The political economy of financial repression in transition economies
Financial systems in developing countries tend to be"restricted"or"repressed"through burdensome reserve requirements, interest-rate ceilings, foreign-exchange regulations, rules about the composition of bank balance sheets, or heavy taxation of the financial sector. Why are governments drawn to regulate financial markets to the point of financial repression? To address this question, the authors explore preliminary evidence from the post-Communist economies of Eastern Europe and the former Soviet Union, where financial regulations have rarely been examined systematically. They find that public-finance framework has limited ability to explain financial repression in the transition economies, given the peculiar financial lineage of the socialist state. The weak distinction between"public"and"private"spheres of finance in transition economies means that the deficit often conveys little information about the governments'real fiscal activities. It is more fruitful to examine how political institutions, by shaping the incentives politicians face, affect financial policy. Their findings suggest that post-Communist governments may adopt repressive financial controls - not to finance deficits more cheaply than would be the caseunder financial liberalization, but to maintain the authority and ensure the survival of those in power. In countries where pre-reform elites are plentiful in legislative bodies, where interparty competition is low, and where government parties are well-represented in parliaments, elites have been able to perpetuate a system of implicit subsidies by"softening up"the financial sector - especially commercial banks - to ensure the continued flow of cheap credit to specific borrowers. The main beneficiaries of these policies - large formerly state-owned industries with tight financial links to the largest commercial banks - are thus able to convert their well-established claims on public resources into preferential access to credit lines. In other words, financial repression in transition economies may simply serve to solidify main-bank, main-firm relations. These results would lend support to the claim of smaller, cash-starved Eastern European entrepreneurs that the commercial banks have"taken over the role of the old planning ministries."
|Date of creation:||31 Dec 1998|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pradhan, S., 1996. "Evaluating Public Spending: A Framework for Public Expenditure Reviews," World Bank - Discussion Papers 323, World Bank.
- Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
- Robert G. King & Ross Levine, 1993.
"Finance and Growth: Schumpeter Might Be Right,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(3), pages 717-737.
- King, Robert G.*Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
- Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
- Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
- repec:cup:apsrev:v:88:y:1994:i:04:p:811-828_09 is not listed on IDEAS
- Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.
- Roubini, N. & Sala-i-Martin, X., 1992. "A Growth Model of Inflation, Tax Evasion and Financial Repression," Papers 658, Yale - Economic Growth Center.
- Nouriel Roubini & Xavier Sala-i-Martin, 1992. "A Growth Model of Inflation, Tax Evasion, and Financial Repression," NBER Working Papers 4062, National Bureau of Economic Research, Inc.
- Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-790, October.
- Bencivenga, V.R. & Smith, B.D., 1990. "Deficits, Inflation, And The Banking System In Developing Countries: The Optimal Degree Of Financial Repression," RCER Working Papers 214, University of Rochester - Center for Economic Research (RCER).
- Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc.
- Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-963, September.
- Buffie, Edward F., 1984. "Financial repression, the new structuralists, and stabilization policy in semi-industrialized economies," Journal of Development Economics, Elsevier, vol. 14(3), pages 305-322, April.
- Luca Barbone & Domenico Marchetti, 1995. "Transition and the fiscal crisis in Central Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(1), pages 59-74, March.
- Luca Barbone & Domenico J. Marchetti, 1995. "Transition and the Fiscal Crisis in Central Europe," CASE Network Studies and Analyses 0040, CASE-Center for Social and Economic Research.
- Easterly, William, 1993. "How much do distortions affect growth?," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 187-212, November.
- Easterly, William & DEC, 1993. "How much do distortions affect growth?," Policy Research Working Paper Series 1215, The World Bank.
- Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
- Vito Tanzi, 1993. "Fiscal Policy and the Economic Restructuring of Economies in Transition," IMF Working Papers 93/22, International Monetary Fund.
- Haggard, Stephan & Webb, Steven B, 1993. "What Do We Know about the Political Economy of Economic Policy Reform?," World Bank Research Observer, World Bank Group, vol. 8(2), pages 143-168, July.
- Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
- Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
- Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
- Brock, Philip L, 1989. "Reserve Requirements and the Inflation Tax," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 106-121, February.
- Rodrik, Dani, 1993. "The Positive Economics of Policy Reform," American Economic Review, American Economic Association, vol. 83(2), pages 356-361, May.
- Van Wijnbergen, S., 1985. "Macro-economic effects of changes in bank interest rates : Simulation results for South Korea," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 541-554, August. Full references (including those not matched with items on IDEAS)