John P. Bonin

Financial Sector Development in Transition Economies: Lessons from the First Decade

The first decade of transition witnessed rapid and tumultuous financial sector development. Although, few transition economies have reached the point where institutions and markets fulfill all the functions of market based financial intermediation, progress has been much more rapid than had been anticipated. In many countries, active market-oriented financial institutions function where there was only a state planning mechanism a decade ago. Initial experiences showed that bank privatization programs often failed to achieve independence from government control and from undesirable weak clients. It is now widely accepted that the participation of foreign strategic investors in banking is an effective way of meeting these goals Capital market development is complicated by the need to support the development of institutional infrastructure and regulatory mechanisms while at the same time avoid interfering in the markets. In many instances policy makers expected immature markets and institutions to accomplish unattainable goals. Equity markets cannot be effectively support mass privatization programs. There are still many missing pieces in virtually all of the transition country capital markets.

Dealing with the Bad Loans of the Chinese Banks

Chinese banks suffer from serious financial fragility manifested by high proportions of non-performing loans and low capital-adequacy ratios. A key policy introduced recently by the Chinese government to reduce financial risks is the establishment of four asset management companies (AMCs) for dealing with bad loans. Drawing on the experiences of the Resolution Trust Corporation in the United States and bank restructuring in the Central European transition economies, we argue that the original AMC design will not be successful in resolving the existing non-performing loans (NPLs) nor will it prevent the creation of new bad loans. We recommend a modification of the current proposal that redefines the relationships between the parent banks and the AMCs by transferring the deposits of problem enterprises along with their NPLs from parent banks to AMCs.

Retail Banking in Hungary: A Foreign Affair?

Over the last decade, Hungary has experienced more foreign bank entry than any country in world, starting with foreign greenfield operations and then followed by the privatization of four of its largest banks to strategic foreign owners. Currently about two thirds of all banking assets in Hungary are foreign owned; the only major bank without a foreign owner is Orsz??gos Takar??kp??nzt??r ??s Kereskedelmi Bank (OTP). During a decade in which lending to households declined in real terms until recently and household deposits remained relatively steady at around 20% of GDP, OTP lost its monopoly in retail banking to foreign-owned banks. By the end of the decade, OTP held shares of just over 50% in both household deposit and credit markets. In the last half of the decade, foreign banks increased substantially their market shares and currently hold more than 40% of all household deposits and about 40% of all loans to households. In this paper, we identify the important role played by foreign greenfield operations in intermediation within the household sector, especially from 1997. We provide evidence that, once they take control of formerly state-owned banks, strategic foreign investors move aggressively into retail banking. As the decade came to a close, retail banking was a growth industry in Hungary and foreign-owned banks were actively participating in both markets. Foreign entry provided healthy competition to OTP and prodded this widely held domestically controlled bank to develop new products and better services for Hungarian households. Over the last half of the decade, bank cards have been introduced to Hungarian households and transactions using these cards have grown by a factor of more than five. Over half of the population uses bank cards twice a month on average, almost exclusively for cash withdrawals from their current accounts. By investing heavily in information technology and using its extensive branch network, OTP has become the market leader in this new, growing business with more than 40% of all ATMs and bank cards issued in Hungary and more than 70% of all bank card transactions. Our analysis of OTPs behavior indicates that domestically controlled banks with local expertise may have a significant role to play in retail banking in small, open transition (or emerging) economies.

Foreign Entry into Chinese Banking: Does WTO Membership Threaten Domestic Banks?

No abstract available.

Work incentives and uncertainty on a collective farm

Abstract The collective farm households optimal allocation of time among work on both the collective and private plots and leisure is analyzed in certain and uncertain environments. The examination of static equilibrium solutions indicates that the collective farm need not be inefficient nor provide poor work incentives. Uncertainty is shown to exert a distinctive influence on work allocations. Implications are drawn from comparative static analysis to discuss the effects of government policy, e.g., increased crop quotas, on work incentives. The Soviet development period, recent agricultural reforms in the Khrushchev-Brezhnev era, and general policy implications are considered in the light of these new analytical results.

