Barter in Transition Economies: Competing Explanations Confront Ukrainian Data

In this paper we survey the common explanations of barter in
transition economies and expose them to detailed survey data on 165
barter deals in Ukraine in 1997. The evidence does not support the
notion that soft budget constraints, lack of restructuring, or that
the virtual economy are the driving forces behind barter. Further,
tax avoidance is only weakly associated with the incidence of
barter in Ukraine. We then explore an alternative explanation of
barter as a mechanism to address transitional challenges where
capital markets and economic institutions are poorly developed.
First, barter helps to maintain production by creating a
deal-specific collateral which softens the liquidity squeeze in the
economy when credit enforcement is prohibitively costly. Second,
barter helps to maintain production by preventing firms to be
exploited by their input suppliers when suppliers' bargaining
position is very strong due to high costs of switching suppliers.
Thus, in the absence of trust and functioning capital markets
barter is a self-enforcing response to imperfect input and
financial markets in the former Soviet Union. The paper concludes
by discussing potential long-term costs of barter arrangements, and
by suggesting particular pitfalls of expansionary monetary policy
in barter economies such as Ukraine and Russia.