Soft Credit Research Articles

Reproduction and Monetary Sphere <i>(On the Paper by A. Navoi "On the Role and Place of the Central Bank Money Emission…")</i>

The article discusses the interconnections of real sector and monetary sphere. The structure of modern macroeconomic processes is analyzed, and its elements such as production, informational and financial processes are characterized. The main problems of the theory of value are stressed. It is indicated that intensification of financial process has led to forming debt economy which is characterized by soft credit constraints. They define soft demand constraints in the economy and, as a consequence, significant indebtedness of households and increasing financial risks. Money is not neutral in relation to processes in real sector and is able to accelerate them.

THE COMPETITIVENESS OF SOYBEAN PRODUCTION IN BLITAR-EAST JAVA, INDONESIA

In East Java Province, the government still provides subsidy to soybean production in the form of soft credit to production inputs. Since the government budget and subsidy have been limited, efficiency in production, marketing and trade become crucial issues. The conducted research will try to achieve some research objectives as follows: Analyzing soybean farmer income in the Blitar District at the different cropping system; Obtaining analysis on comparative advantage and competitive-ness of soybean by different cropping system; analyzing influences of social price changes to farmers income due to public investment; and analyzing government policy impact on farmers income due to market/actual price development. The research uses Policy Analysis Matrix to obtain competitiveness rate, efficiency and impact of government policy on soybean production under multi-cropping system and different ecological zones in the Blitar district.

Fallen heroes: explaining the failure of the Gdansk shipyard, and the successful early reform strategies in Szczecin and Gdynia

In this paper, I examine the causes of failure in the Gdansk shipyard, and alternatively, the determinants of success in Szczecin and Gdynia. I give particular attention to the role of the initial owner of these companies—the Polish government. Why were these three firms treated differently by the government, and how did this affect their approaches to restructuring? I find that in the cases of Szczecin and Gdynia, initial government aid conditionality, combined with pro-active employee support of reforms, produced environments where restructuring had a real chance. In Gdansk, the government and company employees failed to reach agreement on a strategy for initiating reforms. Both feared the potential consequences (economic for the workers and political for the government) of embarking on reforms that were in no way guaranteed to succeed. What emerged was an ongoing stalemate, with company management rejecting a series of reform projects and the government continuing to offer soft credits to keep the unprofitable firm alive. This stalemate, or sub-optimal equilibrium, was linked to the shipyard’s uniquely credible threats of intransigence.

Ownership and the Temptation to Loot: Evidence from Privatized Firms in the Czech Republic

Using a new dataset on firms privatized in the Czech Republic from 1993 to 1996, we show that, even after controlling for size and structure, voucher-privatized joint stock companies perform worse than firms with concentrated shareholdings that had to be purchased for cash, i.e., limited liability companies and foreign joint stock companies. We argue that static asset stripping, or tunneling in Czech parlance, was combined with dynamic looting of the Akerlof and Romer (1993) type because these same joint stock companies had privileged access to soft credit from state controlled banks. Although we do not have direct evidence of looting, we show that liabilities increased at a much faster rate in joint stock companies than in limited liability companies. J. Comp. Econ., March 2002, 30(1), pp. 1–24. World Bank, Washington, DC. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: L2, G3, K4.

Investment, Efficiency, and Credit Rationing: Evidence from Hungarian Panel Data

Relying upon a rich and unique panel of Hungarian firms over 7 years, from 1992 up to 1998, this paper estimates simultaneously TFP, Total Factor Productivity, identified as efficiency, and the parameters of a model where investment depends upon internal funds, wages, and sales, as in Prasnikar J. and Svejnar J. (2000). It shows that while real investment is higher in foreign firms, the improvement in efficiency due to investment is significantly higher in Hungarian domestic firms. We test the possibility that this higher than average foreign investment may exacerbate other firms credit constraints by crowding them out of domestic capital markets. Of course one must control for that foreign firms may simply be more profitable and have access to more collateral, hence be a better investment for lending institutions. All firms (foreign, private and domestically owned, and State-owned) are credit rationed, including foreign firms. State-owned firms do not have an investment behaviour compatible with profit maximisation, a result which emphasises the soft budget constraint persistence (but not through the providing with soft credit). For these firms, wages increase together with investment.

Is biodiversity-friendly coffee financially viable? An analysis of five different coffee production systems in western El Salvador

The current trend for reducing shade cover in coffee plantations in northern Latin America has prompted concern among conservationists because of its potential implications for the loss of biodiversity. To help reverse such a trend, a project has been launched to promote biodiversity-friendly cultural practices in coffee plantations and the marketing of certified ‘biodiversity-friendly’ coffee. This paper examines the financial feasibility of investing in the certification criteria for a ‘biodiversity-friendly’ coffee in farms with different production systems in western El Salvador. Models were developed to estimate net present values and risks associated with the investment for five hypothetical, but typical, coffee farms: (1) traditional polyculture; (2) commercial polyculture; (3) technified shade less than 1200 m elevation; (4) technified shade greater than 1200 m elevation; and (5) unshaded monoculture. To invest in the ‘biodiversity-friendly’ certification criteria was financially viable in all farms. The unshaded monoculture farm type was the most profitable case, and the farm under traditional polyculture was the only risk-free. Capital requirements for the investment are low, though they increase as shade cover in the farm becomes reduced. Small, cash-poor farmers will need assistance to make the up-front expenditures required to have the farm certified. Incentives for certified biodiversity-friendly coffee plantations such as tax relief, payment for environmental services, and soft credits could help make the investment more attractive.

