As it was noted above, there may be several factors behind the initial emergence of non-payments. In case both parties tolerate payment arrears their persistence may be explained by this fact. However this “crediting” is of non-voluntary nature, there naturally arises the question why the creditor does not demand that the debtor repay the indebtedness.
A factor behind this phenomenon is the effectiveness of such an economic and legal mechanism as “contractual obligations” (in other words, the development of such an institute of the market economy as the “contractual economy,” or the enforcement of contracts).
It is well known that the Soviet-type economies did not encounter the problem of contractual obligations; there it was substituted by a system of personified responsibility for meeting planned targets in the framework of the command and administrative system (up to the Party-imposed penalties for personal non-compliance with centrally set obligations). Such a “personified” mechanism ensuring the enforcement of the compliance with obligations broke down at the same time as the whole system of management of the hierarchically organized economy based on the Party and Soviet principles collapsed.
While the mechanism described above was dismantled relatively fast, the search for a substituting mechanism suitable to ensure enforcement of compliance with obligations in the new economic environment proved to become a very serious problem. It is not a surprising development, since the construction of a new (not personified, but economic) mechanism for enforcing contractual obligations of economic agents may be carried out only if a number of prerequisites is in place: the legal infrastructure, adequate institutes (including those capable of self-organization at the micro-level), an effective system of law and contract enforcement coupled with the political will, the relevant macroeconomic environment, and a relatively prolonged period for the establishment of new relations.
Exactly the latter factor was responsible for the emergence of a certain “uncertainty period” in the behavior of economic agents after the old mechanisms had been dismantled, what directly affected the problem of payment arrears.
However, even in the situation, where the contractual law does not work, there is a possibility to prevent the emergence of non-payments (for instance, the implementation of such measures as pre-payment for shipped goods, or suspension of shipments after the first instance financial obligations were not properly met). However, in practice enterprises refrain from terminating deliveries.
Several factors may be responsible for the fact that partners continue to supply defaulters with their products. In case shipments are not terminated, either both parties are interested to maintain business relation, or the termination looks impossible.
The mutual interests of counteragents to continue deliveries may be explained, for instance, by their wish to maintain output volumes. This hypothesis agrees with the mutual crediting of enterprises in the situation of contracting bank crediting.
Another factor behind the mutual interest in payment arrears is related to asymmetric information problems. The complexity of monitoring of counteragents’ financial standing in the situation of non-payments, unscrupulous behavior of the management (collusion of counteragents seeking concealed gains) may become the reasons behind the continuing deliveries to defaulters.
There are possible situations, where creditor enterprises can not stop deliveries. An example of such behavior are state-regulated operations of enterprises-monopolies, especially those in the fuel and energy sector.
Economic relations between enterprises consuming energy resources and energy monopolies have their specifics. For instance, the payment is usually effected upon the actual consumption of the resources. Therefore, enterprises operating in the fuel and energy sector often do not have a free hand to set the amounts of supplies, since both technical (indiscriminate power cutoffs) and political (it is prohibited to cut off state-owned objects) factors prevent them from the suspension of supplies. The precedent of power cutoffs has been set only since recently. As a result, monopolists having no levers to influence their debtors may agree to settle with defaulters via various less suitable financial methods and instruments (barter7, offsets, promissory notes).
It shall be noted that similar systems are used not only in the relations between fuel and energy monopolies and their customers, but also by enterprises having well established business relations. Many of them refrain from requiring pre-payment even dealing with financially unreliable partners explaining the fact by their unwillingness to decrease volumes of output.
The liberal attitude taken by the state toward defaulting enterprises seems to be of a special importance. State interference results in the fact that monopolistic enterprises become non-voluntary creditors of ineffective enterprises and the state (state owned enterprises and organizations). The problem is aggravated due to the fact that the state also often defaults on its debts. The inability of the state to meet its target expenditures hinders it to undertake strict measures against “deliberate non-payers.” As a rule, all previous measures aimed to decrease the level of indebtedness have been reduced to offsets of mutual claims, what failed to eliminate real factors behind the emergence of non-payments and only created incentives for non-payers to further accumulate their indebtedness.
The implementation of strict measures against non-payers (such as initiation of bankruptcy procedures) is also prevented by grave social consequences requiring the drastic interference on the part of the government. Mass bankruptcies may result in large scale labor redundancy and growth in unemployment. It seems that these considerations prevented the government from the implementation of such measures. As a result, no working mechanisms ensuring the legal settlement of the problem of non-fulfilled contracts have been set in place.
Therefore, the persistence of payment arrears becomes possible in the situation, where contact enforcement mechanisms are lacking. Rostowski (1993) argued that non-payments would become extinct in a natural way in case the state took a tougher stand on the issue.
СвязиInteraction between Models
Thus, three major sources of payment arrears were outlined above (premeditated non-compliance with obligations, bridging of short term cash gaps, financing of losses). Each of these factors characterizes a qualitatively different level of the problem. Meanwhile, between different factors there exist an interaction which is reflected by the possibility to transit from one model to another.
