Assessing impact of EFFORT and all Other EPRDF Controlled Companies- Purely from Economics point of view The Soft Budget Constraint: Part 2 More on soft budget constraint The term “soft budget constraint” is a familiar part of the economics lexicon after its introduction by the Hungarian Economist Janos Kornai in early 1980’s. The term budget constraint is of course taken over from micro economics theory of the household. The assumption that the decision maker has a budget constraint is equivalent to the assumption that he has to strictly abide to it. The budget constraint is not a bookkeeping identity nor a technical relation, but a rational planning postulate. It occurs when a limit to spending by some public or public affiliated companies are supposed to be subject to the budget constraint believe that the consequences of breaching it will not be serious. For example, the managers of Party affiliated EFFORT companies may believe that if they run at a loss, they know that they will not be claimed bankrupt. The state invisible hand (tax removal, granting of free loan and special treatment than the private sectors ) will help them out of losses and make profits at the expense of other striving private companies- these firms will not be not sacked away due to bankruptcy. In EFFORT and all Other EPRDF Controlled Companies discerned a remarkable trend that the budget constraints of the companies are "soft." However; you need to note that profit maximization refers to the internal goal-setting of the decision maker of the firm – soft budget companies like EFFORT can also make profits at the expense of hard budget firms. What is really important is the psychological effect of the constraint; with a hard budget constraint, a deficit causes fear because it may lead to extremely serious consequences like shutting down of the firms. In other words, the softness-hardness of the budget constraint refers to the external tolerance-limits to losses. It follows from this line of reasoning that the stringency of the budget constraint is not simply a financial matter. It reflects in financial form the deeper socio-economic phenomenon. It reflects a certain social relationship between the state/ government and the economic micro-organization like EFFORT. The "soft budget constraint syndrome" is usually associated with the paternalistic role of the state/ party towards EFFORT and other party affiliated companies and private firms, non-profit institutions and households. Two important properties must be well noted in relation to this. First, the softening of the budget constraint occurs when the strict relationship between expenditure and earnings has been relaxed because excess of expenditure over earnings will be paid by some other institution in EFFORT case by the government or the State. A further condition of softening is that the EFFORT managers expects such external financial assistance with high probability, and this probability is built firmly into their behavior. Part 3 will continue very soon
Posted on: Fri, 27 Sep 2013 06:54:42 +0000
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