Recapitalization of Banks in Transition Economies
Poland and Hungary in the New Market Economy
by
Book Cover & Preview Text
Introduction
‘Probably in
no other domain are the organizing principles of the Soviet-style central
planning and of the capitalist market economy so radically opposed as in
matters of finance.’
‘Across the
great landmass from Brandenburg to the Bering Straits the business of banking
is reviving, as market economies are established. A process that took hundreds of years in Western Europe and
decades in Japan is being telescoped into a few years in Central and Eastern
Europe and the Former Soviet Union.’
These two observations underscore the significant
magnitude and crushing time constraints of transition banking in Central and
Eastern Europe (CEE). In the decade
following the collapse of communism, Poland and Hungary emerged as two of the
region’s economic leaders. Both
countries are consequently poised as early candidates to join the European
Union. Although not finalized, the road
to accession-readiness was paved through the bitter economic and political
landscape of the 1990s. The decade was
ushered in by the requirements of economic reform on an unprecedented
level. Starting virtually from scratch,
the development of a financial structure was needed to underpin the economy. While a banking system existed under
communism, it bore no resemblance to the type of institution required for a
market economy.
Under the right conditions, financial markets and
institutions allocate resources, ‘intermediating between savers who seek safe
and remunerative repositories for their funds and entrepreneurs seeking
external finance for investment projects.’
They also support hard budget constraints by assessing projects on a
risk and return basis, monitoring funds and holding corporate governance
accountable. Transaction costs may be
reduced because banks efficaciously manage monetary transfers and
payments. According to the European
Bank for Reconstruction and Development (EBRD), economic performance is
determined by the efficiency of the financial institutions and markets. Yet early in the transition, most
governments primarily focused their attention on macroeconomic stabilization
and price liberalization. It did not
take long, however, before a crisis erupted in the banking system that
threatened to undermine the entire economy.
Formats
Book Details
About the Book
This book is as much about human behavior as it is
about banking and economics. The
technical aspects of bail-out policies, capital asset ratios, risk assessments,
etc. are clearly outlined. But the key
to successfully transitioning from a planned to a market economy, particularly
in the banking sector, ultimately comes down to people. After decades of central planning, Central
and Eastern Europe was fully indoctrinated with a mindset that was anathema to
a liberal market economy.
Nicholas Barr, a professor at the London School of
Economics and an economist at the World Bank, aptly characterized the
post-Soviet era as a trail of tears. He
directly witnessed the absolute economic devastation that blanketed the former
iron curtain in the 1990s. While
elements of widespread pain are unavoidable in transition economies, there are
approaches to change that can put financial systems on successful
trajectories. Some of the best and
brightest minds traversed the Atlantic to offer sage advice on financial
economics. But at the end of the day,
success or failure was ultimately driven by sticks and carrots.
Finally, the lessons from this book are global in
scope. One only has to remember the
U.S. Savings & Loan debacle of the 1980s.
About the Author
James Mitchell was the Managing
Director of International Sales and Marketing for CSX Corporation. In addition to his responsibilities at the
corporate headquarters, Mr. Mitchell managed the company’s offices in