EUROPEAN UNIVERSITY INSTITUTE, FLORENCE
DEPARTMENT OF ECONOMICS
E U I W O R K I N G P A P E R No. 8 8 / 3 6 1 R E M O N E T IS A T IO N AN D C A P IT A L M A R K E T S IN T H E R E F O R M O F C E N T R A L L Y PLA N N E D E C O N O M IE Sby
DOMENICO M ARIO NUTT
BADIA FIESOLANA, SAN DOMENICO (FI)
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© Domenico Mario Nuti Printed in Italy in Novem berl988
European University Institute Badia Fiesolana - 50016 San Domenico (FI) -
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R E M O N E T I S A T I O N A N D C A P I T A L M A R K E T S IN T H E R E F O R M OF C E N T R A L L Y P L A N N E D E C O N O M I E S D o m e n i c o M a r i o Nuti, E u r o p e a n U n i v e r s i t y I n s t i t u t e , 5 0 0 1 6 F l o r e n c e , Italy. T h i r d A n n u a l C o n f e r e n c e of t he E u r o p e a n E c o n o m i c A s s o c i a t i o n , B o l o g n a U n i v e r s i t y , 2 7 - 2 9 A u g u s t 1988. S e s s i o n on: " I n t r o d u c i n g ca p i t a l m a r k e t s in E a s t e r n E u r o p e " . 1 . I n t r o d u c t i o n . S i n c e the m i d - 1 9 5 0 s t h e r e have b e e n r e p e a t e d a t t e m p t s at r e f o r m i n g the C e n t r a l sly P l a n n e d E c o n o m y (CPE) of t he S o v i e t U n i o n and o t h e r S o v i e t - t y p e e c o n o m i e s , i.e. d e c e n t r a l i s i n g e c o n o m i c d e c i s i o n s , a c t i v a t i n g m a r k e t s to r e p l a c e plans, u s i n g i n c e n t i v e s g e a r e d to p e r f o r m a n c e at m a r k e t v a l u e s . The f r e q u e n c y of t h e s e a t t e m p t s and t h e i r r e v e r s a l s i n d i c a t e s b oth the i n t e n s e p r e s s u r e for r e f o r m and t h e d i f f i c u l t y of its s u c c e s s f u l i m p l e m e n t a t i o n . The c u r r e n t r o u n d of e c o n o m i c r e f o r m i n v o l v e s t h e S o v i e t U nion, w i t h the " p e r e s t r o i k a " l a u n c h e d by G o r b a c h e v on his a c c e s s i o n to p o u e r in M a r c h 1985; H u n g a r y , w h e r e t h e p r o c e s s s t a r t e d in 1 968 has e n t e r e d a new p h a s e in t he l ast t h r e e y e a r s ; P o l a n d , in s p i t e of a spell of m i l i t a r y rule; B u l g a r i a and - f r o m a h i g h e r a c h i e v e d d e g r e e of m a r k e t i s a t i o n - Y u g o s l a v i a . R e f o r m a p p e a r s to have r e s t a r t e d , m o r e r e c e n t l y and sl o w l y , in C z e c h o s l o v a k i a ; in E a s t e r n E u r o p e t he o n l y c o u n t r i e s w i t h o u t s i g n s of r e f o r m are t h e GDR, w h e r e p r e s s u r e f o r c h a n g e is r e d u c e d by its p r i v i l e g e d r e l a t i o n s h i p w i t h the FRG and by its m ore f l e x i b l e v e r t i c a l l y i n t e g r a t e d s t r u c t u r e , and R o m a n i a w h i c h is r e g r e s s i n g t o w a r d s t he A l b a n i a n m o d e l . H o w e v e r s i g n i f i c a n t r e f o r m s are also t a k i n g p l a c e in s o c i a l i s t c o u n t r i e s o u t s i d e East E u rope, n o t a b l y in C h i n a and A l g e r i a .
T h e c u r r e n t r o u n d of r e f o r m s d i f f e r s f r o m e a r l i e r q a t t e m p t s in s e v e r a l r e s p e c t s . T h i s t i m e t h e l e a d c o m e s f r o m t he S o v i e t Union; it is a c c o m p a n i e d o f t e n by p o l i t i c a l r e n e w a l (see S o v i e t e m p h a s i s on glasnost,' ); it is m o r e w i d e l y u n d e r s t o o d t h a t a t e c h n o l o g i c a l and s e c t o r a l r e s t r u c t u r i n g of the e c o n o m i e s to be r e f o r m e d is n e c e s s a r y , and t h a t r e f o r m i m p l i e s a b a n d o n i n g t r a d i t i o n a l p o l i c i e s of o v e r a m b i t i o u s i n v e s t m e n t , u n c o n d i t i o n a l c o m m i t m e n t to p r i c e s t a b i l i t y and p r o t e c t i o n of job r i g h t s (and p e r h a p s full e m p l o y m e n t i t s e l f ) ; t h e r e is greater, o p e n i n g to d i r e c t f o r e i g n t r a d e w i t h o t h e r e c o n o m i c s y s t e m s ^ a n d to f o r e i g n i n v e s t m e n t , w h i l e t he b u r d e n of s e r v i c i n g a l a r g e ext e r n a l d e b t f o r c e s the m a i n t e n a n c e of t h e s e c o n d i t i o n s . H o w e v e r the m o s t v i s i b l e , s o m e t i m e s s p e c t a c u l a r a s p e c t of the c u r r e n t r o u n d of e c o n o m i c r e f o r m is t he r e v a m p i n g of m o n e y and m o n e t a r y p olicy, f o l l o w e d or to be f o l l o w e d by m o r e or l ess d e v e l o p e d c apital m a r k e t s .
