Structure and Strain in Explaining Inter-Enterprise Arreas

Daniel Daianu

No 97, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This study considers strain to be the main source of arrears; strain can be linked with the structure of the economy and the size of resource misallocation. The focus here is on the real side of the economy in explaining the growth of arrears and on exploring avenues for their reduction. Arrears "soften" markets and influence the system, apparently, in an ambivalent way: they seem to operate as a self-protecting device against the pressure for change (against the need to proceed with swift and fundamental reforms); at the same time, they can slow down dangerously the speed of restructuring and adjustment by relaxing financial discipline. Arrears preserve a soft-budget constraint syndrome. As temporary quasi-inside money, arrears in fact fuel inflation: they enable firms to raise prices and wages without fearing immediate consequences. Since they are only a temporary substitute for real money, arrears work to 'endogenize' money supply dynamics in a perverse way. The dimension of the arrears pro blem in the various post-command economies is linked, basically, with their capacity to adjust, which in turn depends on structure and the size of required structural change (adjustment). Exports are a possible side-effect of arrears and a constraining factor on these. The best one can hope in fighting inter-enterprise arrears is, essentially, to try to contain and reduce them. Containing arrears cannot be a one shot policy-drive; here one deals with a process that will eventually overlap with the evolving environment.

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Date: 1997-11-01
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