Government Financial Transfers to the Largest Recipient Enterprises in Russia
Ref. no. 679-98C
Most Central and Eastern European countries launched market reforms with a large volume of government financial transfers to the enterprise sector. Reducing these transfers was one of the major challenges for the region's governments in their efforts to stabilize their economies. In Russia at the start of the market transformation in 1992 this problem was much more severe than anywhere in Central and Eastern Europe. While the government has made much progress in the past few years in reducing overall transfers to enterprises, state financial assistance to enterprises remains substantial. And the remaining transfers are concentrated among a small number of the largest and most well-connected enterprises.
Tackling these transfers will be critical for both macroeconomic stabilization and enterprise reform in the next couple of years, for several reasons. First, these transfers still constitute an unacceptably large share of government transfers to the economy and have a significant impact on the budget. They need to be further reduced and rationalized if macroeconomic stabilization is to be sustained. Second, many of the largest recipient enterprises are "problem" enterprises, and their problems can and will contaminate the rest of the economy through interenterprise arrears and arrears to the banking system. Their performance will have a significant effect on the financial system, especially the banking system. Third, because many of these enterprises are in basic, upstream industries, sometimes with monopolistic market positions, their performance will directly affect the competitiveness and adjustment of many other enterprises. Fourth, these enterprises are usually the largest employers in their regions and localities, so how they are restructured will have important social implications.
This study analyzed the rationale for and the size and type of such government financial support and examined the options for reducing and rationalizing it. The study used data from a large World Bank survey of industrial enterprises in Russia, case studies of 1015 of the largest recipient enterprises in different regions of Russia, and official data on government financial support.
The study's results show that government financial assistance does not go to the enterprises that face the most severe financial problems or to those particularly affected by recent external shocks, such as the loss of markets in Eastern Europe and in other former Soviet republics. Nor is government assistance biased toward enterprises with more intensive investment spending. Instead, one of the most important determinants of whether an enterprise receives government transfers, and how large these transfers are, is the size of its workforce. Overall, government financial transfers do not seem to serve any identifiable objectives (such as promoting restructuring or supporting high-technology and export industries), although certain forms of transfers do play a slightly compensatory role for price controls or government procurement. The current system of government assistance to enterprises consists of about a dozen independent channels and a large number of government agencies, which makes government assistance even less efficient and more difficult to monitor.
The current level and system of government financial support clearly have not promoted enterprise restructuring, especially for the largest recipients. To encourage enterprise restructuring will require further reduction and rationalization of government financial assistance--by deepening price and trade liberalization, reducing the total volume of transfers, reducing the number of channels and the number of agencies involved in the allocation of transfers, improving the transparency of the allocation system, conditioning remaining transfers on restructuring, and improving monitoring and supervision of the use of transfers.
Responsibility: Europe and Central Asia, Country Department III, Country Operations Division 2--Qimiao Fan (qfan2@worldbank.org) and Lev Freinkman, and Moscow Resident Mission--Alexander Morozov; and Private Sector Development Department--Syed Mahmood. With Victor Rassadin; Elena Starostenkova; Tatyana Chetvernina; Stepan Titov; Michail Broitman, Troika-Dialog; Yuri Kuznetsov; Georgy Semenov; and Alla Godunova.
Completion date: October 1996.
Reports:
Alfandari, Gilles, Qimiao Fan, and Lev Freinkman. 1996. "Government Financial Transfers to Industrial Enterprises and Restructuring." In Simon Commander, Qimiao Fan, and Mark Schaffer, eds., Enterprise Restructuring and Economic Policy in Russia. EDI Development Studies. Washington, DC: World Bank.
Freinkman, Lev, and Michael Haney. 1997. "What Affects the Russian Regional Governments' Propensity to Subsidize?" Policy Research Working Paper 1818. World Bank, Europe and Central Asia, Country Department III, Washington, DC.
Back to Transition Economies contents
Back to 1997 Abstracts of Current Studies Home Page