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T h i s p a p e r c h a r a c t e r i s e s the t r a d i t i o n a l CPE m o n e t a r y , and f i n a n c i a l s y s t e m ( s e c t i o n 2), i l l u s t r a t e s the e x t e n t of c u r r e n t c h a n g e s ( s e c t i o n 3) w h i c h will be d i s c u s s e d f u r t h e r in the p a p e r s p r e s e n t e d at t h i s s e s s i o n by Z s i g m o n d Jarai and A l e s V a h c i c ; r e t r a c e s the s t e p s in the a r g u m e n t for and the actual s e q u e n c i n g of m o n e t a r y and f i n a n c i a l r e f o r m ( s e c t i o n 4); d i s c u s s e s s o m e s y s t e m i c c o n s t r a i n t s and t h e i r i m p a c t on f e a s i b l e f u r t h e r d e v e l o p m e n t s ( s e c t i o n 5). The p a p e r by W l o d z i m i e r z Brus and K a z i m i e r z L aski c o n s i d e r s w h e t h e r t he f u l l - f l e d g e d model of m a r k e t s o c i a l i s m m i g h t be a ble to a v o i d l a b o u r u n e m p l o y m e n t or h a n d l e f l u c t u a t i o n s in the level of e c o n o m i c a c t i v i t y ; R i c h a r d P o r t e s c o n s i d e r s the i n t e r n a t i o n a l a s p e c t s of i n t r o d u c i n g c a p i t a l m a r k e t s in E a s t e r n Europe. 2. M o n e y a nd f i n a n c e u n d e r ce n t r a l p l a n n i n g In t h e t r a d i t i o n a l CPE m o n e y is p r i m a r i l y an a c c o u n t i n g i n s t r u m e n t of a g g r e g a t i o n and c o n t r o l ; f i n a n c i a l f l o w s are c o m p a r t m e n t a l i s e d b e t w e e n e n t e r p r i s e s and h o u s e h o l d s , w i t h a bank m o n e y c i r c u i t for i n t e r - e n t e r p r i s e s t r a n s a c t i o n s and cash (or c a s h - c o n v e r t i b l e a c c o u n t s ) for t r a n s a c t i o n s i n v o l v i n g h o u s e h o l d s as s e l l e r s or buyers, i.e, w a g e p a y m e n t s and c o n s u m p t i o n p u r c h a s e s . T h e s e f i n a n c i a l f l o w s are a d j u s t e d p a s s i v e l y to p l a n n e d p h y s i c a l f l o w s and to the d e g r e e of t h e i r i m p l e m e n t a t i o n by a s i n g l e bank m o n o p o l i s i n g t h e f u n c t i o n s of c o m m e r c i a l as well as central b a n k i n g ( t h e r e f o r e d u b b e d " M o n o b a n k " in W e s t e r n l i t e r a t u r e ) . H o u s e h o l d s s a v i n g s ( w h e t h e r v o l u n t a r y or, w h e n i n t e n d e d p u r c h a s e s e x c e e d s u p p l y at c e n t r a l l y f i x e d prices, i n v o l u n t a r y ) can t a k e t he f o r m of a small r a n g e of d u r a b l e s i n c l u d i n g s o m e p r o d u c t i o n goods, or c a s h or a l i m i t e d r a n g e of f i n a n c i a l i n s t r u m e n t s ( d e p o s i t s , bonds, i n s u r a n c e , l o t t e r y t i c k e t s ) ; the b a l a n c e of r e v e n u e s and e x p e n d i t u r e s of t h e p o p u l a t i o n is c l o s e l y m o n i t o r e d and f o r m s the b a s i s of c a s h i s s u e s ; i d e a l l y it is b a l a n c e d ex ante t h r o u g h p r i c e and i n c o m e s po l i c y . E n t e r p r i s e s can o n l y use f i n a n c e for p u r p o s e s s p e c i f i e d in p lan d o c u m e n t s ; in t h i s s e n s e B e r l i n e r ( 1 9 7 0 t a l k s of " d o c u m o n e t a r y " e c o n o m y . I n v e s t m e n t is c e n t r a l l y d e c i d e d and a l l o c a t e d in real t e r m s w h i l e f i n a n c e is p r o v i d e d a u t o m a t i c a l l y and i n t e r e s t - f r e e f r o m t he s t a t e b u d g e t to i n v e s t o r s , who are s u b j e c t to s t r a i g h t line a m o r t i s a t i o n c h a r g e s on the h i s t o r i c a l c o s t of t h e i r i n v e s t m e n t s and t r a n s f e r b ack to t he s t a t e b u d g e t any s u r p l u s w h i c h t h e y m ay r e a l i s e (or r e l y on f u r t h e r t r a n s f e r s f r o m t he b u d g e t to c o v e r t h e i r p l a n n e d lo s s e s ; h o w e v e r o f f i c i a l r e g u l a t i o n s f or i n v e s t m e n t s e l e c t i o n i m p l y a s h a d o w ca p i t a l char_ge, see Nuti 1971b). C r e d i t is m o s t l y s h o r t t e r m and is also a u t o m a t i c a l l y a v a i l a b l e to e n t e r p r i s e s to f i n a n c e t h e i r w o r k i n g capital r e q u i r e m e n t s n e c e s s a r y to f u l f i l l t h e i r p l a n n e d tasks; it is g r a n t e d by the Ce n t r a l B ank at an a l m o s t s y m b o l i c i n t e r e s t r a t e d e s i g n e d to c over banks' a d m i n i s t r a t i v e costs. T r a d e c r e d i t b e t w e e n e n t e r p r i s e s is f o r b i d d e n . T h u s m o n e y in the t r a d i t i o n a l s y s t e m is the u nit of a c c o u n t , a t w o - t i e r m e d i u m of e x c h a n g e c o n d i t i o n a l l y to p lan c o n f o r m i t y , a s t o r e of
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v a l u e in c o m p e t i t i o n w i t h i n v e n t o r i e s of g o o d s r a t h e r t h a n w i t h a l t e r n a t i v e f i n a n c i a l or p r o d u c t i v e a s s e t s . M o n e y is an i n s t r u m e n t for m o n i t o r i n g and c o n t r o l l i n g p lan i m p l e m e n t a t i o n ( " c o n t r o l by the r o u b l e " is e m p h a s i s e d in S o v i e t l i t e r a t u r e ) , not an i n s t r u m e n t f o r e c o n o m i c m a n a g e m e n t , e x c e p t w h e n p l a n n e r s lose c o n t r o l o v e r f i n a n c i a l b a l a n c e s , in w h i c h c a s e m o n e t a r y p o l i c y can be an i m p o r t a n t i n s t r u m e n t f o r r e s t o r i n g t h a t b a l a n c e . F i s c a l p o l i c y t a k e s t h e f o r m p r i m a r i l y of d i v e r s i f i e d t u r n o v e r t ax r a t e s or s u b s i d i e s on c o m m o d i t i e s , and is i n d i s t i n g u i s h a b l e f r o m pr o f i t ; i n c o m e t a x is s p u r n e d as an u n n e c e s s a r y i n t e r n a l t r a n s f e r w i t h i n t h e s t a t e s e c t o r ; a m o d e s t g o v e r n m e n t s u r p l u s is t h e c u s t o m a r y b u d g e t a r y s t a n c e ; g o v e r n m e n t d e f i c i t s are e f f e c t i v e l y i n s t a n t l y m o n e t i s e d . T r a d i t i o n a l 1y C P E s are r e g a r d e d as h a v i n g a p r o p e n s i t y f o r a u t a r k i c or q u a s i - a u t a r k i c s t r u c t u r e (Wiles,- 1968). In t he p r o c e s s of plan c o n s t r u c t i o n ^ f i r s t the n e c e s s a r y i m p o r t r e q u i r e m e n t s of p l a n n e d l e v e l s of g r o s s o u t p u t are e s t i m a t e d by c o m m o d i t y g r o u p s , t h e n e x p o r t p l a n s are a d a p t e d to t he f o r e i g n c u r r e n c y r e q u i r e m e n t s of t he i m p o r t plan; if a d e f i c i t e m e r g e s , o v e r w h a t can be f i n a n c e d o u t of r e s e r v