95/06739 Pakistan and Bangladesh: The energy potential

Using a new dataset on firms privatized in the Czech Republic from 1993 to 1996, we show that, even after controlling for size and structure, voucher-privatized joint stock companies perform worse than firms with concentrated shareholdings that had to be purchased for cash, i.e., limited liability companies and foreign joint stock companies. We argue that static asset stripping, or tunneling in Czech parlance, was combined with dynamic looting of the Akerlof and Romer (1993) type because these same joint stock companies had privileged access to soft credit from state controlled banks. Although we do not have direct evidence of looting, we show that liabilities increased at a much faster rate in joint stock companies than in limited liability companies. J. Comp. Econ., March 2002, 30(1), pp. 1–24. World Bank, Washington, DC. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: L2, G3, K4.

The politics of soft credit in post‐Soviet Russia

AN ESSENTIAL ELEMENT of economic reform in post-communist states is to create efficient capital markets. In developed capitalist orders, such markets are 'at the centre of the brain of the entire economic system'.' Banks, stock and bond brokers, mutual funds, venture capital firms and other financial institutions compete to attract investment resources and to direct them to uses where expected profits are highest. Through their actions, Pareto superior allocations are achieved and growth rates rise.2 Soviet-type economies were 'redistributive systems'.3 Capital markets, efficient or otherwise, did not exist. Instead, financial resources were allocated and continually redistributed through a combination of planning, informal bargaining and malfeasance. Investment plans were adopted centrally and disaggregated by lower-level planning bodies and ministries. They were financed almost entirely through budgetary transfers. Short-term credit for working capital was extended to enterprises by the state bank within limits established by the credit plan. In turn, almost all enterprise profits were remitted to the budget for future reallocation.4 In practice, however, central priorities were reshaped from below. Agents concealed and distorted information, reinterpreted directives in the implementation, and sometimes simply disobeyed principals higher up in the hierarchy. Plan assignments were repeatedly renegotiated, sometimes as late as in December of the planned year.5 All the parameters of financial redistribution-investment capital, credit limits, prices-were subject to bureaucratic lobbying, rendering budget constraints 'soft'.6 An 'administrative market' of bartered favours evolved, along with a 'shadow economy' of diverted goods and resources.7 Since 1987 the Soviet-and then the Russian-banking system has undergone reforms.8 The monobank system was first replaced by a two-tiered structure of a central bank and five specialised banks.9 Then the specialised banks were commercialised and transformed into joint stock companies, with regional and local branches often becoming independent. With the dissolution of the Soviet Union in December 1991, the State Bank divided into 15 central banks. In parallel, about 1700 private

Diminishing Returns to Administrative Controls and the Emergence of the Unofficial Economy: A Framework of Analysis and Applications to Ukraine

Economic liberalization Daniel Kaufmann This paper (written in May, 1994) presents a fresh perspective on underemphasized issues of liberalization in the Ukraine. The paper constructs an index of the intensity of administrative controls, and concludes that by the Summer of 1994 the Ukrainian economy was only minimally liberalized. This level of liberalization was almost the same as at the time of independence in late 1991. In addition to the prevalence of vested interests and economic ‘myths’, I attribute the persistence and proliferation in central administrative controls over the economy to the inconsistency between fiscal and monetary policies. The need for fiscal restraint has not been understood by policy-makers, and monetary stringency that is inconsistent with budgetary laxity is not sustainable beyond a few months. By default, administrative controls are used as macroeconomic remedies. I hypothesize that beyond a certain point, as the intensity of administrative controls over the official economy continues to increase, the actual administrative control of the state over the overall economy declines in reality. This ‘inverted-U shape’ relationship comes from agents shifting their economic transactions from the official economy to the underground economy as direct controls are increasingly placed on the former. The initiation of a bold programme of economic liberalization is the key to stopping the movement out of the official economy and regaining the confidence of the unofficial economy. Market liberalization must be implemented in order for the macroeconomic stabilization, privatization and social protection programmes to succeed. It will reduce the demands for budget subsidies and soft credits, and restore growth to the economy. Such principles have been grasped by the Kuchma administration that came to power in August 1994. A comprehensive reform programme, including liberalization of foreign trade, foreign exchange and prices has been initiated.

Trends in the arms market‐is Europe pricing itself out of the market?

Starting with the premise that the international arms market has two distinct faces, commercial and military, Ron Smith argues that Europe may not be able to afford to remain in the market. In response to this reality, European governments will have to confront a number of questions: are national governments willing to surrender enough sovereignty to create a multi‐national European arms producer; can Europe afford either the necessary R & D investments or the soft credits needed to sell to others? Depending on the security environment, therefore,’ Ron Smith asks if exit from certain market sectors might be a risk worth taking.

Adjustment to price and quantity signals in a socialist economy

The study tries to answer the question : what is the impact of prices and of quantity signals on production in a socialist economy. The point of departure is the reconsideration of the notion of the «budget constraint». This plays an axiomatic role in standard microeconomic theory and is regarded as a self-evident behavioral rule of every decision-maker. In fact, the budget constraint of the state-owned socialist firm is «soft». Even if there is a large and long-lasting deficit, the state will bail out the firm, by the following means : /i/ the administrative price will be raised and adjusted to the actual production costs, /ii/ the firm is given state subsidy, /iii/ the firm is granted tax exemption and/or /iv/ the firm is granted soft credit. As a consequence, the survival of the firm is warranted, and the growth of the firm will become independent of profitability. The softer the budget constraint, the less price responsive is the firm. Since the firm is not sensitive to costs, demand is almost insatiable. The softness of the budget constraint, the widely spread chronic shortages, and the low price responsiveness of the firm are mutually reinforcing phenomena. Finally, the paper discusses the role of non-price signals, such as commands given by the centre and reports of the firm to the centre ; stock-signals, shortage-signals, etc.