Abstract
Three areas of inquiry relate to the transformation of the financial system in Vietnam. The first is the study object per se: a financial system. The second is the transition from a centrally planned system to a market economy, the process in which the financial system receives a new function. The third area is Vietnam itself: the historic and institutional context of the current transformation of the banking system. The common denominator for the approach to these areas is the institutional perspective. Hence, the first section of this chapter introduces this perspective. Section two deals with the main features of finance in a market economy. The final two sections of the chapter deal with the central planning problem and the transition process. The rest of the book deals with the third topic: Vietnam and its banking system.
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Commons (1934) argues that transactions should be the basic unit of analysis. Coase (1937) put forth the idea that institutions are a response to transaction costs and lays the foundation of transaction costs analysis in his works of 1937, 1946 and 1960 (see Coase (1988). Williamson (1975). Chapter 1, launches the concept of new institutionalism. Milgrom & Roberts (1992) is a broad overview of issues relating to transaction costs economcs. An issue of the Journal of Institutional and Theoretical Economics (1993), especially Williamson (1993), is a valuable introduction to the new institutionalism and its various sub-fields.
North (1990a), (1990b), (1991), (1993).
North(1990a),p.6.
North(1993),p.36.
North(1990),p.84.
Putnam(1993),p. 179.
Milgrom & Roberts (1992) make the distinction throughout their analysis.
Akerlof (1970) is the classic reference. In the “market for lemons” (i.e. used cars), only used cars of poor quality will be traded.
The classical example of moral hazard is that of insurance. If you are insured, you are less careful, and the risk is higher that your insured goods will be stolen. But if your insurance include self risk you are motivated to take better care. See Holmström (1979).
The maintenance of the prison is costly to the state, and to the prisoner there are costs in terms of losing your personal freedom, and losing your alternative income.
Kornai(1992).
Nove (1986) points out that information, motivation and means together rule action; p. 33.
Mayer & Vives (1993).
The focus in this study is on financial organizations as intermediaries for financial resources. Channelling financial resources through a banking system is, however, only one way to achieve intermediation. Other forms of debt financing are various types of direct lending (such as company securities). In addition, equity may finance the operations of firms.
The institutional perspective distinguishes between institutions, i.e. the rules regulating a certain activity, and organizations, i.e. the physical, organizational reflection of these rules. In the finance literature (and sometimes in other organizational contexts as well), banks and other financial organizations are often referred to as “financial institutions”. The terminology becomes further confusing as the recent developments of financial intermediation theory stress a functional focus (i.e. the functions that banks and other intermediators perform) rather than a focus on the institutional structure (i.e. the kind of organizations which perform these functions, which vary from country to country due to historical reasons). In reality, the former approach is more “institutional” than the latter, as it traces the transaction costs arising in financial exchange, and the resultant institutional responses. In this study, “institutions” are referred to only as rules for interaction: the banking institution is thus the specific pattern of intermediating resources, conducting payments, and handling risk, and not necessarily a bank organization.
See Bhattacharya & Thakor (1993) for a survey of modern banking theory, where this and other central problems in connection with financial intermediation are discussed.
Diamond & Dyvig (1983).
Diamond (1984), and Boyd & Prescott (1986).
Stiglitz and Weiss (1981).
With completely collateralized lending, the function of finance as promotor of productive investments also disappears, however. We would not get what Schumpeter (1934) refers to as “abnormal” credit: credit given against future gains. This is credit not given against a tangible collateral, but rather against the banker’s confidence in the entrepreneur’s ability to transform the credit into production.
Durski (1993) gives a good overview of various forms of Western bank regulation. Bhattacharya & Thakor (1993) provides more of the fundamental, theoretical aspects of regulation.
See Herring & Santomero (1991) pp. 25-30 on the risk of bank runs and the saftey net of the financial system to prevent these runs.
Greenwald & Stiglitz (1991).
Merton (1977).
See further Daltung (1994) [Chapter IV]; see also and Milgrom & Roberts (1992), pp. 170-176 on the collapse of the Savings & Loans associations in the US, which gives ample evidence of these mechanisms.
The Swedish banking crisis in the early 1990s, following fairly abrupt deregulation, is probably a good example of this.
For these aspects of government intervention in banking, see, for example, World Bank (1989), Stiglitz (1991), and Greenwald & Stiglitz (1991).
Hellwig(1991).
Gurley & Shaw (1960), Goldsmith (1969).
King & Levine (1993 a) and (1993b) argue that finance does affect economic growth.
Floro & Yotopoulos (1991) describe this as the traditional approach to capital markets in less developed countries.
King & Levine (1994) labels the focus on capital accumulation “capital fundamentalism”.
See Gersovitz (1988) and Deaton (1989). 34Gonzalez-Vega (1983) and Adams (1992).