e s or f r e s h b o r r o w i n g , u n l e s s i m p o r t s u b s t i t u t i o n can fill t he gap o u t p u t p l a n s a re s c a l e d down. E x p o r t s are r e g a r d e d as a " n e c e s s a r y e vil", as a w i t h d r a w a l f r o m t h e d o m e s t i c m a r k e t . P l a n n e d t r a d e is u n d e r t a k e n t h r o u g h l a r g e i m p o r t - e x p o r t s t a t e e n t e r p r i s e s , s p e c i a l i s e d by c o m m o d i t y group, not on b e h a l f of p r o d u c e r s but on t h e i r o w n a c c o u n t . D o m e s t i c c u r r e n c i e s are not c o n v e r t i b l e into c o m m o d i t i e s ( o u t s i d e t he s p h e r e of c o n s u m e r p u r c h a s e s by n a t i o n a l s ) , let a l o n e o t h e r c u r r e n c i e s ; e x c h a n g e r a t e s h ave a p u r e l y a c c o u n t i n g role, w i t h e q u a l i s a t i o n s u b s i d i e s and t a x e s t e n d i n g to m a k e all p l a n n e d e x p o r t s e q u a l l y p r o f i t a b l e to p r o d u c e r s and i m p o r t s c o m p e t i t i v e w i t h d o m e s t i c s u b s t i t u t e s w h e n e v e r t h e y are a v a i l a b l e ; t h e e c o n o m y is e f f e c t i v e l y i n s u l a t e d f r o m t he f l u c t u a t i o n s in i n t e r n a t i o n a l p r i c e s and e x c h a n g e rate. T h e r e is p l a n n e d t r a d e i n t e g r a t i o n w i t h i n t he s o c i a l i s t t r a d i n g b l o c - C M E A or C o u n c i l of M u t u a l E c o n o m i c A s s i s t e n c e ( also c a l l e d C o m e c o n but o n l y in W e s t e r n l i t e r a t u r e ; at p r e s e n t i n c l u d e s t he USSR, t h e E a s t E u r o p e a n Six, M o n g o l i a , C u b a and U i e t n a m ) - as the r e s u l t of t he c o o r d i n a t i o n of n a t i o n a l plans. E ven w i t h i n C MEA, h o w e v e r , t r a d e f l o w s t e n d to be b i l a t e r a l l y c l e a r e d ( m o r e o v e r w i t h i n g r o u p s of h a r d and s o f t c o m m o d i t i e s ) and t h e r e is no c o m m o n c u r r e n c y , b a l a n c e s in t h e s o - c a l l e d t r a n s f e r a b l e r o u b l e b e i n g n e i t h e r c o n v e r t i b l e in S o v i e t c o m m o d i t i e s nor t r a n s f e r a b l e to c o u n t r i e s o t h e r t h a n t h e S o v i e t U n i o n , w i t h o u t p r i o r m u t u a l a g r e e m e n t ; i n t r a - C M E A t r a d e p r i c e s are u s u a l l y i n d e x e d to a m o v i n g a v e r a g e of i n t e r n a t i o n a l p r i c e s in c o n v e r t i b l e c u r r e n c i e s ’. All in all, f o r e i g n t r a d e t r a n s a c t i o n s are a d m i n i s t r a t i v e l y d e t e r m i n e d and t h e r e is no a u t o m a t i c m e c h a n i s m t r a n s m i t t i n g to p r o d u c e r s s i g n a l s a b o u t t r a d e o p p o r t u n i t i e s and i n d u c i n g t h e m to t a k e a d v a n t a g e of any s u c h o p p o r t u n i t i e s (see B r o w n and N e u b e r g e r 1968; H o l z m a n 1974, 197.4; v a n B r a b a n t 1973). In t h e o r y the C P E ' s M o n o b a n k is the c u s t o d i a n of e c o n o m i c e q u i l i b r i u m ; in p r a c t i c e it p r e s i d e s o v e r a r e g i m e
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of a l m o s t p e r m a n e n t e x c e s s de m a n d , i n t e r n a l and e x t e r n a l , to the p o i n t of l e a d i n g to the i d e n t i f i c a t i o n of the e c o n o m i c s of s o c i a l i s t p l a n n i n g w i t h " t h e e c o n o m i c s of s h o r t a g e " (Kornai 1980, 1982, 1986); t h i s is t h e r e s u l t of o v e r a m b i t i o n at all l e v e l s and p r i c e d o w n w a r d s i n f l e x i b i l i t y but is u l t i m a t e l y m a d e p o s s i b l e by t h e a c q u i e s c e n c e of the b a n k i n g s y s t e m . H e n c e the m o v e t o w a r d s m a r k e t d i s c i p l i n e , i n c l u d i n g c r e d i t d i s c i p l i n e i n s t e a d of a u t o m a t i c credit. 3. T h e e x t e n t of m o n e t a r y and f i n a n c i a l r e f o r m . M o n e t a r y and f i n a n c i a l r e f o r m p r e s u p p o s e s the p r i o r d i s m a n t l i n g of ce n t r a l p l a n n i n g as a s e t of d e t a i l e d p h y s i c a l c o m m a n d s to e n t e r p r i s e s and s e c t o r s , and the i m p l e m e n t a t i o n of a d e g r e e of e n t e r p r i s e a u t o n o m y and f i n a n c i a l i d e n t i t y , s u b j e c t to g o v e r n m e n t po.l i cy e x e r c i s e d t h r o u g h i n d i r e c t i n s t r u m e n t s . T h u s t he m o n e t a r y and f i n a n c i a l i n s t i t u t i o n s of Yugoslavia', w h i c h f i r s t m o v e d away f r o m ce n t r a l p l a n n i n g , are t he m o s t d e v e l o p e d in E a s t e r n E u r o p e (see D i m i t r i e v i c a nd M a c e s i c h , 1973, 1983); but e s p e c i a l l y in t h e l a s t two y e a r s t h e p ace of m o n e t a r y and f i n a n c i a l r e f o r m has b een f a s t and a c c e l e r a t i n g .
T he Y u g o s l a v b a n k i n g s y s t e m i n c l u d e s - b e s i d e the c entral b a n k N B Y plus the na t i o n a l b a n k s of t he f e d e r a t i o n m e m b e r s - 166 b a s i c b a n k s and t he a s s o c i a t e d b a n k s f o r m e d by b a s i c banks, o t h e r f i n a n c i a l i n s t i t u t i o n s s u c h as the P o s t O f f i c e S a v i n g s bank, t h e Y u g o s l a v B ank f or I n t e r n a t i o n a l E c o n o m i c C o o p e r a t i o n Y B I E C and i n t e r n a l b a n k s (i.e. c l o s e d f i n a n c i a l i n s t i t u t i o n s i n t e r n a l to e n t e r p r i s e s a c c e p t i n g d e p o s i t s f r o m e n t e r p r i s e w o r k e r s and B 0 A L s ) . N B Y c o n t r o l s c o m m e r c i a l b a n k s t h r o u g h l i q u i d i t y r a t i o s , r e s e r v e r e q u i r e m e n t s , c r e d i t c e i l i n g s , r e f i n a n c i n g . In 1972 the c o m m e r c i a l b a n k i n g s t r u c t u r e c h a n g e d f r o m o n e c o n s i s t i n g of c o m m e r c i a l b a n k s and i n v e s t m e n t b a n k s to a m i x e d b ank s y s t e m e n g a g e d in b o t h s h o r t and long t e r m o p e r a t i o n s . B a s i c b a n k s are f o r m e d by e n t e r p r i s e s , i n t e r n a l b a n k s of enterprises,, and o t h e r n o n - g o v e r n m e n t i n s t i t u t i o n s ; t h e y are r e g u l a t e d by o r g a n s c o m p o s e d of r e p r e s e n t a t i v e s of f o u n d i n g e n t e r p r i s e s ; until r e c e n t l y f o u n d i n g m e m b e r s of b a n k s had u n l i m i t e d l i a b i l i t y . A s s o c i a t e d b a n k s f o r m e d by b a s i c b a n k s pool r e s o u r c e s and u s u a l l y h a n d l e f o r e i g n e x c h a n g e o p e r a t i o n s , and t e n d to o p e r a t e a l o n g r e g i o n a l lines.
