Evolution, Problems and Prospects
- New Horizons in Money and Finance series
Edited by David Lane
Chapter 9: The Political Economy of Banking Reform and Foreign Debt
9. The political economy of banking reform and foreign debt Claudia M. Buch, Ralph P. Heinrich, Lusine Lusinyan and Mechthild Schrooten MOTIVATION* A sustained recovery from the 1998 crisis will depend critically on restoring conﬁdence in the banking system for two reasons. First, the ﬁnancial sector has so far barely contributed to the growth of the economy. In 1999, credit to the private sector stood at less than 12 per cent of GDP, one of the lowest values observed in transition economies and certainly well below the levels of developed countries (IMF, 2000b, Table 35).1 In the ﬁrst half of 2000 alone, real domestic credit contracted by an additional 12 per cent (DIW and IfW, 2000b). After the crisis, the economy recovered, largely on the basis of investment ﬁnanced from retained earnings. However, the limits of this approach began to show in early 2001, when rising real wages started to squeeze proﬁts, and current and future proﬁt opportunities started to diverge. As a result, it will be key to create a system of ﬁnancial intermediation which is capable of providing attractive savings incentives for households and of eﬃciently channelling those savings into productive new investments in the private sector. Secondly, Russia will need to restore access to international ﬁnancial markets in order to be able to sustain its economic recovery. Typically, the domestic banking system is a major channel through which emerging market economies integrate into international capital markets. Without thorough reform, the ineﬃciency...
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