APPROACHING THE LEVEL OF LOSSES CAUSED BY IRRATIONAL FINANCING: THE CASE OF RUSSIAN FARMS


Nikolai M. Svetlov
Moscow Agricultural Timiryazev Academy (Russia)
Irina V. Bezlepkina
Moscow Agricultural Timiryazev Academy (Russia)
Wageningen University (the Netherlands)

Low financial discipline and an inefficient credit system in Russia result in irrational financing of agricultural production. Postponed payments and lack of the short-term credit/deposit possibilities negatively influence production (Macours & Swinnen, 1999). This study aims at answering the question whether irrational financing causes essential losses for Russian agricultural production and what is their approximation?
The modified Bayesian formalism (Svetlov, 2000) used in this study allows us to employ scarce data to approximate losses. We used this formalism to approach the empirical dependence of profit on cash flow and debts. This dependence is used as an objective function of optimisation model. This model seeks for the optimal quarterly cash distribution within a year allowing for taking credit and making deposit (specification I and II) and for variability in debt receivable (specification II). The losses are derived by comparing the values of optimal profit to capital ratio and the modelled ratio under actual cash flow distribution.
The model is applied to a sample of farms of Moscow Region. We used 60 quarterly reports of six agricultural enterprises from 1995 to 1998. The results are obtained fpe two scenarios of each model specification. The scenarios represent efficiently working and imperfect economies with different discount rate. The losses amount to 42.6% of total farm's expenses. The reserves to improve farm financial performance can be revealed from individual changes in the quarterly cash flow distribution. The efficiency of working capital on average improved by 0.10 (specification I ) and by 0.15 (specification II). These results give the first insight to evaluation of consequences of irrational financing. Further investigations are necessary for a greater number of farms in order to analyse how these losses can be reduced by changes at the policy level.

References

1. Macours, K. and J.Swinnen 1999, Causes for output decline in economic transition: The case of central and Eastern European agriculture. Paper presented at the IX EAAE Congress 1999, Warsaw, Poland.
2. Svetlov, N.M. 2000, Metodika predvaritel'noi otcenki poter', obuslovlennykh neratcional'nym finansirovaniem sel'skohozyaistvennykh predpriyatii [Methodology of preliminary evaluation of losses caused by irrational financing of agricultural enterprises, in Russian]. Working paper published at RePEc file archive. RePEc serial: nos:ecomon:747321.
 

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