Politics and finance: A comparison of banking system reform in Hungary, Poland, the Czech Republic, and the Russian Federation, 1990-1994.

Abstract

Are the failings of commercial banking systems across Eastern Europe and the former Soviet Union--cautious lending policies, growing non-performing loans, and limited competition--unavoidable legacies of central planning or are they the outcome of the political process? This dissertation argues that governmental policies have inhibited the development of efficient and effective financial markets across the region. A comparison of the Hungarian, Polish, Czech, and Russian experiences evaluates the behavior of banks and influence of interest groups, political institutions, external constraints, and economic considerations on three issue areas affecting banking sector development: adherence to tight monetary and fiscal policies; recapitalization and restructuring of major banks' balance sheets; and construction of new legal and regulatory environments. Three findings emerge. First, political institutions are important. Policy makers' approval of loose credit policies, inability to cut budgetary expenditures, forgiveness of non-performing loans, and propensity to erect barriers for new financial intermediaries are functions of the political institutional milieu. In particular, fragmented political systems lacking centralized party control mechanisms inhibit agreement among major political actors and give interest groups increased influence. Approaching elections may make policy makers susceptible to interest groups, but only when highly polarized political environments and winner-take-all arrangements leave incumbents unlikely to remain in office. Second, no single factor can account for the outcome of all reform efforts. Sometimes political weakness matters, sometimes political instability. Under certain circumstances, inherited economic conditions, international considerations, and periods of extraordinary politics have influenced the direction and outcome of reforms. Third, banks in Eastern Europe and the former Soviet Union are not necessarily impediments to the transition process. Rather, they are capable of making a positive contribution to the transition process, both as providers of finance and as corporate governors.