3 would lead to some shrinkage of heavy manufacturing given its excessive energy and material intensity relative to international levels. What was surprising was (a) the magnitude and .- nediacy of the drop, 19% in January 1990 and a further 15% in February, and (b) its composition, with light manufacturing and consumer goods sectors declining faster and earlier and the heavier sectors following suit only later.

Sample data mimic aggregate manufacturing trends: in the firms sampled, real sales fell by 15% in January 1990 and another 15% in February (Fig. 1 and Annex V), thereafter continuing on a downward course until July. At the same time, finished goods stocks grew, suggesting some demand resistance (Fig. 2 and Annex V). Sectors that did relatively well in January 1990- - metallurgy, chemicals and food processing - declined somewhat faster upto mid-1990. This initial stabilization period (Fig. 1) coincided with high savings rateF, vompletely unanticipated fiscal and trade surpluses and significant erosion of real wages, reducing aggregate domestic demand. Sales picked up between August and November, coinciding with lower interest rates, increased consumer spending and the simultaneous using up of the fiscal surplus and unutilized margin under wage indexation from the first half of 1990 ("macro loosening", Fig. 1, which began to be strongly reversed towards end-1990 as inflation picked up and the trade balance Figure **1** <!-- Start of picture text --> Real Sales Index<br>Rea Sales cmde<br>(Dec 1989-100) iok<br>l -<br>' i oro- i<br>Im|wt<br>I l<br>0l<br>I l I<br>l I<br>I I<br>T/<br>o i J A i 0 N O i F M<br>iih 1o0 I 1991 l<br>Based on Total Smple<br><!-- End of picture text -->

worsened). But output fell in December, in contrast to the year-end spurt to fulfil plan targets associated with pre-ETP years and continued to fall in first quarter 1991 with the collapse of CMEA trade. This market loss effect was accompanied by the elimination of CMEA subsidies on inputs and a big fall in real wages, indicating a simultaneous demand and supply shock. The electromachinery sector in particular was hard hit owing to its energy and material intensity plus dependence on CMEA markets.

Mirroring declining sales, finished goods stocks (as a percentage of sales and in absolute terms) displayed an erratic but upward trend, rising marginally in January 1990 and then sharply in February (Fig. 2 and Annex V). There was a marked increase in first quarter 1991 following the CMEA shock, especially in electromachinery, chemicals and light manufacturing. Interviews with managers indicated that electromachinery firms kept producing hoping that the CMEA sales impasse would be politicaliy resolved; chemicals firms found it increasingly unprofitable to export following the squeeze of margins resulting from the combination of dollarized CMEA energy and input prices and fixed exchange rate; and the light sector (textiles and leather) was unable to sell as a result of a severe deficiency in marketing skills and export barriers to the EC and other prized markets.

The sample data can be used to understand better the sharp initial contraction of output, which has been variously attributed to exploitation of monopoly power (raise price, lower output); liquidity squeeze owing to credit ceilings and high nominal interest rates; and inadequate aggregate