In 1 9 8 5 a new law was i n t r o d u c e d , w i t h w h i c h b a n k s w e r e to c o m p l y b e f o r e t he end of 1986. T he pew law r a i s e s c a pital r e q u i r e m e n t s of c o m m e r c i a l banks,, d e f i n e s the l i m i t e d l i a b i l i t y of b a n k s s h a r e h o l d e r e n t e r p r i s e s , r e q u i r e s t he b u i l d up of r e s e r v e s and e n c o u r a g e s ’i n t e r - r e g i o n a l c o m p e t i t i o n . A new a c c o u n t i n g law f r o m 1-1-1,987 e l i m i n a t e d t he p o s s i b i l i t y of d e f e r r i n g c u r r e n t f o r e i g n e x c h a n g e l o s s e s in e n t e r p r i s e b u d g e t s . T he p u r p o s e of t h e s e r e f o r m s is t h a t of e l i m i n a t i n g the d r a w b a c k s of the Y u g o s l a v b a n k i n g s y s t e m to date; t he f i n a n c i a l i n d i s c i p l i n e in the e n t e r p r i s e and b a n k i n g s e c t o r s , the t a k i n g o v e r by t he N BY of f o r e i g n e x c h a n g e r i s k on e n t e r p r i s e f o r e i g n b o r r o w i n g , t h e n e g a t i v e i n t e r e s t r a t e s , t he l e n d i n g to e n t e r p r i s e s at r a t e s l o w e r
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t h a n t he c o s t of f i n a n c e , t h e s o c i a l i s a t i o n of e n t e r p r i s e 1 o s s e s a l 1 r o u n d . In H u n g a r y , w i t h e f f e c t f r o m 1 - 1 - 1 9 6 7 , f i r s t c o m m e r c i a l b a n k i n g has b e e n s e p a r a t e d f r o m c e n t r a l b a n k i n g by t h e M o n o b a n k - as it w as d o n e in B r i t a i n w i t h S ir R o b e r t P e e l ' s A c t of 1844, w h i c h a b a n d o n e d t he p r i n c i p l e s of the b a n k i n g s c h o o l in f a v o u r of t h o s e of t he c u r r e n c y sc h o o l ) ; t h e n c o m p e t i t i o n has b een i n t r o d u c e d in c o m m e r c i a l b a n k i n g by t u r n i n g t he M o n o b a n k l e n d i n g d i r e c t o r a t e s and s o m e r e g i o n a l d e p a r t m e n t s i nto a u t o n o m o u s b a n k s and c r e a t i n g a d d i t i o n a l c o m m e r c i a l b a n k s ( c o m p e t i n g c o m m e r c i a l b a n k s w e r e a l r e a d y p r e s e n t in t h e U S S R in t h e e a r l y s t a g e s of NEP, see A r n o l d 1937; C a r r and D a v i e s 1969). T h r e e of the new b a n k s h a v e b e e n s e t up w i t h t he p a r t i c i p a t i o n of W e s t e r n c apital, n a m e l y C i t i b a n k B u d a p e s t , t he C e n t r a l E u r o p e a n I n t e r n a t i o n a l B ank and U n i c b a n k ; c o m m e r c i a l b a n k s h o w e v e r do not yet c o m p e t e f o r h o u s e h o l d s d e p o s i t s , r e s e r v e d to t he Nat i o n a l S a v i n g s Bank. T he c h a n g e i m p l i e s t h e g r a d u a l i n t e g r a t i o n and c o n n e c t i o n of all f i n a n c i a l f lows, and t h e r e p l a c e m e n t of b u d g e t a r y g r a n t s and a u t o m a t i c c r e d i t w i t h c o n t r a c t u a l r e l a t i o n s w i t h b a n k s b a s e d on c r e d i t - w o r t h i n e s s , and at an i n t e r e s t w h i c h is s u p p o s e d to b a l a n c e t h e l o a n s market. C e n t r a l B ank co n t r o l of c r e d i t e x p a n s i o n is e x e r c i s e d through, i n d i r e c t i n s t r u m e n t s s u c h as r e s e r v e and l i q u i d i t y r a t i o s , r e d i s c o u n t i n g s c a l e and r a t e s , o p e n m a r k e t o p e r a t i o n s ( i n i t i a l l y c o n s i s t i n g of p r i m a r y i s s u e s of s h o r t t e r m s e c u r i t i e s ) ; t h e way is p a v e d f o r a c t i v e m o n e t a r y p o l i c y . At p r e s e n t it is f e l t t h a t b o t h t he s c a l e of r e f i n a n c i n g and r e s e r v e r a t i o s are h i g h by i n t e r n a t i o n a l s t a n d a r d s , t w o e l e m e n t s o f f s e t t i n g e ach o t h e r but p e r h a p s a d d i n g up to a h i g h e r d e g r e e of d i r e c t c e n t r a l c ontrol t h a n d e s i r a b l e or i n t e n d e d . A t h o r n y q u e s t i o n is the v e r i f i c a t i o n and t r e a t m e n t of t h e p o r t f o l i o i n h e r i t e d by banks, s o m e of w h i c h c o n s i s t s of d o u b t f u l l o a n s m a d e under t h e e a r l i e r f i n a n c i a l r e g i m e . A n o t h e r is the o r g a n i s a t i o n of h o u s i n g f i n a n c e , w h i c h is p r e c o n d i t i o n f or the u n i f i c a t i o n of t he t wo m o n e t a r y c i r c u i t s of h o u s e h o l d s and e n t e r p r i s e s . H u n g a r i a n s t y l e m o n e t a r y r e f o r m has b een a d o p t e d in P o l a n d and B u l g a r i a (see D a v i d d i 1987), and its n e c e s s i t y has b e e n m a i n t a i n e d in t h e S o v i e t U n i o n by l e a d i n g r e f o r m e r s ; a f i r s t s t e p in t he U S S R has a l r e a d y been made w i t h t h e s e t t i n g up of s ix new s p e c i a l i s e d banks, d e c r e e d in J u l y 1987. C r e d i t - w o r t h i n e s s and f i n a n c i a l d i s c i p l i n e r e q u i r e s s t r i c t p r o c e d u r e s f o r the r e c o v e r y , l i q u i d a t i o n and b a n k r u p t c y of non f i n a n c i a l l y . v i a b l e e n t e r p r i s e s ; s uch p r o c e d u r e s are now in f o r c e in H u n g a r y , V u g o s l a v i a , P o l a n d and t h e S o v i e t U n i o n , and a h a n d f u l of b a n k r u p t f i r m s m o s t l y in c o n s t r u c t i o n - are pro-udly l i s t e d by r e f o r m e r s as a m a j o r a c h i e v e m e n t . In H u n g a r y s i n c e 1983, i.e. a l r e a d y b e f o r e the b a n k i n g r e f o r m , a b o n d m a r k e t has o p e r a t e d w i t h p r i m a r y i s s u e s and s e c o n d a r y t r a d i n g , for b o t h e n t e r p r i s e s (non s t a t e g u a r a n t e e d ) and h o u s e h o l d s ( g u a r a n t e e d ), w i t h i s s u e s g r o w i n g by o v e r t h i r t y t i m e s (100 t i m e s f or h o u s e h o l d s ) in
