State enterprise performance and soft budget constraints: The case of Bulgaria

Abstract

This paper analyses the performance of state enterprises in Bulgaria during 1992-94. Consistent with the literature on other transitional economies, this paper finds that one key factor underlying (the lack of) enterprise adjustment in Bulgaria during this period was the availability of financing. Empirically, the (lack of) past adjustment and the softness of finance are the best predictors of current adjustment. Many state enterprises, mostly smaller ones, appear to have adjusted to the new economic structure, partly in response to tighter budget constraints. However, a number of large, hard-core lossmaking state enterprises did not adjust, due primarily to the soft budget constraints that they faced. These enterprises crowded out profitable enterprises, both public and private, through their large financing requirements, adversely affecting economic growth. Moreover, continued bank financing of these large loss-makers decapitalized the banking system, and budgetary financing of their losses, largely through tax arrears, has undermined fiscal policy. This lack of enterprise adjustment and the resulting financial indiscipline lies at the core of the macroeconomic difficulties that Bulgaria has recently faced. Copyright The European Bank for Reconstruction and Development, 1997.

Budget Constraints And Profitability: Evidence From A Transition Economy

“…This work fits in the body of the literature, which seeks to measure the degree and impact of credit constraints directly (e.g., Jappelli, 1990;Feder et al 1990;Barham, Boucher and Carter, 1996;Claessens and Peters, 1997). This study presents some innovations to the literature on credit market disequilibria and develops the link between credit access and profitability.…”

Theories of the soft budget-constraint

“…Maintaining or enhancing softness of budget constraints will have the opposite effect. This hypothesis is supported by empirical research on Bulgaria (Djankov andHoekman, 2000 andPeters, 1997), China (Cull andXu, 2000 andLi andLiang, 1998), Russia (Pinto, Debrentzov, andMozorov, 2000 andde Boissieu, Cohen, andde Pontbriand, 1995), Romania (Abdelati andClaessens, 1996 andDjankov, 2001), seven Central and Eastern European countries (Claessens and Djankov, 1998), and 25 transition countries (Carlin, Fries, Schaffer, and Seabright, 2001). 3.…”

“…Elsewhere, the use of this instrument has been curbed and tax concessions granted instead, e.g., in Russia (Alfandari, Fan, and Freinkman, 1996, Brown and Earle, 2000, and Shleifer and Treisman, 2000. In many places, a major instrument of softening has been tolerance of tax arrears, e.g., in Bulgaria (Claessens and Peters, 1997), Romania (Coricelli and Djankov, 2000), and several other postsocialist countries (Schaffer, 1998 A number of empirical surveys confirm that this second group of instruments has become the main means of softening the budget constraint in several countries. In particular, state-owned banks tend to give preference to distressed enterprises when allocating credit, and tolerate late or even omitted repayments; see studies on China (Cull andXu 2000 andGao andSchaffer, 1998), on Romania (Coricelli and Djankov, 2001) and on a collection of post-socialist countries Schaffer, 1998.…”

“…The dividing line between an acceptable level of trade credit and a SBC situation is debatable (Schaffer, 1998). However, experience convincingly exhibits the benefits that accrue when firms start demanding payment vigorously from their customers; see the studies on Bulgaria (Claessens and Peters, 1997), Hungary (Schaffer, 1998), Russia (de Boissieu, Cohen, andde Pontbriand, 1995), andVietnam (McMillan andWoodruff, 1999 (Bonin andSchaffer 1995, Kornai 2001). Such phenomena have occurred repeatedly during the post-socialist transition (Schaffer, 1998), hence the need for caution when measuring the strength of the SBC syndrome via the means of softening.…”

Can EU conditionality remedy soft budget constraints in transition countries?

“…21 See for Poland Pinto et al 1993;for Russia de Boisseau et al 1995, andPinto et al 2000; for Romania Abdelati andClaessens, 1996, andCoricelli andDjankov, 1998;andfor Bulgaria Djankov andHoekman, 2000, andPeters, 1997. Furthermore, see the comprehensive surveys of Carlin et al, 2001 andFrydman et al, 2000. with probability 1 − p. Thus the expected price is…”