Financial Liberalization and Financial Repression in Formerly Socialist Economies (original) (raw)

Abstract

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 la...

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