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f i v e y e a r s to a l m o s t 30 bn F o r i n t in 1987. S h a r e s have also b e e n i s s u e d and r e t r a d e d t h o u g h until now e x c l u s i v e l y w i t h i n s t a t e e n t e r p r i s e s . T h e n e x t t a s k s of the f i n a n c i a l r e f o r m are t h e d e v e l o p m e n t of t he r o l e of f i n a n c i a l i n v e s t o r s ( i n s u r a n c e c o m p a n i e s , p e n s i o n f u n d s , s a v i n g s a s s o c i a t i o n e t c e t e r a ) and of an i n t e g r a t e d m o n e y m a r k e t w i t h a u n i f i e d i n t e r e s t r a t e s t r u c t u r e , and t he d e v e l o p m e n t of an e q u i t y m a r k e t e x t e n d e d to h o u s e h o l d s ( a n n o u n c e d f or 1 - 1 - 1 9 8 9 ) ; this will r e q u i r e a p a r a l l e l d e v e l o p m e n t and g e n e r a l i s a t i o n of j o i n t - s t o c k c o m p a n i e s , at p r e s e n t l i m i t e d in n u m b e r and s c o p e . S i m i l a r f i n a n c i a l f a c i l i t i e s h ave b een a v a i l a b l e s i n c e 1 986 on an e x p e r i m e n t a l b a s i s in C hina, w h e r e c o m m e r c i a l b a n k i n g has d e v e l o p e d and t he f i r s t s t o c k e x c h a n g e w a s o p e n e d on 1 S e p t e m b e r 1986 in S h a n g h a i , f o l l o w e d by G u a n g d o n g and o t h e r p r o v i n c i a l i n i t i a t i v e s ; t h e r e are e i g h t " o v e r t he c o u n t e r " c e n t e r s in S h a n g h a i and S h e n y a n g 1 (i n t h e L i a o n i n g P r o v i n c e ; by N o v e m b e r 1987 the v a l u e of b o n d s q u o t e d had r e a c h e d Y u a n 300 inn, or U S $ 8 5 mn at t h e o f f i c i a l e x c h a n g e rate; see E l l m a n 1987; on e a r l y e x p e r i m e n t s s e e Xu T i n g 1an 1987). S h a r e s are still i l l i q u i d , h a v i n g to be h eld for s u b s t a n t i a l m i n i m u m pe r i o d s , and do not c a r r y a vote. At C h i n a ' s 1 3th P a r t y C o n g r e s s in O c t o b e r 1 9 8 7 it was a g r e e d t h a t s t o c k s and b o n d s h ave a p o s i t i v e r o l e to p lay in t he C h i n e s e e c o n o m y at its p r e s e n t s t a g e of d e v e l o p m e n t ( E l l m a n , 1987). In A l g e r i a , f o l l o w i n g l i b e r a l i s a t i o n m e a s u r e s for e n t e r p r i s e s and b a n k s ( m a i n t a i n e d in e x i s t e n c e by the 1962 n a t i o n a l i s a t i o n but o t h e r w i s e o p e r a t i n g as in a t r a d i t i o n a l C PE m o d e l ) , J a n u a r y 1 988 l e g i s l a t i o n has d e c r e e d the f i n a n c i a l r e s t r u c t u r i n g of s t a t e e n t e r p r i s e s , w h i c h have b e e n g i v e n new c a pital and t u r n e d i nto s t a t e - o w n e d j o i n t s t o c k c o m p a n i e s ; t h e i r s h a r e s are g i v e n a v a l u e c a l c u l a t e d and r e v i s e d by a c c o u n t a n t s and g o v e r n m e n t o f f i c i a l s . In May 1 9 8 8 e i g h t s t a t e - o w n e d but i n d e p e n d e n t T r u s t F u n d s ( " F o n d s de P a r t i c i p a t i o n " ) w e r e e s t a b l i s h e d , p a r t l y but not c o m p l e t e l y s p e c i a l i s e d by s e c t o r (m i n i n g , i n v e s t m e n t goods:, c o n s t r u c t i o n , p e t r o c h e m i c a l s , e l e c t r o n i c s , f o o d p r o c e s s i n g , m i s c e l l a n e o u s i n d u s t r i e s , s e r v i c e s ) ; t h e y have t he f u n c t i o n of m a n a g i n g s t a t e o w n e r s h i p . In the A l g e r i a n a p p r o a c h F unds m a n a g e r s , r e w a r d e d a c c o r d i n g to the f i n a n c i a l p e r f o r m a n c e of t h e i r p o r t f o l i o , w h i c h t h e y can a l t e r by t r a d i n g w i t h o t h e r Funds, are e x p e c t e d to e f f e c t i v e l y s i m u l a t e t he f u n c t i o n i n g of c a p i t a l m a r k e t s . In m i d - A u g u s t 1 9 8 8 a s p e c i a l Y u g o s l a v c o m m i s s i o n h e a d e d by Mr B r a n k o M i k u l i c , t he P r i m e M i n i s t e r , p r o p o s e d a r a d i c a l r e f o r m of ' e n t e r p r i s e s and of s o c i a l i s t o w n e r s h i p , w h i c h w o u l d a l l o w ^ Y u g o s l a v and f o r e i g n e r s to buy s h a r e s in t hem; t he p r o p o s a l will be c o n s i d e r e d in t he a u t u m n by the F e d e r a l A s s e m b l y (FT, 1 7 A u g u s t ) .
O t h e r c o u n t r i e s have b een m o r e c a u t i o u s in d e v e l o p i n g ca p i t a l m a r k e t s , but s o m e have b een b o l d e r in o t h e r d i r e c t i o n s : for i n s t a n c e , s i n c e S e p t e m b e r 1 987 o n c e a f o r t n i g h t the P o l i s h E x p o r t P r o m o t i o n Bank has been
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a u c t i o n i n g f o r e i g n e x c h a n g e w o r t h m i l l i o n s of d o l l a r s , to i m p o r t e r s on b e h a l f of e x p o r t e r s , at a r e a l i s t i c r a t e of e x c h a n g e i n c r e a s i n g l y c l o s e to the b lack m a r k e t rate.
