Political Competition and Financial Reform in Transition Economies1

In recent years, a ‘consensus’ explanation of policy reform in the transition economies has emerged, according to which, greater political partisanship and intra-government division promotes progress in reform. Using panel data from 24 post-Communist countries between 1991 and 1998, we find that increasing the number of veto players faced by the executive branch promotes financial reform. However, countries where ruling parties controlled both executive and legislative branches of governments – as long as those governments were constitutionally constrained – were more likely to dismantle preferential credit programmes and implement banking and securities’ market reforms. Meanwhile, communist party strength and limited partisanship increase the likelihood that governments will remove financial restrictions but do not have clear effects on the adoption of subsequent financial-regulatory reforms. These findings suggest several modifications to the consensus explanation of economic reform in the transition. Comparative Economic Studies (2006) 48, 563–582. doi:10.1057/palgrave.ces.8100154