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As concerns the rate of growth in the money supply, its impact on non-payments was detected only via interest rates. The variable of the real money supply dynamics was introduced in the equation of non-payments and proved to be statistically insignificant. At the same time, the influence of changes in the money supply on interest rates is statistically significant and may be characterized by two periods. The current increase in the rates of growth in the money supply causes interest rates to decrease (the liquidity effect), what may facilitate a decrease in the growth of non-payments. The growth in the money supply facilitates increases in interest rates in the medium term (3 to 6 months), what creates incentives for the growth in non-payments. It shall be noted that according to the results of the model evaluation the effect of the medium-term impact of the money supply on interest rates proves to be more significant than the effect of the short term decrease. Apparently, the non-payment problem can not be settled by expanding money supply.

Indicators of Profitability

The identification of problems described by the third model may be affected by the results of comparison between indicators of profitability of firms and the accumulation of indebtedness.

In case non-payments are used as a means to finance losses, there may be detected a positive relationship between the indicators of the financial results of the economic activities and net non-payments (the difference between overdue payables and overdue receivables at the enterprise level). Losses are a part of the normal economic process, however, it losses are transferred to creditors they may be reviewed as the subsidizing of loss-making enterprises. In this situation the problem can not be settled by expansion of bank crediting. While crediting of loss-making enterprises may decrease inter-enterprise payment arrears, in fact they will be just reregistered as debts to banks. Moreover, in case non-payments are a form of concealed subsidizing of loss-making enterprises, even bank credits granted to profitable enterprises, whose partners include loss-making firms, will facilitate the subsidizing of the latter thus strengthening the system of non-payments at large.

A number of authors analyzed the relationship between the indicators of profitability and non-payments. A.Calvo and Fabrizio Coricelli (1994) conducted an econometric testing of the hypothesis basing on the data from balances of Romania’s enterprises and arrived to the conclusion that non-payments may occur at rationally behaving firms, i.e. non-payments shall not be associated only with firms operating at a loss, what supports the hypothesis about temporary difficulties or late payments. Alfandari and Schaffer (1996) arrived to similar conclusions basing on their analysis of Russian enterprises.

It shall be noted that the methodology applied by the authors of the second paper (and, accordingly the obtained results) are sensitive to the choice of the indicator of the non-profitability of enterprises. The authors used the financial results of enterprise operations. The analyzed period (1992 through 1995) was characterized by high inflation rates. As is well known, inflation is responsible for overstated financial results due to the production lag. The authors pointed out this circumstance, however, they preferred this indicator asserting that in case a firm registers negative financial results under inflation, it experiences really serious problems. This suggestion may be accepted, however, in this case the sample is divided not in loss-making and profitable enterprises, but in the most non-profitable ones and the rest. The latter group will also include enterprises in fact operating at a loss (in real terms), but showing positive financial results due to inflation. This fact affects the authors’ conclusion that only a small share of non-payments is generated by loss-making enterprises and that non-payments are by most part late payments.

This hypothesis was tested basing on regional data in the course of our earlier research (see: Lugovoi, Semenov, 2000) and on time series (see: Entov et al., 1998).

The aggregate amount of losses, profits, and the share of loss-making enterprises in the national economy were used as the indicator of profitability. Although official financial reporting was used without adjustment for inflationary distortion of financial results, the results of econometric tests provide an evidence that there exists a relationship between non-payments and profitability. A clear statistically significant relationship between non-payments and characteristics of production ineffectiveness was detected. For some periods losses explain up to 50 per cent of the dispersion of overdue indebtedness.

The obtained results disagree with the conclusions suggested by A.Calvo and Fabrizio Coricelli (1994), Alfandari and Schaffer (1996). The results may differ due to the fact that the former authors conducted the testing basing on the data on Romanian enterprises, while the latter authors based on the data collected in the early 1990s, and their conclusions agree with our results (for the period from 1993 to 1994), where we detected weak relationships seemingly caused by inflationary distortion of financial reporting.

It shall be emphasized that this model (Model 3) is focused on the behavior of loss-making enterprises. Behavior of profitable enterprises is outside the framework of this model and may be described by first two models. Besides, in case an enterprise is a net creditor, its behavior is outside the framework of these three microeconomic models, since such an enterprise does not generate payment arrears, but credits its counteragents.

It shall be noted that the available official statistics may be not sufficiently reliable due to some other factors. While the financial results registered by accounting are different from economic ones (as it was observed above, an especially wide gap between these indicators emerges in the periods characterized by high inflation rates due to the generation of inflationary profits), enterprises may conceal the true results of their operations by misrepresenting accounting data in order to diminish the tax base. Therefore, it is difficult to distinguish between profitable and loss-making enterprises basing only on official financial reporting.

The factors indirectly affecting their financial results and independent of (or less dependent on) financial reporting may be used in order to alternatively test the hypothesis that loss-making enterprises generate payment arrears (Model 3).

There may exist many factors affecting the effectiveness of economic operations of enterprises (and even whole sectors of the economy). First, there are changes in the price structure related to goods produced by enterprises and their suppliers. Second, due to the curtailment of production capital-intensive enterprises lost in gains derived from the returns to scale effect, what resulted in redundant employment. In case the factors affecting the financial results of enterprise operations also have an impact on non-payments, it may help to accept or discard the hypothesis that financial standing of enterprises is significant for the generation of payment arrears.