In t h e S o v i e t U n i o n j o i n t - s t o c k c o m p a n i e s are r e p o r t e d to h a v e b een s et up " s p o n t a n e o u s l y " by s t a t e e n t e r p r i s e s or a g e n c i e s , s e e i n g t h a t i n t e r - e n t e r p r i s e a g r e e m e n t s of t h i s k i n d are not a c t u a l l y f o r b i d d e n by Law. For i n s t a n c e , in L e n i n g r a d t h e r e are now two " c o m m e r c i a l j o i n t s t o c k " b a n k s , set up by the M i n i s t r y of C h e m i c a l E q u i p m e n t ( M i n k h i m a s h ) and t h a t of E n e r g y T e c h n o l o g y ( E n e r g o m a s h ) to f i n a n c e e x p o r t p r o m o t i o n and d o m e s t i c v e n t u r e s , a p p a r e n t l y e m p o w e r e d to i s s u e b o n d s and a c c e p t d e p o s i t s in f o r e i g n c u r r e n c i e s as well as in r o u b l e s (FT, 12 A u g u s t 1 988). At the end of J u l y 1988 V n e s h e c o n o m b a n k - the S o v i e t B a n k of F o r e i g n E c o n o m i c A f f a i r s - and the E u r o c a r d / E u r o c h e q u e and M a s t e r c a r d o r g a n i s a t i o n s s i g n e d a l i c e n c i n g a g r e e m e n t e x t e n d i n g c r e d i t c a r d and c h e q u e f a c i l i t i e s f i r s t to f o r e i g n e r s (in c o m p e t i t i o n w i t h I n t u r i s t w h i c h has s i g n e d a s i m i l a r a g r e e m e n t w i t h U i s a ) then, in the s e c o n d y e a r of o p e r a t i o n , to 1 5 0 , 0 0 0 - 2 0 0 , 0 0 0 S o v i e t d i p l o m a t s , b u s i n e s s e x e c u t i v e s and t e c h n i c i a n s w i t h c o n v e r t i b l e r o u b l e a c c o u n t s at t he F o r e i g n E c o n o m i c A f f a i r s Bank. S a v i n g s b a n k s also h ave been i n v o l v e d in d i s c u s s i o n s a b o u t i s s u e i n g c r e d i t c a r d s on t h e i r o w n a c c o u n t - a s t e p t o w a r d s a c a s h l e s s s o c i e t y but d e f i n i t e l y not m o n e y l e s s s o c i e t y . At t h e s i g n i n g c e r e m o n y of the l i c e n c i n g a g r e e m e n t Mr U i k t o r G e r a s c h e n k o , the S o v i e t U n i o n f i r s t d e p u t y c h a i r m a n , t o o k d e l i v e r y of a t h r e e f e e t by f i v e f o o t E u r o c a r d (FT, 1 A u g u s t ) . T h i s is p e r e s t r o i k a . 4 . T h e " s e q u e n c i n g " of r e f o r m model T h e i m p o r t a n c e of w a s s t r e s s e d by Brus m o n e y in the r e f o r m e d ( 1 9 6 4 ) j a pi o n e e r i ng soci ali st d e t e c t i o n and a n a l y s i s of t he e a r l y s t a g e s of t h i s p r o c e s s in the 1 9 5 0 s can be f o u n d in G arvy, 1 955 and G r o s s m a n , 1 955 and 195Sj a g r e a t deal of a t t e n t i o n has a l s o - b een p aid to m o n e t a r y i m b a l a n c e and t he d e f i n i t i o n a nd m e a s u r e m e n t of " r e p r e s s e d i n f l a t i o n " (see for i n s t a n c e P o r t e s 1983; Nuti 1985). O t h e r w i s e t he r o l e of m o n e y and f i n a n c i a l i n s t i t u t i o n s u n d e r m a r k e t s o c i a l i s m has b e e n c o n s p i c u o u s l y n e g l e c t e d b o t h in the c l a s s i c a l l i t e r a t u r e on m a r k e t s o c i a l i s m a nd - until v e r y r e c e n t l y - in t he b l u e p r i n t s for e c o n o m i c r e f o r m in E a s t e r n E u rope. Vet t h e r e is a c o m p e l l i n g l o g i c a l s e q u e n c e in the a r g u m e n t f o r m o n e t a r y and f i n a n c i a l r e f o r m , w h i c h can also be i d e n t i f i e d as an actual and i n d e e d n o r m a t i v e s e q u e n c i n g in r e f o r m i m p l e m e n t a t i o n . It b'ears o u t M a u r i c e D o b b ' s c o n t e n t i o n t h a t e l e m e n t s of diffe-rent e c o n o m i c s y s t e m s c a n n o t be m i x e d in just any p r o p o r t i o n s , as o n e can w i t h a cake v a r y i n g i n g r e d i e n t s to t aste: o n c e l i m i t e d m a r k e t s for p r o d u c t s are i n t r o d u c e d , the a r g u m e n t e s c a l a t e s in f a v o u r of f u r t h e r e x t e n s i o n s . T h e s t a r t i n g p o i n t is the i n e f f i c i e n c y of ce n t r a l a l l o c a t i o n of p r o d u c t i o n t a r g e t s and g i v e n p h y s i c a l r e s o u r c e s to e n t e r p r i s e s in the c o n s u m p t i o n g o o d s s e c t o r : it
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s o o n b e c o m e s a p p a r e n t t h a t it is m o r e e f f i c i e n t to let c o n s u m e r i n d i c a t e thei.r p r e f e r e n c e s for the k ind of g o o d s t h a t can be p r o d u c e d w i t h t h o s e r e s o u r c e s , by s i g n a l l i n g d e m a n d p r ices, i n s t e a d of l e a v i n g o u t p u t s t r u c t u r e to a ce n t r a l d e c i s i o n ( even s o c i a l l y d e s i r a b l e and u n d e s i r a b l e g o o d s can be r e g u l a t e d by t a x e s and s u b s i d i e s i n s t e a d of d i r e c t c o m m a n d s ) . T he s e c o n d s t a g e is the e x t e n s i o n of t h i s r e a s o n i n g to i n t e r - e n t e r p r i s e a l l o c a t i o n of c u r r e n t in p u t s , still w i t h i n an o v e r a l l a l l o c a t i o n of i n t e r m e d i a t e i n p u t s to c o n s u m p t i o n ; the t h i r d s t a g e is t he r e d e p l o y m e n t of a g i v e n a m o u n t of p l a n n e d i n v e s t m e n t , a l l o c a t e d to c o n s u m p t i o n goods, b e t w e e n d i f f e r e n t s e c t o r s and e n t e r p r i s e s . G r a d u a l l y , in t he f o u r t h and f i f t h st a g e s , b oth t h e level and the s t r u c t u r e of i n v e s t m e n t are a r g u e d to be b e s t d e c e n t r a l i s e d to t he level of e n t e r p r i s e s . ft p a r a l l e l d e v e l o p m e n t o p e n s e n t e r p r i s e p u r c h a s e s and s a l e s to i n t e r n a t i o n a 1 s u p p l i e r s and p u r c h a s e r s .
