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Financial Discipline in the Enterprise Sector in Transition Countries: How Does China Compare?

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  • Shumei Gao and Mark E. Schaffer
  • Shumei Gao and Mark E. Schaffer

Abstract

This paper makes some selective comparisons of the empirical evidence relating to financial discipline and soft budget constraints in the enterprise sector in China and the transition countries of Central and Eastern Europe and the former Soviet Union (CEEFSU). The paper finds that: (1) in both CEEFSU countries and China, budgetary subsidies have fallen as prices have been liberalized, and the budgetary subsidies which remain are not clear evidence of soft budget constraints; (2) firms in both CEEFSU countries and China typically impose hard budget constraints on each other; levels of trade credit in China were roughly constant in 1994-96, implying inflows have approximately equaled outflows, i.e. inter-enterprise debts are being paid; the level of total trade credit observed in China, at about 20-25% of GDP, is similar to that observed not only in CEEFSU countries but also in developed Western economies; (3) in a comparison of bank financing of Chinese and Hungarian firms, Chinese banks were providing poorly-performing firms with new financing, whereas in Hungary, banks were reducing their exposure to bad firms; and (4) tax arrears in CEEFSU economies have emerged as a major source of soft budget constraints in recent years, but enterprise-level data for China show that as of the early 1990s, tax arrears were not an important source of financing for loss-making Chinese firms.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 124.

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Length: pages
Date of creation: 01 Feb 1998
Date of revision:
Handle: RePEc:wdi:papers:1998-124

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Keywords: soft budget constraint; transition economies; China; trade credit; bad debt; tax arrears;

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References

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  1. Schaffer, Mark E, 1995. "Government Subsidies to Enterprises in Central and Eastern Europe: Budgetary Subsidies and Tax Arrears," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1144, C.E.P.R. Discussion Papers.
  2. Schaffer, Mark E., 1998. "Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 80-103, March.
  3. J. P. Bonin & M. E. Schaffer, 1995. "Banks, firms, bad debts and bankruptcy in Hungary 1991-4," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 20764, London School of Economics and Political Science, LSE Library.
  4. G. Alfandari & M.E. Schaffer, 1996. ""Arrears" in the Russian Enterprise Sector," CERT Discussion Papers, Centre for Economic Reform and Transformation, Heriot Watt University 9608, Centre for Economic Reform and Transformation, Heriot Watt University.
  5. Cornelli, F. & Portes, R. & Schaffer, M., 1996. "The Capital Structure of Firms in Central and Eastern Europe," DELTA Working Papers, DELTA (Ecole normale supérieure) 96-05, DELTA (Ecole normale supérieure).
  6. Zou, Liang & Sun, Laixiang, 1996. "Interest Rate Policy and Incentives of State-Owned Enterprises in the Transitional China," Journal of Comparative Economics, Elsevier, vol. 23(3), pages 292-318, December.
  7. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  8. Kornai, Janos, 1986. "The Soft Budget Constraint," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 39(1), pages 3-30.
  9. M Belka & S Estrin & M Schaffer & I.J. Singh, 1995. "Enterprise Adjustment in Poland: Evidence from a Survey of 200 Private," CEP Discussion Papers, Centre for Economic Performance, LSE dp0233, Centre for Economic Performance, LSE.
  10. Perotti, E. C., 1998. "Inertial credit and opportunistic arrears in transition," European Economic Review, Elsevier, Elsevier, vol. 42(9), pages 1703-1725, November.
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Cited by:
  1. Lubomír Lízal & Jan Svejnar, 2002. "Investment, Credit Rationing, And The Soft Budget Constraint: Evidence From Czech Panel Data," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 353-370, May.
  2. Hongbin Li & Weiying Zhang & Li-An Zhou, 2005. "Ownership, Efficiency, and Firm Survival in Economic Transition: Evidence from a Chinese Science Park," Discussion Papers, Chinese University of Hong Kong, Department of Economics 00008, Chinese University of Hong Kong, Department of Economics.
  3. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  4. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, Elsevier, vol. 45(9), pages 1573-1599, October.
  5. Alexandra Reppegather & Manuela Troschke, 2006. "Graduelle Transformation von Wirtschaftsordnungen: Ein Vergleich der Reformstrategien Chinas und Usbekistans," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 260, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  6. Jihe Song & Shumei Gao, 2000. "A Model of Budget Constraint and Enterprise Restructuring," CERT Discussion Papers, Centre for Economic Reform and Transformation, Heriot Watt University 0001, Centre for Economic Reform and Transformation, Heriot Watt University.
  7. Kornai, János, 2000. "A költségvetési korlát megkeményítése a posztszocialista országokban
    [Hardening of the budget constraint in the post-socialist countries]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 1-22.

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