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Finance, economic development and the transition: the East German case

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  • Carlin, Wendy
  • Richthofen, Peter

Abstract

The role of banks in the transition concerns three issues: the bad loans problem, the role of banks in providing a solution to the problems of corporate governance of privatized enterprises and the access of new enterprises to finance for investment. This paper shows how the combination of early privatization of the banking system plus financial restructuring of enterprises by the Treuhand prevented the development of a 'bad loans' problem in East Germany. The merits of banks as large stakeholders in privatized enterprises has been frequently debated in Eastern Europe. Although the role of banks as owners of non-financial companies in West Germany is frequently exaggerated, there was a widespread public expectation that they would play a considerable role in the restructuring of East German enterprises. We show that their role in acquiring stakes in privatized firms in East Germany has been negligible and suggest reasons for this outcome. East Germany is characterized by a very high level of investment and the second part of the paper investigates how the financial system can affect the relationship between investment and growth. It has been argued that the inefficiencies of both development and commercial banking in the Italian Mezzogiorno have contributed to the failure there of high levels of investment to translate into growth. The efficiency characteristics of development and commercial banking in Southern Italy are contrasted with those in East Germany. Considerable attention is given to the extent of competition in commercial banking and to the delegation by the development banks of screening and monitoring activities to the commercial banks, which characterizes the German system. It is argued that the German banking system which has been transferred to East Germany does not suffer from the inefficiencies found in Italy. Evidence is provided for the convergence of the structure of banking in East and West Germany. Nevertheless, in spite of the extensive access of East German firms to development bank finance, evidence is provided that the financial system does not foster investment in intangibles such as in marketing and in R&D. This has serious consequences for those firms which are not owned by Western firms and hence do not have access to the retained earnings of the owner, nor to the ability of the owner to guarantee loans from the banking system.

Suggested Citation

  • Carlin, Wendy & Richthofen, Peter, 1995. "Finance, economic development and the transition: the East German case," Discussion Papers, Research Unit: Economic Change and Employment FS I 95-301, Social Science Research Center Berlin (WZB).
  • Handle: RePEc:zbw:wzbece:fsi95301
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    1. Faini, Riccardo & Giannini, Curzio & Ingrosso, Fulvio, 1992. "Finance and Development: The Case of Southern Italy," CEPR Discussion Papers 674, C.E.P.R. Discussion Papers.
    2. Corbett, Jenny & Mayer, Colin, 1991. "Financial Reform in Eastern Europe: Progress with the Wrong Model," Oxford Review of Economic Policy, Oxford University Press, vol. 7(4), pages 57-75, Winter.
    3. Carlin, Wendy & Mayer, Colin, 1992. "Restructuring Enterprises in Eastern Europe," CEPR Discussion Papers 700, C.E.P.R. Discussion Papers.
    4. Aghion, Philippe & Blanchard, Olivier J & Carlin, Wendy, 1994. "The Economics of Enterprise Restructuring in Central and Eastern Europe," CEPR Discussion Papers 1058, C.E.P.R. Discussion Papers.
    5. Edwards,Jeremy & Fischer,Klaus, 1996. "Banks, Finance and Investment in Germany," Cambridge Books, Cambridge University Press, number 9780521566087, March.
    6. Alexander, Ian & Mayer, Colin, 1990. "Banks and Securities Markets: Corporate Financing in Germany and the UK," CEPR Discussion Papers 433, C.E.P.R. Discussion Papers.
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    Cited by:

    1. R.T.A. de Haas, 2001. "Financial development and economic growth in transition economies A survey of the theoretical and empirical literature," Research Series Supervision (discontinued) 35, Netherlands Central Bank, Directorate Supervision.
    2. Ralph de Haas & Ilko Naaborg, 2005. "Does Foreign Bank Entry Reduce Small Firms' Access to Credit? Evidence from European Transition Economies," DNB Working Papers 050, Netherlands Central Bank, Research Department.
    3. Quack, Sigrid & Hildebrandt, Swen, 1995. "Das Geheimnis der Banken: Zum Einfluß von Organisationsstrukturen und Personalpolitiken deutscher und französischer Kreditinstitute im mittelständischen Unternehmensgeschäft," Discussion Papers, Research Unit: Organization and Employment FS I 95-103, Social Science Research Center Berlin (WZB).
    4. De Haas, Ralph & Ferreira, Daniel & Taci, Anita, 2010. "What determines the composition of banks' loan portfolios? Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 388-398, February.
    5. Schmidt, Klaus-Dieter, 1996. "German unification: A progress report," Kiel Working Papers 722, Kiel Institute for the World Economy (IfW).
    6. De Haas, Ralph & Naaborg, Ilko, 2006. "Foreign banks in transition countries. To whom do they lend and how are they financed?," MPRA Paper 6320, University Library of Munich, Germany.
    7. Hancké, Bob & Coulter, Steve, 2013. "The German manufacturing sector unpacked: institutions, policies and future trajectories," LSE Research Online Documents on Economics 56090, London School of Economics and Political Science, LSE Library.
    8. Hyman, Richard, 1996. "Institutional transfer: industrial relations in eastern Germany," Discussion Papers, Research Unit: Economic Change and Employment FS I 96-305, Social Science Research Center Berlin (WZB).
    9. De Haas, Ralph & Ferreira, Daniel & Taci, Anita, 2007. "What determines banks’ customer choice? Evidence from transition countries," MPRA Paper 6319, University Library of Munich, Germany.

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