The asymmetric information and related problems, as well as deliberate non-payments (Model 1) are the omnipresent factors of varying perceptibility. As it was noted above, they may reach critical levels under weak market institutes. However, this model does not take into account that non-payments are a means to bridge short term cash gaps as a substitution of the bank crediting, or that non-payments present a concealed form of subsidies to loss-making firms. In this aspect the problem may be settled (moderated) by developing market institutions, toughening control and monitoring of operations carried out by individual firms and their managers, developing trade unions. Expansion of crediting, development of financial markets and restructuring of enterprises operating at a loss do not affect the source of the problem and do not facilitate its settlement.
The second model describes the situation, where payment arrears emerge as a result of “technical” shortages on the market of short term loans, conditionally defined as non-payments caused by the expansion of commodity crediting. This model assumes that no losses are financed via commodity crediting, while non-payments are “late payments.” In case enterprises are capable to operate without losses in situations, where bank crediting is unavailable, non-payments are only an indirect problem, since they may trigger negative processes via weakened market institutes. At the same time, the spreading of non-payments, even as substitutes for bank crediting may create incentives for premeditated payment arrears and affect production effectiveness. Lowering effectiveness may result in the aggravation of crises and emergence of factors of the third type.
The problem may be described by the second model in case it may be settled by expanding bank crediting (and developing market institutes).
From the author’s point of view, the deepest roots of non-payments are reviewed in the framework of the third model, which is based on the assumption that payment arrears emerge from such sources as loss-making production and non-market character of production at a number of enterprises. In this case the non-market character of production is understood as the disparity between market demand for and supply of goods produced by such enterprises. As it was noted above, in this case non-payments turn into the “channel” of financing of “bad” firms. The state, other firms, and the employees of the enterprise may present the sources of such financing. The problem of payment arrears may be characterized by the third model in case it can not be settled via the expansion of bank crediting.
It shall be noted that the models are not mutually exclusive, but mutually complementary ones. An enterprise may both premeditate (Model 1) and be forced (Models 2 and 3) to resort to non-payments. Moreover, some factors may trigger the emergence of others.
For instance, negative consequences of the existence of premeditated source of non-payments (Model 1) may create incentives for the spreading of payment arrears, what renders more difficult to single out “bad” and “good’ firms and result in contraction of bank crediting (i.e. facilitate the factors included in the second model). Another negative consequence may become the lowering effectiveness of enterprises caused both by non-payments on the part of debtors and ineffective management, what may result in the aggravation of crises.
Therefore, problems related to the opportunistic behavior, contracting bank crediting, lowering general effectiveness of production may aggravate at the background of growth in non-payments caused by the factors contained in some other model. However, it is important to distinguish between different sources and indicators of non-payments.
Table 2 lists major sources of problems, their brief characteristics, and origins.
Table 1. Models (sources) of payment arrears, their characteristics and origins.
Premeditated non-compliance with obligations (opportunistic behavior).
1. Non-payments are a means to achieve concealed goals of economic agents.
2. Firms are capable to operate without losses.
3. Possible demonstrated loss-making results from: a) ineffective management (differing interests of owners and managers); b) concealment of true financial standing for greed of gain.
4. Non-payments may be both “late payments” and “bad debts.”
1. Ineffective economic and legal institutes (contract, labor laws). The state takes a liberal attitude toward non-payers..
2. Inadequate monitoring of the operations carried out by counteragents, management.
3. Ineffective ownership rights.
1. Non-payments arise from the shortage of current capital experienced by producers. The producers are capable to settle with all creditors (excluding borrowings for the financing of capital investment) after the completion of the technological cycle.
2. Non-payments are “late payments” in contradistinction to “bad debts” (“bad debts” shall be reviewed as debts considerably depreciating by the time of repayment).
3. It is not excluded that enterprises may operate at a loss over some period of time; however, it is excluded that this loss is financed at the expense of the creditors (subsidizing of loss-making enterprises at the expense of external sources of financing).
Inapplicability of traditional methods allowing enterprises to bridge short term cash gaps.
High levels of credit rationing.
Tight monetary policy.
1. Non-payments are characterized by loss making production and transfer of the debt burden to creditors.
2. Non-payments are “bad debts” in contradistinction to “late payments.”
3. Enterprises need financial resources for periods exceeding one technological cycle. The borrower can not settle with all creditors even after the completion of the technological cycle.
Non-market production. Enterprises incapable to produce competitive goods continue to function.
Insufficient financing of state procurement.
Losses do not result in substantial decrease in output volumes, since they are “transferred” to creditors.
Changes in economic environment affecting the effectiveness of production.
Lugovoi, Semenov (2000) advanced a variant of structuring of hypotheses about the emergence and persistence of non-payments (and their interaction), which fully agrees with the system of models presented in Table 2. The origins of non-payment may be of both non-voluntary nature (ineffectiveness, constrained bank crediting), and premeditated (for instance, opportunistic behavior). However, non-payments may persist only under ineffectively functioning market institutes.
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