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THE WILLIAM DAVIDSON INSTITUTE
AT THE UNIVERSITY OF MICHIGAN

Financial Deregulation and Economic Growth in the Czech Republic, Hungary and Poland

By: Patricia Mc Grath

William Davidson Institute Working Paper Number 804 November 2005

Financial Deregulation and Economic Growth in the Czech Republic, Hungary and Poland Literature Review Extraction from PhD in Economics submitted to the Institute of Technology, Tralee, Co. Kerry, Ireland by Patricia Mc Grath Contact: pmcgrath_bitc@eircom.net

Abstract Advocates of financial regulation, Arestis and Demetriades, argue that financial liberalisation does not impact on financial market efficiency and the allocation of investment. Results in this study find that Czech, Hungarian and Polish firms are subject to scrutiny when applying for credit. The firm’s ability to provide collateral, the potential of the proposed investment project and individual financial backgrounds are all factors that are used before loans are offered, and it likely that allocational efficiency is strengthened in these circumstances, and not weakened. Stiglitz has the view that financial repression improves the quality of the pool of loans. Results here indicate that companies in these countries previously had very limited access to credit while government owned companies and government projects received the bulk of credit. After

deregulation it became apparent that the quality of the pool of loans was very poor. This study supports Shaw’s assertion that financial deregulation improves financial deepening.

JEL codes: Keywords:

G, G2, G21 Transition Economies, Industrial Development, Financial Deregulation,

Economic Growth, Eastern Europe

Financial Deregulation and Economic Growth in the Czech Republic, Hungary and Poland Review of the Literature

1.0

Introduction

The following is an extract from my PhD on Financial Deregulation and Economic Growth in the Czech Republic, Hungary and Poland.

The debate on financial market deregulation has a long pedigree and is marked with conflicting conclusions. The difference in conclusions is due not only to differences in theoretical

perspectives, but also to the way in which the link between deregulation and existing institutional set up, is taken into account. Substantial literature, on the role of financial There are two extreme views of

regulation/deregulation has emerged over the decades. regulation/deregulation, namely:

i)

regulation is necessary in order to reduce market failure, avoid banking crises and increase financial stability

ii)

deregulation leads to a more efficient allocation of resources. This leads to reduced costs and increased economic growth

The focus here is on three countries (formerly Central and Eastern Europe), namely the Czech Republic, Hungary and Poland. The positions of other countries are also examined prior to deregulation, during and after deregulation. In this chapter, theories surrounding regulation and deregulation are investigated. Sources have been drawn from books and journal articles from the British Library and libraries of Irish Universities, databases – Emerald and Business Source Elite, and also from the William Davidson Institute, U.S. The literature used dates from 1971 to 2004 and includes all well-known experts on “regulation/deregulation”. It encompasses views of

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theorists world-wide, and includes those interested specifically in developing countries/transition countries and developed countries.

The focus is on financial sector deregulation only, as this is the essence of the study. No attempt is made to include deregulation of any other industries. The differing views that dominate current thinking in this area are described in detail, along with current global events in terms of deregulation of financial markets and subsequent impact on economic growth. The experiences of the Czech Republic, Hungary and Poland to date, with deregulation are covered...
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