According to Braverman & Guasch (1986), on average, only five percent of farmers in low income countries receive 80 percent of credits distributed through low interest rate credit programs.
Although the relationship between interest rates and savings potential is not so clear cut as one might imagine; see Gonzales Arrieta (1988).
McKinnon (1973) and Shaw (1973) made central contributions to this theory. See Fry (1988) for an extensive overview of the financial liberalization schoool and its opponents: the neo-structuralists. Fry’s support of the financial liberalization thesis is somewhat exaggerated, in my view, considering the fairly ambiguos empirical evidence of the relationship between financial conditions and growth he presents (Román, 1991).
Morisset (1993) shows that the character of financial liberalization is important. Liberalized interest rates by themselves do not guarantee economic growth. See also Park (1994).
The effects of financial liberalization in Latin America has indeed been very discouraging; see Diaz-Alejandro (1985) and Dornbusch & Reynoso (1989).
McKinnon (1991).
Floro & Yotopoulos (1991), p. 15.
Market fragmentation is a main theme in McKinnon (1973). See also Floro & Yotopoulos (1992).
A so-called ROSCA (Rotating Savings and Credit Association) is a club where members make regular contributions (daily, weekly, or perhaps monthly). One member receives the total sum of contributions at each installment. The order of distribution is decided by a lottery. See Callier (1990) and Besley, Coate & Loury (1993) and (1994).
Ghate (1988). See also Ahmed (1989) who shows that transaction costs for small informal loans are lower than for formal credit.
See Edwards (1988) for the relationship between formal and informal finance in the Korean case. Kapur (1992) discusses the specific features of formal and informal finance in general.
Kornai(1992),p. 11.
For comprehensive descriptions of the principles and the functions of socialist systems, see Nove (1986), and Kornai (1992); I use both extensively in this section. For more condensed overviews of different socialist countries, see Jeffries (1990), and also Vygodsky (1981).
Kornai (1992), p. 475.
See Komai (1992), Chapter 4, and Nove (1986), p. 325 on ideology, and also Brus & Laski (1989) on this interpretation of Marxism.
The bureaucracy, according to Kornai (1992), includes the totality of the party apparatus, the state administration and other administrative bodies (p. 41).
Kornai (1992), Chapter 3. The party structure is a hierarchy beginning at the bottom in party cells or branches, for specific districts or production units. A number of branches are headed by a district party committee, in turn directed by a province party committee etc. At the top is the central committee, electing the executive body of a political committee. The central leadership has a staff of officials whose activities often parallel those of the state administration in the various ministries. Nove (1986) stresses the dominance of the party over the state apparatus, but also its highly intertwined nature (p. 6).
The privacy, or at least semi-privacy, of signifcant shares of agricultural plots in the USSR should, however, be noted, as discussed by Nove (1986), p. 116 ff. See also Kornai (1990a) and Los (1990) on the private sector and the second economy in Marxist states.
Nove(1986),p.20.
Nuti(1992),p.49.
Wilczynski (1982), p. 43. See also Nove (1986), p. 235, Kornai (1992), p. 131, and Peebles (1991), p. 20, on abolishment of money in early marxism-leninism.
Lenin (1927) recognized the usefulness of a banking system: “Capitalism has created an accounting apparatus in the shape of the banks, syndicates, postal service, consumers’ societies, and office employees’ unions. Without big banks socialism would be impossible... A single State Bank, the biggest of the big, with branches in every rural district, in every factory, will constitute as much as nine-tenths of the socialist apparatus. This will be country-wide book-keeping, country-wide accounting of the production and distribution of goods, this will be so to speak, something in the nature of the skeleton of socialist society.”
For overviews of the socialist financial system see Grossman (1968), Peebles (1991), Kornai (1992), Chapter 8, and Montias (1994), pp. 10-15.
See Kornai (1992), Chapter 8 on the role of planned prices, and Nove (1986), in particular Chapter 7, on prices in theory and practice.
Kornai (1992), p. 232. See also Peebles (1991), pp. 26-27 on savings.
Komai(1992),p. 134.
Grossman (1968), pp. 9-10. 62Peebles(1991),p.29.
The causes behind the imbalances have evoked a heated debate between two schools of thought: the “disquilibrium school” and the “shortage school”. The former, with its prime proponent being Robert Portes, advocates that imbalances are largely a temporary problems due to sticky prices. The main advocate of the shortage school is János Kornai, who argues that shortages are due to systemic micro-related deficiencies in the socialist system, with origins both in the planning problem and in ideology. See van Brabant (1990) for an overview. The following discussion is largely inspired by Kornai, because of his explicit and thorough consideration of the institutional framework which determines the constraints for individual action in the socialist system. See however Ellman (1994) p. 11 on a recent critique against the soft budget constraint as an explanation behind shortages.
