HOW SOFT IS THE BUDGET CONSTRAINT FOR YUGOSLAV FIRMS

Despite the virtual absence of direct government subsidies to firms, as well as the existence of open unemployment, Yugoslav firms are shown to receive soft-budget subsidies that dramatically narrow differences in income per worker across firms. The main source of subsidies is the repayment of liabilities at negative real interest rates. Although channels of redistribution differ significantly from those in other Eastern European economies, the driving force behind redistribution is similar: the pursuit of job and wage security. Determinants of redistribution include a firm's capital intensity and the promotion of less-developed regions. © 1992.