Changes in Price Structure

The liberalization of prices and foreign trade sufficiently affected the price and demand structure of the Russian domestic market. Changes in the price structure affected profitability across many industries.

The approach to the problem of non-payments based on changes in the price structure resulting in non-profitability of a number of enterprises was employed by Volkonski and Kantorovich (1995). The authors attempted to detect a genuinely economic factor (in contradistinction to behavioral factors) behind the non-payment crisis. They defined this factor as the non-market structure of production.

The authors note that the non-market structure (characterized by disproportion, remoteness from the competitive equilibrium of existing (initial) distribution of resources) may be understood and defined differently, and concretized depending on the different sets of factors external to the economy, which determine the possible (desirable) export and import terms, admissible minimal wage levels, etc. In case these conditions are specified, the complete liberalization of prices and wages may result in the fact that they will be relatively fast set at levels rendering certain enterprises to operate at a loss or at a low profit and other to become highly profitable.

The authors develop a model of inter-industrial balance explaining the factors responsible for inflation and non-payments in the situation characterized by substantial price disproportion. The major factors generating the anti-market situation are monopolization and uneven initial (at the moment of price liberalization) distribution of resources across industries and individual enterprises.

The real exchange rate to a certain extent was the regulator of the price structure. Its impact on the competition between domestic and external producers was apparent. Since the beginning of 1992 Ruble has substantially appreciated (see Fig. 5, Annex 1). Apparently, it facilitated a substantial decrease in prices of imported goods competing with domestic products. The analysis of the relationship between non-payments and changes in the price structure (including the Index of qualitative changes in producer prices,11 relative increase in prices of electric power demonstrating the outpacing rates of growth in prices of a major production factor for energy-intensive enterprises, and the real exchange rate. All three empirical tests based on time series favored this hypothesis (for details see: Lugovoi, Semenov, 2000).

Thus, the outpacing rates of growth in prices of energy resources and raw materials relatively to consumer goods prices (basing on the results of empirical tests) result in increasing non-payments. It appears that the deteriorating financial standing of enterprises producing consumer goods is responsible for this development. Therefore, the results of the tests favor the hypothesis that non-payments are generated in the consumer production sector, and not in the raw materials sector, while the accumulation of non-payments in the fuel and energy sector appears to be of the induced nature. The acceptance of this hypothesis is yet another evidence that not raw materials, fuel, and energy monopolies, but non-effective, loss-making enterprises are the source of non-payments.

The real Ruble exchange rate is an important factor in the process of growth in non-fulfilled obligations (basing on the results of empirical tests). The factor behind this development may be the increasing competitiveness of imports due to lowering prices of imported goods. It shall be emphasized that the enhancement of competition facilitates growth in the long run, since it creates incentives to increase the effectiveness of production. However, in the short term the competition pressure deteriorates financial standing of enterprises, what, according to the hypothesis, in the present situation generates non-payments. At the same time, increasing real Ruble exchange rates result in growth of relative costs borne by export-oriented (raw materials) enterprises. So, profitability and financial standing of enterprises deteriorates across practically all sectors. The mechanism of the facilitation of growth via the encouragement of competition implies that the effectiveness of enterprises shall be enhanced via additional investment. However, in the present situation existing in Russia, due to the lack of working markets of capital, investment may be generated only at the expense of internal funds of enterprises. In this situation it is impossible to stimulate growth via the enhancement of competition, since it eliminates the last source of investment – the economic profit.

The detection of relationships between indicators, which characterize the price structure and, respectively, reflect changes in the financial standing of enterprises may favor the third model, which assumes that loss-making is responsible for the generation of non-payments. At the same time, two other possible sources of payment arrears (lack of crediting and premeditated non-compliance with obligations) are not discarded (Models 2 and 1).

Budgetary Payment Arrears

Due to the transformational slump there was registered a decrease in budgetary expenditures resulting in declining demand on the part of the state (health care, education, housing and public utilities, law enforcement, culture, etc.) and contraction of state procurement (military and industrial complex). The situation was aggravated by the fact that actual state expenditures most often were below targets as is evidenced by the difference between the actual and planned administration of revenues and expenditures of the state budget (see Fig. 6, Annex 1). The planned expenditures (as non-paid state procurement) may become a source of non-payments. Due to insufficient financing the enterprises of the public sector could not settle with their creditors.

Therefore, the state may be included in the group of non-scrupulous counteragents defaulting on their obligations. Non-compliance with budgetary obligations with regard to earmarked expenditures deteriorates the effectiveness of enterprises and their partners and prevents them from settling with creditors, thus setting a vicious circle resulting in falling budgetary revenues. The non-compliance with target obligations may occur both at the level of federal and regional budgets.

The provision of the planned aid (federal transfers) is a very important factor for the economic activity of recipient regions. In case the federal center fails to fulfil its obligations with regard to transfers, regional authorities may encounter difficulties in financing public goods, what facilitates the emergence of chains of non-payments. At the same time, regions may also default on their obligations. The creditor indebtedness of regions is an evidence that there are outstanding budgetary obligations.

Our previous research presented an evidence that administration of budgets of all levels is significant for the generation of payment arrears (see: Entov et al., 1998, Lugovoi, Semenov, 2000). Higher levels of payment arrears were observed in regions registering large amounts of budgetary creditor indebtedness.

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