Milgrom & Roberts (1992), Chapter 4.
See Kornai (1992), Chapter 7, and Nove (1986), Chapter 2 on the planning process.
Kornai (1992), pp. 150-151.
See Nove (1986), p. 87 ff on the success indicator problem.
Nove (1986), p. 39.
See Nove (1986), Chapter 3. Van Brabant (1990) discusses the flawed idea about planners as omnipotent decision makers with all the control in their hands.
Kornai(1992), p.98.
Kornai (1992), p. 148.
Grossman (1968), p.4.
Grossman (1989), p.39.
This volunteerism could, however, also be regarded from the individual’s longer term perspective, i.e. that he realizes that his contribution to maintaining basic structures in society will benefit him and his family in the longer run.
Kornai (1992) claims that the official ideology of classical socialism makes no promise of equality of incomes; the relatively smaller income differentials are more due to the lack of alternatives for people in higher positions (and thus there is little competition for good managers etc), plus the existence of compensating, non-pencuniary incentives (pp. 324 ff).
Kornai (1992) p. 52 discusses how classical socialism ends when the unqualified faith in the system’s superiority is shaken.
Also discussed by Kornai (1992), p. 65.
Holmström & Milgrom (1991). If the reward was instead related to the asset’s future returns, this would probably make the manager more interested in maintaining the asset. Such an incentive scheme requires accurate and the unbiased measurement of future returns, involving measurement costs, and these could be saved by replacing such a management contract with private ownership.
Nove (1986), pp. 159-165 on problems of innovation. See also Grossman & Hart (1986, and Hart & Moore (1990).
Hayek (1945) claims that the central economic problem is adaption to change which the market system can best handle. Oliver Williamson (1991) discusses this and Barnard’s (1938) opposite position, which is that it is precisely internal organization that manages to adapt to changing circumstances. Williamson, naturally, claims that both are right. For some types of change, the price system is the sufficient statistics to which autonomous enterprises or individuals respond; other kinds of change require coordinated adaption which is best achieved in an hierarchic organization (pp. 277-279).
kornai (1992), p. 162, discusses the system-specific features of risk-taking which create persistent investment hunger, with the absence of individual responsibility, and the possibility of additional funding because of soft budget constraint mechanisms.
See Kornai (1986) for a definition and discussion of the concept.
Kornai(1986),pp.5-6.
Such considerations are typical in the world of Western banking, where a significant amount of loan contracts are renegotiated.
For alternative views on the soft budget constraint, see Ellman (1994) who refers to Gomulka (1994): “The main factors generating shortages now appear to be state control of international and domestic trade, state price control, and macroeconomics disequilibrium”...“The soft budget constraint now appears to be a concept more relevant to help explain inflation than shortages” (p. 11).
Kornai (1992), p. 133.
Kornai (1986), p.9.
See Schmieding (1993), pp. 216-219, and Ellman (1994) for overviews of the transition processes so far.
See Sachs & Wing Thye Woo (1994), and Wing Thye Woo (1994) for discussions on China in comparison to Russia and Poland.
Ellman (1994) quotes Brus (1993): “contrary to the conventional wisdom”...“mono-archy [i.e. communist dictatorship] may play a positive role in this process” (p. 18).
Von Mises (1935 [1920]), in Hayek (1935), referred to by Schumpeter (1987 [1943]), p. 172. Van Brabant (1990), p. 157 refers to the Barone-Lange-von Mises debate.
Hayek (1945) is the classic. See also Hayek (1988).
Schumpeter (1987 [1943]), p. 188. On the other hand, in Schumpeter’s analysis of capitalism, economic organizations become increasingly large-scale and monopolistic; thus there was no reason why not a central authority could not replace such commercial organizations, and be more beneficial to society (p. 189).
See Heilbroner’s (1992) self-critical reflections on the world after communism.
For example, capitalist collapse would come either because of decreasing profit quotas, according to Marx, or because of its overefficiency and eventual satiation of markets, according to Schumpeter. See Nove (1985[1983]), Chapter 1, and Nove (1986), Chapter 4 on Marx and the socialist system. See also Vygodsky (1981) for a pro-marxist account which indirectly supports the notion that Marx had little to say about socialism (p. 247).
A country like Sweden, with a huge public sector and an important welfare system, has been referred to as a socialist country, despite the fact that the lion’s share of the means of production is privately owned.
See Grossman (1968), and Brus & Laski (1989) for the long history of socialist reforms. 98Fforde & Paine (1987). 99 Bardhan & Roemer (1992).
Kornai (1990b), p.58.
Nuti (1992), p. 22.
Bardhan & Roemer (1992), p. 101.
Bardhan & Roemer (1992), p. 103.