T h e s e p i e c e m e a l e x t e n s i o n s of the b a s i c e f f i c i e n c y of m a r k e t r e d e p l o y m e n t of s c a r s e r e s o u r c e s t o w a r d s t h e i r m o s t p r o d u c t i v e uses t r a c e a na t u r a l path and s e q u e n c i n g of e c o n o m i c r e f o r m of the CPEs. F i r s t t he m a r k e t for c o n s u m p t i o n goods, t h e n for p r o d u c t i o n goods, d e m a n d r e m o n e t i s a t i o n , i.e. the use of v a l u e i n d i c a t o r s to m e a s u r e e n t e r p r i s e p e r f o r m a n c e and to t a k e t he g i v e n r e s o u r c e s to t h e i r m o s t p r o d u c t i v e uses. T h e n t he m a r k e t for f a c t o r s of p r o d u c t i o n , i.e. for labour, l and and ca p i t a l , b oth f i n a n c i a l c apital and p r o d u c t i v e as s e t s ; f i n a n c i a l capital f i r s t b e t w e e n e n t e r p r i s e s , t h e n b e t w e e n e n t e r p r i s e s and t h e i r o wn w o r k e r s , t h e n b e t w e e n e n t e r p r i s e s and h o u s e h o l d s as s e c t o r s ; f i r s t for loan c a p i t a l , t h e n f or r i s k c a pital. T h e r e is a t e n d e n c y t o w a r d s a c a s c a d e or d o m i n o e f f e c t f r o m t h e . a c c e p t a n c e of m a r k e t s as i) a u t o m a t i c ii) s e l f r e g u l a t i n g m e c h a n i s m s iii) r a i s i n g the p r o d u c t i v i t y of r e s o u r c e s . Of c o u r s e t he e x t e n s i o n f r o m m i c r o to m a c r o of t he a r g u m e n t in f a v o u r of m a r k e t s i-s not w a t e r - t i g h t ; t a k i n g i n v e s t m e n t o u t of the p l a n n i n g s p h e r e r a i s e s t h e p o s s i b i l i t y of l a b o u r u n e m p l o y m e n t ; i n d e e d s o m e l a b o u r u n e m p l o y m e n t b e c o m e s n e c e s s a r y to a c c o m o d a t e t he s t r u c t u r a l c h a n g e p r o d u c e d by d e c e n t r a 1 i s a t i o n . T h i s p r o b l e m , t a c k l e d by Brus and Laski in t h e i r p a p e r at t h i s S e s s i o n , is o f t e n e a s i l y f o r g o t t e n , s i n c e the c o m p a r a t i v e m a c r o e c o n o m i c p e r f o r m a n c e of s o c i a l i s t c o u n t r i e s in r e c e n t y e a r s has b een so poor as to t i p the b a l a n c e in f a v o u r of m a r k e t s e ven in the m a c r o s p h e r e ; or at l e a s t e x p e r i e n c e has s h i f t e d the b u r d e n of proof. In an e c o n o m y s u c h as Y u g o s l a v i a , w h e r e w o r k e r s are e n t i t l e d to a s h a r e of t h e i r e n t e r p r i s e s ' v a l u e a d d e d a f t e r d e d u c t i o n s for i n t e r e s t , __ a m o r t i s a t i o n and r e i n v e s t m e n t , the i n t r o d u c t i o n of s h a r e s m a k e s it p o s s i b l e to r e c o g n i s e - by m e a n s of f r e e s h a r e i s s u e s - wo r k e r s ' c o n t r i b u t i o n s to s e l f - f i n a n c e d i n v e s t m e n t and to e n t r e p r e n e u r i a l s u c c e s s ( U valic, 1987). W i t h o u t s u c h a r e c o g n i t i o n , the V u g o s l a v - t y p e e n t e r p r i s e s e e m s s u b j e c t e d to a p r o p e n s i t y to u n d e r e m p l o y l a b o u r and r e s p o n d p e r v e r s e l y to s h o r t t e r m p r i c e c h a n g e s ( Ward 1967; V a n e k 1970), as well as u n d e r i n v e s t in s e l f - f i n a n c e d p r o j e c t s ( F u r o b o t n and P e j o v i c h
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1972, F u r o b o t n 19S0). S h a r e s also e n a b l e the c o o p e r a t i v e - s t y l e Y u s o s l a y e n t e r p r i s e to t ap o u t s i d e r i s k c a p i t a l , w i t h o u t w h i c h it is p e r m a n e n t l y d e p e n d e n t on ce n t r a l c apital or r e l e g a t e d to small s c a l e l a b o u r i n t e n s i v e s e c t o r s . 5. S y s t e m i c c o n s t r a i n t s and r e f o r m a l t e r n a t i v e s O n c e t h e n e c e s s i t y of r e m o n e t i s a t i o n and s o m e k ind of c a p i t a l m a r k e t is a c c e p t e d t w o p r o b l e m s arise: i) s y s t e m i c i d e n t i t y , i.e. w h e t h e r a f u l l y r e f o r m e d m a r k e t s o c i a l i s m is r e c o n c i l a b l e w i t h the s y s t e m i c and i d e o l o g i c a l p r e m i s e s of s o c i a l i s m ; ii) f e a s i b i l i t y , i.e. w h e t h e r it w o u l d be p o s s i b l e to d e v e l o p f u r t h e r f i n a n c i a l i n s t i t u t i o n s w h i l e s till s a t i s f y i n g s y s t e m i c or i d e o l o g i c a l r e s t r i c t i o n s . Can c a pital m a r k e t s or q u a s i - m a r k e t s be r e c o n c i l e d w i t h s o c i a l i s m ? The b o l d n e s s of the H u n g a r i a n or the C h i n e s e p r o j e c t s m ay s u g g e s t t h a t t h i s is an i dle q u e s t i o n . Y e t we m u s t t a k e i nto a c c o u n t the s mall s c a l e , e x p e r i m e n t a l n a t u r e and u n f i n i s h e d i m p l e m e n t a t i o n of t h e s e p r o j e c t s , w h i c h m a y s till be o p p o s e d , s u s p e n d e d or r e v e r s e d p r e c i s e l y in t h e n a m e of s y s t e m i c o r t h o d o x y . T h e q u e s t i o n has a q u a l i f i e d p o s i t i v e a nswer. In all s o c i a l i s t e c o n o m i e s t h e r e is a p o s s i b i l i t y of a p p r o p r i a t i n g c o n s u m p t i o n g o o d s for p o s t p o n e d c o n s u m p t i o n ; w h y not t h e n let p e o p l e s a v e in t h e f o r m of m o n e y r a t h e r t h a n h o a r d i n g goods, so t h a t t h e r e is m o r e to go r o u n d for t h o s e w h o w i s h to c o n s u m e or for t h e s t a t e to u n d e r t a k e n m o r e p r o d u c t i v e i n v e s t m e n t or m o r e s o c i a l c o n s u m p t i o n . If t h e r e is m o n e y t h e r e is a p o s i t i v e n o m i n a l i n t e r e s t to i n d u c e p e o p l e to p art w i t h t h e i r l i q u i d i t y - y i e l d i n g cash (too m u c h l i q u i d i t y in the h a n d s of t he p o p u l a t i o n is p o t e n t i a l l y u n s t a b l e ) ; in all s o c i a l i s t e c o n o m i e s t h e r e are a lso l o t t e r i e s . If p r i v a t e s h a r e h o l d i n g is d i f f u s e d , as in t h e c a p i t a l i s t ideal of a " p r o p e r t y o w n i n g d e m o c r a c y " , and if s h a r e h o l d e r s ' v o t i n g p o w e r s w e r e r e s t r i c t e d or r e m o v e d , p r i