Abstract
Capital market imperfections have at least implicitly been identified as a potential source for frictions in the restructuring process already in the previous chapter in the context of labour re-allocation. In fact, capital markets indeed play a key role for successful structural change in transition economies. Economic restructuring in transition economies depends crucially on the functioning of financial markets, facilitating, e.g., the growth of the private sector and the restructuring of (former) state enterprises through the provision of capital. This requires in the first place that a sufficient amount of savings is mobilised in the household sector, and, even more importantly, that these funds are channelled to those sectors and enterprises, where they are used most efficiently. In this respect, the importance of financial markets for the transition process cannot be emphasised enough.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
This has also negative consequences for banks, whose loan portfolios are highly concentrated (cf. Abel and Bonin 1994: pp. 110, Bonin et al. 1994: pp. 1). Accordingly, banks are in many cases highly dependent on certain industries and firms, which may — as will be discussed below in the context of non-performing loans — also affect their lending policies.
It has been argued by some authors that this increase is not too dramatic when compared with the level of inter-enterprise credit in Western market economies (cf. e.g. Montias 1994: pp. 24). However, the financial position of enterprises in Western market economies is on average by far more stable and the default risks associated with inter-enterprise arrears are considerably less.
Similar estimates are given by Erdély 1996, Hrncir 1994, Montias 1994 or EBRD 1997.
Two-tier banking systems were introduced in 1987 in Hungary, 1989 in Poland and 1990 in the Czech Republic (then still the CSFR) (cf. Buch 1996: pp. 19, Várhegyi 1994: pp. 1994, Vit 1996: 30).
A somewhat different and remarkable approach has been chosen in Slovenia, where responsibility for managing the bad loan problem has to a large extent been given to a special government agency, the “Bank Rehabilitation Agency”, and where bank consolidation has been directly connected to enterprise restructuring (cf. Voljc 1994: pp. 9). If a bank’s loss exceeds its capital by a certain amount, the Bank Rehabilitation Agency gets comprehensive rights to interfere with the management of the bank. At the same time, the BRA becomes also creditor to the bank’s borrowers and in this context attains substantial influence on restructuring decisions of these enterprises.
A similar argument is provided in Stiglitz (1989) with regard to developing countries, where he argues that due to imperfections which are inherent to financial markets (largely originating from problems of asymmetric information), second-best policies have to be considered in devising a strategy for economic development.
This result is very close in spirit to the model by Murphy, Shleifer and Vishny (1992), where they show that partial price reforms can be welfare reducing, if unhampered resource flows from the controlled to the uncontrolled sector ensue.
This is essentially analogous to the result derived in the model by Mussa (1978, 1982), presented in section 5.1.
This basic structure is therefore equivalent to a model where part of the workforce starts investment projects in the first period, which are successful with probability π and which fail with probability 1 – 7r, and where the projects are financed from issuing bonds to the workers still employed in the state sector. The model is thus very close to the one by Castanheira and Roland (1996a, 1996b), where the development of new private firms is also financed from the income produced in the state sector, adding, however, the additional feature of uncertainty over the success of newly founded firms.
The following presentation basically follows Cornes and Milne (1989) who provide a very general survey on welfare implications of incomplete markets. Moreover, they emphasise the formal analogy between models of incomplete markets and rationing models and relate the results obtained to standard second-best theory.
Similar effects are present also in goods and labour markets, as discussed in the literature on efficiency wages or on the market for lemons problem. For a general survey cf. Stiglitz (1987).
This is essentially in line with the formulation in the OLG-models of Bencivenga and Smith (1993) or Ma and Smith (1996), where credit supplied in period r is used for the accumulation of capital, which is then used for production in period r + 1.
Rights and permissions
Copyright information
© 2000 Betriebswirtschaflicher Verlag Dr. Th. Gabler GmbH, Wiesbaden, und Deutscher Universitäts-Verlag GmbH, Wiesbaden
About this chapter
Cite this chapter
Wunner, N. (2000). Capital markets and transition. In: The Political Economy of Transition. Gabler Edition Wissenschaft. Deutscher Universitätsverlag, Wiesbaden. https://doi.org/10.1007/978-3-322-89642-1_6
Download citation
DOI: https://doi.org/10.1007/978-3-322-89642-1_6
Publisher Name: Deutscher Universitätsverlag, Wiesbaden
Print ISBN: 978-3-8244-7242-0
Online ISBN: 978-3-322-89642-1
eBook Packages: Springer Book Archive