See Komai (1992), p. 387 for a discussion of different aspects of transformation, revolution, reform etc.
Blanchard et al (1991) p. xxi. There is a substantial literature of varying quality on the transition processes. Good introductions to the main issues at stake are provided by Blanchard et. al. (1991), Clague & Rausser (1992), Aslund (1992c), Åslund (1994), and Ellman (1994).
Kornai (1992), Chapter 16.
But while doi moi (“new road” or “renovation”) is the Vietnamese equivalent of the Russian perestroika (restructuring), there is no similarly well known phrase in Vietnamese for glasnost (openness).
Olson (1992) argues for the importance of establishing individual rights (and responsibilities) in order to succeed with reform.
There is another way to view the motives behind the reduced subsidies from the state after privatization: if the state wants to ensure a high — but inefficient production — it has to compensate the enterprise by a subsidy. With privatization, the state can no longer order the enterprise to produce a high output. The private enterprise has stronger bargaining power: the compensating subsidy must at least be equal to the profits that a more efficient (and lower) output would yield. In this case, it is not the general interest in enhancing efficiency in the economy which is important to the bureaucracy, but rather the need to reduce costly subsidies; see further Boycko et.al. (1992).
Calvo & Frenkel (1991b).
Aoki & Kim (1995).
The financial sector as a bottleneck in the transition is frequently stressed; see for example Ellman (1994), and Kornai (1994).
Bonin, Long & Noel (1995), p. 3.
See, for example, Prindl (1992), Gowland (1992), Roe (1992), Lampe (1992), a special issue of the Journal of Banking and Finance (1993), Bonin & Székely (1994), Griffith-Jones & Drabek (1995), Bonin, Long & Noël (1995), Long & Rutkowska (1995), and Aoki & Kim (1995).
Williamson(1991).
See Blanchard et. al. (1991) on price stabilization.
McKinnon (1991),pp. 121-122.
See Hansson (1992) for reasons behind hyperinflation in transforming countries.
Blanchard et.al. (1991), Chapter 1.
Stiglitz (1992),p. 183.
McKinnon (1992), p. 123.
See Siklos (1994) for a discussion.
Poenish (1992), p. 41. Such transparancy may be difficult to obtain since socialist banking — even more than banking in market economies — are renowned for extreme secrecy. At the same time it is vital to change the public’s impression of banks as organizations which by obscure methods protect the state industry and the established but deficient structure of society.
Siklos(1994).
Poenisch (1992).
Durski (1993), pp. 15-16.
Fischer & Gelb (1991).
But, the literature points out, there are social costs of bankruptcy, especially considering the current state of the transition economies. In particular there are risks that viable enterprises may be forced into bankruptcy because of chain reactions, and the unclear definitions of property rights may also incur further costs (Aoki, 1995, p. 26).
There might, however, be reasons why banking should face somewhat heavier restrictions than other industries as far as competition is concerned, as argued in Chapter II; competition may force banks to squeeze margins, and thus banks may take on too large risks. This may cause losses to society both in terms of financial expenditures (compensating depositors), and in terms of deteriorating confidence in the banks.
Although there has been general agreement of the importance of the bad debt problem (see, for example, Griffith-Jones & FitzGerald, 1995), there seems to emerge a doubt as to whether the problem is as severe as believed (see Berglöf, 1995, p. 86, referring to Dittus, 1994). Although burdening many banks in many countries, some (in the Czech Republic, for example) have managed to (partly) resolve the problem, while in other countries high rates of inflation have reduced the value of financial claims.
Calvo & Frenkel (1991b).
Mates (1992).
Roland(1995).
Montias (1994).
See Åslund (1992c), Chapter 2, for an introduction.
Blanchard et.al (1991), p. xi.
Dewatripont & Roland (1992).
McKinnon (1991), p. 162.
Åslund (1992c), p. 39. Åslund has been a clear proponent of swift reform.
See Fischer & Frenkel (1992), who argues for shock treatment in Russia, but accepts more gradual meas ures in, for example, China (p. 38).
Svejnar (1991).
This insight is gaining recognition as the experiences of reform accumulate; see, for example, Ellman (1994).
Here I follow Schmieding (1993) in the division of these three types of approaches.
Perhaps a reason why real wages may increase too much, i.e. overshoot as described above: since workers experience a real wage reduction at first, they will — perhaps — be overcompensated by a substantial wage increase.
Poenish (1992), pp. 42-44.
Litwack (1991), p.78.
Schmieding (1993), p. 236.
North (1990), p. 140.
Murrell (1992), p.92.
As also argued by Montias (1994). 151Schmieding (1993), p 235.
Montias (1994), p. 10.
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Román, L. (1999). Banks and Transition a Theoretical Framework. In: Institutions in Transition. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-4981-9_2
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