Financial Turbulence and Capital Markets in Transition Countries by Jens s> Holscher (review)

Abstract

REVIEWS 589 but to give the reader an insider'sview of what has happened in the country since independence. To this end the author succeeds. However, an introduction and conclusion developing connections between the economic, political and securityaspectsexamined within the book would have improved such an account. Department ofPolitics J. GLENN University ofSouthampton Holscher, Jens (ed.). FinancialTurbulence and CapitalMarketsin Transition Countries. Macmillan, Basingstoke and London, and St Martin's Press, New York,2000. XX+ 197 pp. Index. ?45.oo. WE now think that we know more about the key determinants of successful transition.Very high on the list is the financial sector. In a marketsystemthe main systemicfunction of the financialsystemis to collect savingsfroma very large number of people, and with them to provide investment funds for somewhat smallernumbersof people and projects.As a necessary adjunctto this processfinancialintermediariesmake assessmentsof the creditworthiness of borrowers,and the viability of projects.They also monitor the progressof theprojectsand the loan repayments.Ifthe financialinstitutionsareincapable of providingthese servicesthen firmsare thrownbackon self-financeor interfirm loans. But even if there are functioning banks in transition economies, then it is important to remember that the financial system is inherently unstable, because it is driven by the profit motive. So regulation is required. But in addition it is necessary to recall that external financial shocks, often propagated through the international currency markets, will periodically threatenthe stabilityof the system.Hence the need for nationallendersof last resort,inter-centralbankborrowingfacilitiesandprudentbutflexiblenational exchange rate, monetaryand fiscalpolicies. Transitioneconomies provide a wide rangeof models of how to shiftfroma monobank system to a two-tiered central and commercial bank system, and then to privatize the second, commercial bank tier. The global financial turbulence, originatingin EastAsia in 1997, provided a test of the robustness of the new systems, and exposed significant weaknesses in their design. Hollscher'sedited book of a I999 conferenceprovidesfourcase studiesof this test:forRussia(Semenkov);Poland(Polanski);the Czech Republic (Turnovec, with a supplementarypaper by Matousek and Traci);and Hungary (Torok). Each case study is accompanied by two short comments by discussants,and their inclusion gives the reader a feeling for the debates that must have attended the originalpresentations. The case studiesarepreceded by two keynote addresses,by Tomann on the role of institutions in transition economies, and by Herten and Holscher on the type of financialmarketsthat might best suit Central-EastEurope. There are also two finalpieces: a conferencewrap-upspeech by Frowen,and a short fourpage note on riskand hedgingby Battermannand Broll. Thus the book succeedsor failson the strengthof the case studies.They are a qualified success. The account by Semenkov is pacey and fluently written, 590 SEER, 8o, 3, 2002 but the concentration on 'who is to blame?'and 'whatto do?'should alertthe reader to the fact that while this must have made an excellent conference presentation,it is not the detailedforensicexamination one might have hoped for. The storyiswell told, but there are no novelties. The Polish case studyis a solid piece of scholarship.It emphasizes that the country was little affected by the international economic turmoil of the late nineties -what effectstherewere coming more throughthe realsectorof the economy thanthroughthefinancialmarkets.Throughout thepreviousdecade Poland had pursued, or been forced by internal opposition to pursue, gradualist transition policies. The relatively stable nature of its economic institutions,and especiallythose in thefinancialsector,played a keypart in its avoidance of problems. Taken together, the papers on the Czech experience provide an interesting account of the failure of the Klaus government to appreciate how a market economy functions. Like a tyro general this government made the fatal mistakeof 'forminga view' about the field, without having seen it. Achieving an efficient functioning market system was a much harder task than they expected. These earlymistakeslost the Republic output, time and credibility, and although the latter can be recovered, the others cannot. It should be a salutarywarning for late starterslike Belarus. Restructuringand regulation are not optional extras. Hungary fared reasonably well, as one might have expected from the country with the most sophisticatedpre-transitionfinancial system. But even then the financial turbulence exposed failings in system design. Private ownershipturnedout to have only a weakimpact on banks'performance,and as Torokemphasizes,it is the qualityof the ownersas well as the qualityof the loan book that is important. Taken together...