Financial System in Russia as Compared to Other Transition Economies: Anglo-american versus German-japanese Model

The type of financial system that emerges in transition economies is a result of path dependent development with an outcome determined primarily by two factors: the chosen model of privatisation and the degree of concentration of the banking system. Due to the specifically transitionary nature of former communist economies, in particular, due to wide scale privatisation that was carried out in these countries during relatively short period of time, chances to develop an American type financial system were generally even worse than in other emerging market economies (i.e. those without communist past). The only significant exception may be Russia which seems to be drifting in the direction of securities-based financial system due to unique combination of "securities friendly" nature of privatisation (give away of property to work collectives and distribution of vouchers), very decentralised banking system, and the period of very high inflation (1992-95) that undermined bank financing and virtually wiped out long term bank credits. Cross country comparisons and cross industry comparisons for Russia seem to suggest that bank credit and stock market, contribute to higher investment independently of each other; there is no evidence that bank-based financial system is superior for investment than the market based. Moreover, it appears that Russian banks redistribute funds from strong to weak enterprises, from relatively better off to poorly performing industries and hence do not really contribute to restructuring. ---------------------------------------------------------------------------------------------------* World Institute for Development Economics Research, United Nations University, [email protected] FINANCIAL SYSTEM IN RUSSIA AS COMPARED TO OTHER TRANSITION ECONOMIES: ANGLO-AMERICAN VERSUS GERMAN-JAPANESE MODEL Most economists seem to agree that (1) the financial system best suited to the current needs of transition economies is bank-based (i.e. of German-Japanese type), not market-based (Anglo-American type) and that (2) it is exactly this type of a system that emerges in postcommunist countries, including Russia (Aoki, 1994; Belyanova, Rozinsky, 1995; Berglof, 1995; Blasi, Kroumova, Kruse, 1996; Filatochev, 1997; Gros and Steinherr, 1997; KozulWright and Rayment, 1997; Litwack, 1995; Sutela, 1996). The arguments in favour of the bank-based system are usually based on the assumption that it takes a much longer time to develop efficient stock markets than to create a sound banking system (after all, banks existed under socialism, while securities markets did not even in the embryonic form) and that in the absence of well developed stock market banks are in a better position than any other existing institutions to ensure appropriate monitoring of managers and good corporate governance. There is a different view, however, held by some scholars. Kornai (1990) predicted that institutional investors in former socialist economies will become bureaucratic rather than entrepreneurial. Rostowski (1995) suggests that there is little scope for the development of German style universal banks in transition economies because state owned banks with poor skills to allocate long term credit would fail to exercise tight financial control over borrowers and because bank-based system requires very low rates of inflation which are unlikely to be achieved in transition economies for as much as a decade. Grosfeld (1997) argues that close links between banks and industry in a bank-dominated financial system do not serve well particular needs of transition economies since they do not create appropriate incentives for generation of information about different investment opportunities, and thus hinder rather than facilitate much needed industrial restructuring. Johnson (1997) states that financial-industrial groups (FIGs) in Russia have yet to prove that they can provide money and leadership for the effective restructuring policies and that it may well be that they have bitten off more than they can chew. Åslund (1998) claims that FIGs control a much smaller part of Russian economy than usually believed, that even new bank-led FIGs are likely to face more problems than fortunes and that more large FIGs will go down soon as market competition gains strength. It is argued in this article that the type of financial system that emerges in transition economies is not a matter of conscious choice of policy makers based on advantages and disadvantages of respective models. Rather, it is a result of path dependent development with an outcome determined primarily by two factors: the chosen model of privatisation and the degree of concentration of the banking system. Due to the specifically transitionary nature of