petrochemicals (47%). The best sufficiency rate in this regard is demonstrated by metallurgical plants, with just 26% of enterprises tending to believe the lack of liquidity poses a problem to their growth.

% Lack of liquidity Low demand Arrears Lack of raw materials Lack of staff Competition on the part of import 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/Fig. 28. Impediments to Production Growth In late 2004, only 16 of enterprises referred to nonpayments, once the greatest peril to the economy. Last year, the constraining effect of this particular factor slid over 1.times: given that in 2003 nonpayments hampered 26% enterprises performance, in 2004 only 17% ones on average. It is the industry of construction materials that currently experi ences the greatest settlements problems (29%). Its enterprises have managed to reduce the constraining effect of nonpayments just by 5 p.p. over the year. The best results in the Section 3.

The real sector timely effecting of settlements were demonstrated by metallurgical and forestry enter prises, with just 6% of them citing nonpayments. For reference, in 1995 nonpayments were referred to on average by 74 77% of producers across the national industrial sector.

Against the background of the constraining effect generated by such obstacles as the domestic demand, lack of liquidity and nonpayments more and more Russian indus trial enterprises refer to impediments associated with the resource provision of output and competition on the part of imports.

In 2004, 20% of Russian producers on average consider competing imports to be an obstacle, which is the peak (i.e. worst) annual result. In the 3rd quarter, the reference to it climbed up as high as 26%, which forms an absolute record value through the whole pe riod of monitoring. Imports has not practically posed a problem only to forestry producers and those of the construction material industry (Fig. 9) only 8 and 4% of enterprises on average in these particular sectors referred to this impediment in 2004. By contrast, the light, chemical and petrochemical industries form the opposite pole. For instance, 29% of enterprises in the light industry considered import to be an obstacle in 2004, while imme diately after the default (1999) the respective index in the sector accounted for 5%, while the post default maximum (1996) was 26%. So, the default lowered the pressure of im ports on the sectoral output 5 fold, but the pressure consequently grew nearly 6 fold over the 5 post default years. Accordingly, presently the national light industry experiences the greatest constraining effect on the part of imports.

Post default, chemical and petrochemical companies likewise were experiencing a growing pressure of competing imports, albeit the range of fluctuations of the pressure was less intense. The pre default maximum in the sector accounted for 18% and appeared superior to those noted in two sectors (namely, the food processing 30% and light 20% ones). Post default, the import pressure slid to 8%, but bounced back up to 27% by 2003, thus exceeding its pre default level. In 2004, import competition affected perform ance of slightly less number of enterprises (25%).

The default gave Russias machine engineering a double fall in the import pressure.

While in 1998 it had affected 11% of enterprises (notably low level vs. other sectors), in 1999, only 5% of them referred to the import competition. The import pressure on the sec tor began to grow then and in 2004 as many as 22% of enterprises believed imports ham pered their output. So, in the machine engineering sector, the pressure on the part of competing import has also exceeded the pre default maximum level.

RUSSIAN ECONOMY in trends and outlooks Light Chemicals and petrochemicals Machine engineering Food Metallurgy Forestry Construction 0 5 10 15 20 25 30 Pre-default maximum 2004 .

Fig. 29 Frequency of References to Competing Import as an Obstacle to Rise in Output across Industries According to enterprises estimates, the pre default strongest (more precisely, the most widespread) constraining effect of imports was noted in the food processing sector.

In 1997, a. 30% of food processing companies on average believed imports hampered the growth in their output. In 1999, this index dropped 10 times down to 3%, but conse quently began to gradually regain its position and reached 20% in 2004. This is nearly the 7 fold rise, which none of other Russian industries has ever experienced. The pre default maximum has not yet been reached, nonetheless, and the industry still enjoys the Rb. de preciation effect. Yet two other industries fin themselves in an analogous position: those are the forestry sector and the construction material industry that have not yet overshot the pre default level of the import pressure.

Results of the regression analysis with the employment of logistical regression showed that in 20002004 only the reference to the staff and equipment shortages was in fact associated with an actual production decline. Referring to other causes underlying the decline in output that were significantly correlated with the production dynamics had an opposite effect they lowered the probability of the production contraction. Such a situa tion, in our view, may be explained as follows: the equipment shortages and lack of quali fied staff form very unusual challenges to Russias transition economy. Traditionally, it is believed that until recently the domestic industrial sector has had an unlimited supply of these production factors and did not consider that they would ever seriously constrain the rise in output. The economic information sources available to industrial enterprises have not tackled the issue either. In other words, there was no spinning of these obstacles by the media, government agencies or the enterprises themselves. This allows to assume that the enterprises referred to the noted obstacles only when they actually constrain the rise in their output. Plus, the enterprises did not do that from the very beginning, as they first had to break stereotype and realize that staff and equipment could also form constrains to their Section 3.

