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

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  • Stijn Claessens
  • R. Kyle Peters

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.

Suggested Citation

  • Stijn Claessens & R. Kyle Peters, 1997. "State enterprise performance and soft budget constraints: The case of Bulgaria," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 5(2), pages 305-322, November.
  • Handle: RePEc:bla:etrans:v:5:y:1997:i:2:p:305-322
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    References listed on IDEAS

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    1. Pohl, G. & Djankov, S. & Anderson, R.E., 1996. "Restructuring Large Industrial Firms in Central and Eastern Europe: An Empirical Analysis," Papers 332, World Bank - Technical Papers.
    2. Hoekman, Bernard & Pohl, Gerhard, 1995. "Enterprise restructuring in Eastern Europe : how much? how fast? where? - preliminary evidence from trade data," Policy Research Working Paper Series 1433, The World Bank.
    3. Djankov, Simeon & Hoekman, Bernard, 1995. "Trade Liberalization and Enterprise Restructuring in Bulgaria, 1992-4," CEPR Discussion Papers 1301, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Budina, Nina & Garretsen, Harry & Jong, Eelke de, 1999. "Liquidity constraints and investment in transition economies : the case of Bulgaria," Research Report 00E05, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    2. Sébastien Charles & Jonathan Marie, 2016. "Hyperinflation bulgare de 1997 : transition, fragilité bancaire et change," CEPN Working Papers 2016-13, Centre d'Economie de l'Université de Paris Nord.
    3. Brucker, Herbert & Schroder, Philipp J.H. & Weise, Christian, 2005. "Can EU conditionality remedy soft budget constraints in transition countries?," Journal of Comparative Economics, Elsevier, vol. 33(2), pages 371-386, June.
    4. Stijn Claessens & Daniel Oks & Rossana Polastri, 2000. "Capital Flows to Central and Eastern Europe and the Former Soviet Union," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 299-339 National Bureau of Economic Research, Inc.
    5. Clarke, George R.G. & Cull, Robert & Shirley, Mary M., 2005. "Bank privatization in developing countries: A summary of lessons and findings," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 1905-1930, August.
    6. Marian Rizov, 2004. "Credit Constraints and Profitability : Evidence from a Transition Economy," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 40(4), pages 63-83, July.
    7. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
    8. repec:dgr:rugsom:00e05 is not listed on IDEAS
    9. Desai, Raj M. & Olofsgard, Anders, 2006. "The political advantage of soft budget constraints," European Journal of Political Economy, Elsevier, vol. 22(2), pages 370-387, June.
    10. Vassilis Monastiriotis, 2008. "The Emergence of Regional Policy in Bulgaria: regional problems, EU influences and domestic constraints," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 15, Hellenic Observatory, LSE.
    11. 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.
    12. Herbert Brücker & Philipp Schröder, 2007. "EU accession and the hardening of soft budget constraints: some macro evidence," Economic Change and Restructuring, Springer, vol. 40(3), pages 235-252, September.
    13. Kornai, János & Maskin, Eric & Roland, Gérard, 2004. "A puha költségvetési korlát I
      [The soft budget constraint I]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 608-624.
    14. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, vol. 45(9), pages 1573-1599, October.
    15. Kaminski, Bartlomiej & Ng, Francis, 2006. "Bulgaria's integration into the Pan-European economy and industrial restructuring," Policy Research Working Paper Series 3863, The World Bank.
    16. Toyofuku, Kenta, 2013. "Stability or restructuring? Macroeconomic dynamics under soft budget constraint problems," Economic Systems, Elsevier, vol. 37(4), pages 625-649.
    17. Irina Akimova & Gerhard Schwödiauer, 1999. "Restructuring of Ukrainian Enterprises after Privatization: Does Ownership Structure Matter?," Industrial Organization 9903003, EconWPA.
    18. Lin, Xiaochi & Zhang, Yi, 2009. "Bank ownership reform and bank performance in China," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 20-29, January.

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