Banking in Transition Countries

Modern banking institutions were virtually non-existent in the planned economies of central Europe and the former Soviet Union. In the early transition period, banking sectors began to develop during several years of macroeconomic decline and turbulence accompanied by repeated bank crises. However, governments in many transition countries learned from these tumultuous experiences and eventually dealt successfully with the accumulated bad loans and lack of strong bank regulation. In addition, rapid progress in bank privatization and consolidation took place in the late 1990s and early 2000s, usually with the participation of foreign banks. By 2005, the banking sectors in many transition countries had developed sufficiently to provide a wide range of services with solid bank performance. Recently, banks have switched their focus from lending to enterprises in a somewhat underdeveloped institutional environment to new collateralized lending to households, which accounts for much of the recent growth of credit in many transition countries.

Dealing with financial fragility in transition economies

We examine the efforts of transition economies to deal with financial fragility and resolve banking cries We characterize the birthing process of banking in transition and the three essential features of banking crises in transition economies: (i) bad loans and the relationship to state owned industries, (ii) development of institutional infrastructure and (iii) credible commitments to resolution and privatization. We then discuss the experiences of seven important transition countries in order to identify the salient features of their efforts to resolve banking crises.

Towards Market-Oriented Banking in the Economies in Transition

Privatization of the banking sector is usually viewed as the way to create market oriented banking sectors in formerly planned or transition economies. However, bank privatization is only part of the requisite story. Market-oriented banking requires the disengagement of the state from direct governance of banks (whether they are state-owned or privatized) and the simultaneous development by the state of an effective regulatory framework for the banking sector. At one and the same time, the governments should be getting out of the banking business and getting into the regulatory/supervisory business. It is no wonder that managing these two seemingly contradictory tasks is often so difficult.

On the theory of the competitive labor-managed firm under price uncertainty: A correction

In a recent issue of this journal, Muzondo (1979) introduces price uncertainty into the “pure model” of the labor-managed firm whose objective is to maximize short-run dividend per worker by varying freely a single input, labor. Following the Ward(1958) tradition, Muzondo assumes that any variation in labor requires a change in the membership base on which the dividend is calculated. For this “pure model” of the labor-managed firm (hereafter, L-M), Muzondo claims four main results: (1) a risk-averse L-M firm produces more output than a risk-neutral L-M firm; (2) under constant risk aversion the responses of an L-M firm under price uncertainty are, generally, the same as those under certainty; (3) under decreasing absolute or increasing relative risk aversion, the responses of an L-M firm are, generally, unpredictable; and (4) except for result (2), the responses of L-M firms under price uncertainty are, generally, different from those under price certainty. Although results (1) and (2) are correct, results (3) and (4) are incorrect due to a recurring error in the proofs contained in the appendix of Muzondo’s paper. In fact, we show in this note that many of the responses of an L-M firm under price uncertainty are qualitatively the same as those under price certainty given Muzondo’s assumptions. In particular, the L-M firm will increase employment when fixed charges are increased and decrease output in response to an upward shift in the distribution of output price. Both are equivalent to the results shown by Ward for the price-certain case. From a policy perspective, the response of the L-M firm to tax changes is important. However, except for the result that is ambiguous, Muzondo’s qualitative results are incorrect and should not be used for policy prescriptions. Furthermore, when signable, the responses of the L-M firm to a change in a tax parameter are always the opposite of those of the capitalist-managed (hereafter, C-M) counterpart.

Information, motivation, and control in decentralized planning: the case of discretionary managerial behavior

Abstract A simple piecewise-linear managerial incentive scheme is analyzed in a decision-making environment in which a manager is allowed some discretionary activity (effort). Initially, he must report to the planner a target that will be used subsequently to evaluate his performance. If managerial effort is chosen after the random production components are realized, this predicted target will be more realizable than one reported in the absence of such discretionary adjustment. The sensitivity of target and performance to the parameters of the incentive scheme and the managers utility function is examined to study the planners ability to both acquire information and motivate performance. J. Comp. Econ. , Sept. 1979, 3 (3), pp. 235–253. Wesleyan University, Middletown, Connecticut, and Massachusetts Institute of Technology, Cambridge, Massachusetts.