The real sector output. By contrast, the situation with such impediments as a low demand, import compe tition and lack of liquidity was different. These particular problems were in the air and, thanks to the media and the limited official statistics, the interest in them (sometimes, per haps, not so sound one) is still there. This could not help affecting the enterprises re sponses: they traditionally referred to these obstacles, while objectively their constraining affect had faded.

3.2.3. Impediments to rise in output formed by staff problems While analysts have long kept their watchful eye on the pressure of competing im ports on the national industry, the constraining effect of the lack of qualified staff an com petitive capacities have not yet moved to the forefront of their debate. The ET surveys evi dence, however, that post default, the lack of qualified staff has always constrained production growth more often than the competition with imports, while the shortage of equipment was referred to more often than imports in 19992002 and in 20032004 it was just at 1 p. down vs. the import competition in this regard. As a prompt elimination of these obstacles (like a default liquidates the problem of import pressure on the domestic market) is unlikely an hardly possible technically, the analysis of resource constraints is worse a greater attention.

Lack of raw materials and in% termediate products Lack of staff Lack of equipment Lack of energy 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/Fig. 30. Resource Obstacles to production Growth Even in the early 1990s (Fig. 30), the national industrial sector perceived it was falling short of qualified staff. In 1993, this reason was referred to by 23% enterprise on average.

The need in employment of qualified staff began to decrease in parallel with the decline in effective demand and, accordingly, output and hit the bottom 7% by 1998. However, prior to the default some industries experienced a minimum need for qualified staff to boost their output. Thus, in 1993 maximum 7% of the food industry enterprises reported such a need, while it dropped to 1% by 1998. A relatively stable demand, live cash for produce and wages payable in cash enabled the industry to a maximum extent avoid the hunger for staff in 19931998. Post default, the food processing enterprises also experienced the need in staff to boost their output to a minimum extent. In 2001 and 2004, only 9% of them believed they fell short of staff (Fig. 31).

RUSSIAN ECONOMY in trends and outlooks % Light Food 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/Fig. 31. Frequency of References to Staff Shortages as an Obstacle to Production Growth in Some Sectors, as % The light industry displayed absolutely different dynamics of the need for staff to boost its output. In 1993 the need for staff was reported by 24% of its enterprises, albeit it was not the greatest 1993 value the maximum one (40%) was reported by the construc tion materials industry. The need for staff had been declining, following in the wake of the fall in demand and output, by default. In July 1998, only 5% of enterprises reported the shortage of staff, and during the next 12 months the need for qualified staff had been on the utmost low level. For instance, in January 1999 it fell to 2% and grew back to 16% only in July 1999. The indicator has begun to grow since then (except for 2002) and reached 40% (2003 and 2004). none of other industry branches experienced such a great need in qualified staff in 20032004. As concerns the light industry itself, the highest need for qualified staff is presently noted in the cotton (55%) and sewing (40%) subsectors. This situation is unquestionably explained primarily by a hard situation in the sector and, ac cordingly, poor wages, rather than by an absolute lack of necessary workforce on the labor market.

Yet two another sectors likewise demonstrated in 2004 the maximal over the whole period of monitoring need for staff: those were the construction materials industry and machine engineering 29 and 34%, respectively. Machine engineering has almost always experienced the greatest need for staff in annualized terms to ensure a boost of its output, and it was only in 2003 04 when the light industry outran it. Presently the following ma chine engineering subsectors fall short of staff: shipbuilding (84% of enterprises); power engineering (74%), repair plants (84%). The forestry complex passed through the peak of the need in qualified personnel in 2003, when every third enterprise on average reported the lack of specialists to boost its output. In 2004, the need slid to 31% and it is generated mostly by the timber (44%) and sawing (28%) subsectors.

Section 3.

The real sector 80 Enough % 60 Balance (right axis) 40 More than enough -20 -Insifficient -0 -1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/Fig. 32. Respondents Assessment of an Excessive Number of Employees at an Enterprise and the Balance of Assessments The need in staff to boost output is combined with an excessive employment in the national industrial sector. According to the IET surveys, prior to the default, the proportion of enterprises that had more than sufficient, due to expected changes in demand, number of staff reached 42%, given that the number of employees in the sector had been declining intensively over the 1990s. Post default, with the rise in effective demand and the secured by cash output, there started a decline in the share of enterprises whose employment proved to be excessive to output. By the 3rd quarter 2000 an excessive number of employ ees had been noted at just 11% of national industrial enterprises. This index hits its bottom (9%) in the 4th quarter 2001. In 2004, only 15% of enterprises on average still believed the number of their employees was excessive, with the greatest proportion of such enterprises (18%) noted in the machine engineering industry.

Most enterprises have always had a sufficient number of employees. The default un doubtedly extended the segment of the industrial sector where employment was sufficient due to envisaged changes, but the extension was not intense, as one could have assume.

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