6 second half of 1990 as demand picked up and fiscal and monetary policy were eased, also suggests demand problems: in all cases (except food processing, which is highly seasonal owing to the concentration of production activity in the second half of the year), inventories at the end of 1990 were considerably higher than at the end of 1989. Managers universally complai:ied about the demand barrier, but began complaining about liquidity only towards the end of the sample period in mid-1991, when slow sales and rising finished goods stocks began blocking cash flow, exacerbated by the collapse of the CMEA market. In stressing the gravity of the demand problem, however, it must be pointed out that neither the regression results nor the managers' assertions enable isolation of supply bottlenecks stemn ng from product quality and obsolescence problems. Further analysis is needed of supply bottlenecks, beyond the scopt of the survey results presented here.

# Profit and Cost Dynamics

Macroeconomic stringency and the nominal exchange rate anchor were designed primarily to halt inflation at the start of the ETP, but were also seen as a source of adjustment pressure on SOEs. Evidence on shrinking profit margins and changing cost structure presented below attest to several factors: (a) inflationary gains on raw materials were beginning to wear off as inventories were depleted, firms typically following historical, rather than inflation-based cost accounting; (b) firms were increasingly unable to follow 'cost plus constant mark-up" pricing rules owing to the fixed exchange rate and import competition; (c) the exchange rate anchor was obviously beginning to bite with the inflation process approaching what one would expect in a small, open economy - prices being constrained by international parities rather than being driven by cost-push alone; (d) firms under pressure to make ends meet were resorting to asset sales and leasing; (e) cost cutting measures were not in strong evidence.

# Underlying Profitability

Quarterly profit dynamics are presented in Table 1, which captures the ephemeral nature of 1990 profits. Metallurgy consistently displayed the highest profitability, until the first quarter of 1991, when it was overtaken by food processing. Initially, profitability in electromachinery was comparable to metallurgy; but it declined much faster, reaching bankruptcy levels by 1991:1 with the CMEA shock. The chemicals sector witnessed a sharp decline in 1990:1, and then stabilized, collapsing following the dollarization of CMEA energy and raw materials prices in 1991:1. The collapse of the light sector came much sooner, in 1990:11. This sector was subject to immediate price competition from South East Asian and private, unrecorded imports. In foreign markets, this sector was handicapped by barriers in the US, EC and EFTA markets. Marketing expertise is also severely deficient, the combination of factors leading to underlying losses by 199 1: I.

3Both net extraordinary gains, which behave erratically **during** hyperinfiation, **and** other income (subsidies; leasing and asset sales) were excluded in order to focus on underlying profitability, which nevertheless reflects inflationary gains on **stocks** in the last quarter of 1989 and to a smaller extent in the **first quarter** of 1990. To elminate the latter would require information on accounting practice, quantity of inventories and historical purchase prices, inforntaion not **easily** available. However, these effects may be disrcgarded after 1990:11. See Glos3ary.