Are Russian Enterprises Restructuring?

by Gilles Alfandari and Une Lee

In Russia enterprises are restructuring, even if to a limited extent. That was the general conclusion of a conference, "Russia: Economic Policy and Enterprise Restructuring," held in St. Petersburg on June 12-13, 1995. The conference was organized jointly by the World Bank and Russia's Economic Ministry. Eight of the fourteen conference papers used for their analysis came from a mid-1994 World Bank survey of 439 Russian industrial enterprises. The first comprehensive, randomly selected, representative survey of Russian enterprises, it embraced the major manufacturing industries across economic regions, covering state-owned and privatized firms as well as newly established private firms.

The following is a brief overview of some of the papers presented at the St. Petersburg meeting.

Trading Wages for Employment

Russian enterprises have been buffeted by a combination of aggregate demand shocks and supply shocks, including the major negative effect associated with the collapse of both the Counsel of Mutual Economic Assistance (CMEA), and trade among the countries of the former Soviet Union. Industrial production in late 1994 was roughly half of the 1990 level, according to official data. In response to these shocks, Russian enterprises are restructuring. However, progress appears to be uneven across industries and regions, and the extent of restructuring is limited.

Qimiao Fan and Bingsong Fang in their paper report that the majority of enterprises have introduced new products, increased product varieties, and initiated new trading relationships. There is some evidence of layoffs and real wage contraction; between 1990 and 1994 average monthly wages in constant prices decreased by about 15 percent. During the same period, on average, full time employment declined by 10 percent, while the average number of employees who either were working part time or were on unpaid leave increased by more than two-and-a-half times.

Labor sharing is more common than labor shedding, as suggested by Rostislav Kapeliushnikov and Sergei Aukutsionek in their paper, Russian Enterprises in the Labor Market: Evidence from the Russian Economic Barometer. They show that the labor utilization rate, reflecting various forms of labor underutilization, including workweek reduction and involuntary leave, fluctuated between 70 and 80 percent throughout 1994.

Labor hoarding is still extensive in Russian enterprises despite some initial adjustment in employment and working hours. Simon Commander, Sumana Dhar, and Ruslan Yemtsov point out in their paper, How Russian Firms Make Their Wage and Employment Decisions, that Russian enterprises, most of which are dominated by a coalition of managers and workers, have remained reluctant to lay off workers. Instead, because of the influence of these coalitions, employment and worker welfare are among the enterprises' objectives.

As a pattern of adjustment in Russia, enterprises have partially traded down wages for employment stability. Money wages have remained low and drifted slightly downward in real terms, while their share in total compensation has declined. Workers' compensation has become increasingly dominated by the nonmonetary components, principally social benefits, provided by the enterprises, including newly established firms. Simon Commander, Une Lee, and Andrei Tolstopienko report in their paper, Social Benefits and the Russian Industrial Firm, that the low level of money wages and their diminished share in total compensation generates adverse incentive effects, raising the incentive for workers to stay in benefit-providing firms, while simultaneously delivering low effort in their primary employment. Although low aggregate unemployment levels are maintained, low money wages may ultimately impede effective restructuring and the growth of an autonomous private sector.

Budget Constraint Leaks

Although government funding for the enterprise sector has hardened significantly since the beginning of the reforms in 1992, access to soft financing is still available through government subsidies, bank loans, and payment arrears (in particular due taxes). However, this softness is sending the wrong signals to managers, allowing chronic loss-makers to survive.

Gilles Alfandari, Qimiao Fan, and Lev Freinkman discuss transfers of the federal government in their paper, Government Financial Transfers to Industrial Enterprises and Restructuring. Although these transfers have dropped substantially since 1992, they still accounted for 6 to 7 percent of GDP in 1994. This figure would be much higher if financial transfers of local governments were included. The paper concludes that, in general, government transfers have not helped enterprise restructuring.

Financial softness can also be manifested through payment arrears. Gilles Alfandari and Mark Schaffer's paper, On Arrears in Russia, reviews delayed enterprise payments to suppliers (trade credit in arrears), to the government (tax arrears), and to employees (wage arrears).

The level of involuntary trade credit in Russia, including its portion in arrears, is comparable to OECD averages. Russian authorities, however, should be more concerned with tax arrears, whose flow has been estimated at 2 percent of 1994 GDP. Adding tax arrears to more explicit forms of subsidies, only one-fifth of Russian enterprises can be considered free of subsidies. Tax arrears and other subsidies are also concentrated in firms in financial distress (those with both liquidity and profitability problems). While financially distressed firms account for only 12 percent of the survey sample, they account for 70 percent of tax arrears.

Despite an initially low stock of bad loans and declining volume of directed bank credit, the banking sector constitutes an additional source of softness, as discussed in the paper of Mark Schaffer, Qimiao Fan, and Une Lee. About 25 percent of enterprise debts to banks are overdue. In addition, the flow of bank credit to enterprises in arrears is continuing, aggravated by the general practice of recapitalizing the overdue interest and rescheduling the principal.

Both papers suggest that firms with the greatest bargaining power, in terms of their size, market power, and membership in industrial associations, are most successful in lobbying for government transfers. This view is confirmed by the concentration of subsidies in agriculture, energy, and the military-industrial complex. Similarly, managers use wage arrears to lobby the government for subsidies.

Ownership and Institutions

Has a change in ownership had any effect on firm behavior, given that most of the privatization has been carried out by workers and managers? Ownership change has generally had only weak effects on most performance indicators, including sales, wages, and employment. Apart from the newly established firms, (the topic of the paper by Andrea Richter and Mark Schaffer), the majority of privatized and state-owned enterprises do not differ significantly from each other.

John Earle, Saul Estrin, and Larisa Leshchenko wrote Ownership Structures, Patterns of Control, and Enterprise Behavior in Russia. They suggest three reasons that ownership has not changed enterprise behavior: ownership has not yet translated into control, budget constraints have remained soft, or privatization is too recent to have influenced behavior. They also suggest that the Russian mass privatization program may have done little to challenge insider-controled firms. In their view, encouraging market competition and ensuring the tradability of ownership rights could stimulate the emergence of more effective ownership structures.

Barry Ickes, Randi Ryterman, and Stoyan Tenev explore whether market structure has affected Russian enterprises' inclination to adopt some kind of adjustment strategy. Their paper, On Your Marx, Get Set, Go: The Role of Competition in Enterprise Adjustment, is based on a 1994 survey of 150 enterprises in five Russian oblasts. They conclude that an enterprise will be less likely to adjust if it depends too much on trading partners. Competition can either enhance or block the adjustment preference of an enterprise: if competition is too intense, enterprises will be less likely to enter the restructuring process. One possible explanation is that the destabilizing nature of intense shocks can hinder rather than promote restructuring. The authors suggest that enhanced information, improved legal and financial institutions, and better physical infrastructure can balance some adverse consequences of the shock.

Most authors agreed that the adjustment process in Russia has proceeded since the beginning of reform. Enterprise restructuring occurred primarily in the passive sense: firms responded in the aftermath of the shocks. That restructuring has so far been limited is probably not surprising.

The ownership changes have been very recent, the economic environment is still unstable, and the basic market institutions and infrastructure are still at an early stage of development. Clear property rights and harder budget constraints are required. In addition, there is an obvious need for the government to fill the present institutional vacuum.

Copies of the conference papers can be obtained from Yolanda Gedse, Room H-2025X, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, tel. (202) 473-7034, fax (202) 477-3288, (Email: YGedse @Worldbank.org @internet). (It is expected that selected conference papers will be published in a book.)