Financial Liberalization and Financial Repression in Formerly Socialist Economies

The financial systems of developing countries tend to be restricted or repressed by burdensome reserve requirements, interest-rate ceilings, foreign-exchange regulations, constraints on banks? balance sheets, and the heavy financial-sector taxation. This article explores preliminary evidence from the post-communist economies of Eastern Europe and the former Soviet Union. Using data from 25 countries between 1991 and 1996, we find that the standard public-finance framework has limited applicability to the transition economies. It is more fruitful to examine how political institutions affect financial policy. Our findings suggest that post-communist governments may adopt repressive financial controls to ensure the survival of those in power. In countries where the pre-reform elite are abundant in legislative bodies and where interparty competition is low, such elite have perpetuated a system of implicit subsidies. The main beneficiaries of these policies are large, formerly state-owned industries with close financial links to the largest commercial banks. These results lend support to the claim that the commercial banks have taken over the role of the old planning ministries.