v a t e s h a r e h o l d i n g w o u l d be no d i f f e r e n t f r o m a c o m b i n a t i o n of f i x e d i n t e r e s t s a v i n g s and l o t t e r y t i c k e t s , e x c e p t t h a t its y i e l d s w o u l d be m o r e j u s t i f i a b l e t h a n t h o s e of a p u r e g ame of c hance. If s h a r e s w e r e r e g a r d e d as c o n f l i c t i n g w i t h s o c i a l i s t p r i n c i p l e s t h e n t h e v e r y a b i l i t y to s a v e w o u l d h a v e to be c h a l l e n g e d on t he s a m e gr o u n d s . B ut s u p p o s e a f u r t h e r r e s t r i c t i o n - w h i c h will c e r t a i n l y r e m a i n at l e a s t for s o m e t i m e in a n u m b e r of s o c i a l i s t c o u n t r i e s - t h a t s h a r e h o l d i n g s h o u l d be p u b l i c not pr i v a t e . W o u l d it be f e a s i b l e to r e p l i c a t e the f u n c t i o n i n g of c apital m a r k e t s u n d e r t h e s e r e s t r i c t i o n s ? T h e r e s e e m to be two r e a d y m a d e s o l u t i o n s . The f i r s t is t he d e v e l o p m e n t of a G e r m a n - t y p e b a n k i n g i n v o l v e m e n t in t h e m a n a g e m e n t of e n t e r p r i s e s ; t he s e c o n d is t h e m o r e s p e c i a l i s e d use of A l g e r i a n - t y p e F o n d s de P a r t i c i p a t i o n . B a n k s co n t r o l o v e r c o m p a n i e s is e x e r c i s e d in G e r m a n y t h r o u g h the a p p o i n t m e n t of r e p r e s e n t a t i v e s to the
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B o a r d s of b o r r o w i n g f irms, t h r o u g h d i r e c t s h a r e h o l d i n g ( f o u n d to be 9 per c e n t of s h a r e c a p i t a l in a s t u d y of 74 r e p r e s e n t a t i v e q u o t e d c o m p a n i e s , E c k s t e i n , 1980) and a b o v e all t h r o u g h p r o x y v o t i n g on b e h a l f of t h o s e s h a r e h o l d e r s (by and l a r g e t he m a j o r i t y ) who h a v e l o d g e d t h e i r s h a r e s w i t h t h e i r b a n k s (see for i n s t a n c e C a b l e 1 9 8 5 a and 1985b). T his i n s t i t u t i o n a l p a t t e r n was i n t r o d u c e d as a c o n s e q u e n c e of the u n d e r d e v e l o p m e n t of c apital m a r k e t s in l a t e n i n e t e e n t h c e n t u r y G e r m a n y and is n a t u r a l l y s u i t e d to t h e r u d i m e n t a r y ca p i t a l m a r k e t of a r e f o r m i n g s o c i a l i s t c o u n t r y . P u b l i c s h a r e h o l d e r s , p o s s i b l y also p r i v a t e s h a r e h o l d e r s w i t h o u t v o t i n g r i g h t s , c o u l d e n t r u s t c o m p e t i n g c o m m e r c i a l b a n k s w i t h t he t a s k of o v e r v i e w i n g t h e i r c o m p a n i e s and m o n i t o r i n g and p r o m o t i n g t h e i r p r o f i t a b i l i t y . H o w e v e r , t h e m e r i t s of G e r m a n - t y p e s u p e r v i s i o n of i n d u s t r y by b a n k s are c o n t r o v e r s i a l and t h e s y s t e m has c o m e u n d e r s t r o n g c r i t i c i s m r e c e n t l y , e s p e c i a l l y in G e r m a n y ( G e s s l e r Kornmission 1979; E c k s t e i n 1980; U i t t a s 1983). The s y s t e m is w i d e l y r e g a r d e d as a s e c o n d - b e s t o p t i o n ; t he d o m i n a t i n g r o l e of b a n k s in the s t o c k e x c h a n g e is r e s e n t e d , e s p e c i a l l y in v i e w of c o n f l i c t i n g i n t e r e s t s v e s t e d in d i f f e r e n t f u n c t i o n s of b a n k s as l e n d e r s , s h a r e h o l d e r s and a d v i s o r s to i n v e s t o r s , t h e i r e m p h a s i s on s h o r t t e r m p e r f o r m a n c e and t h e d a n g e r s of m o n o p o l i s t i c p r a c t i c e s " ( w h i c h h ave a t t r a c t e d t h e a t t e n t i o n of t he M o n o p o l k o m m i s s i o n , see C able, 19 8 5 a ) . M o r e o v e r the G e r m a n s y s t e m g e n e r a t e s a c e r t a i n i n s u l a t i o n b e t w e e n the real w o r l d of p r o d u c t i o n and t he w o r l d of f i n a n c i a l v alues, w h i c h p r e v e n t s the f u l f i l m e n t of o ne of t he m a i n f u n c t i o n s of a ca p i t a l m a r k e t , t h a t of s t i m u l a t i n g e f f i c i e n t r e d e p l o y m e n t of a ssets. M o r e to t he point, the G e r m a n s y s t e m c o e x i s t s w i t h a f u l l - f l e d g e d s t o c k e x h a n g e and c a n n o t p o s s i b l y be e x p e c t e d to f u n c t i o n as a s u b s t i t u t e for a s t o c k e x c h a n g e . The s e c o n d f e a s i b l e d e v e l o p m e n t i n v o l v e s e x c l u s i v e l y s t a t e h o l d i n g c o m p a n i e s in m a r k e t - m a k i n g and the m a n a g e m e n t of s t a t e i n v e s t m e n t s ; it is the A l g e r i a n s o l u t i o n . T h e e s t a b l i s h m e n t and t h e m o d e of o p e r a t i o n of P o n d s de P a r t i c i p a t i o n are v e r y i n g e n i o u s and o r i g i n a l m e a n s of a d m i n i s t e r i n g s t a t e o w n e r s h i p and s i m u l a t i n g t he o p e r a t i o n of the w a n t e d capital m a r k e t s . T h r e e p r o b l e m s can be a n t i c i p a t e d , h o w e v e r : i) the a r b i t r a r y and n e c e s s a r i l y a c c o u n t i n g - o r i e n t e d v a l u a t i o n of e n t e r p r i s e as s e t s , w h i c h r e m a i n s an a d m i n i s t r a t i v e act d i v o r c e d f r o m m a r k e t v e r i f i c a t i o n ; ii) the u n d e r s t a t e m e n t of p r o f i t s if o n l y c ash f l o w s are c o n s i d e r e d , i g n o r i n g the c o m p o n e n t of e n t e r p r i s e p r o f i t s w h i c h is m a d e up of ca p i t a l g a i n s b r o u g h t a b o u t by e n t e r p r i s e s u c c e s s , w i t h r e s u l t i n g c o n f l i c t s b e t w e e n F o n d s and e n t e r p r i s e s as to the d i s t r i b u t i o n or r e i n v e s t m e n t of p r o f i t s ; iii) the i n c e n t i v e s t r u c t u r e of i n d i v i d u a l a d m i n i s t r a t o r s of the F o n d s r a i s e s a d i l e m m a : in-dividual b e n e f i t can be s e e n as u n d u e p a r t i c i p a t i o n in t h e r e t u r n s to n a t i o n a l s a v i n g s ; yet w i t h o u t s o m e f o r m of p a r t i c i p a t i o n t he i n c e n t i v e / p e n a l t y s t r u c t u r e of F o n d s a d m i n i s t r a t o r s is d e f e c t i v e , and o n l y too l i k e l y to be d o m i n a t e d by M i n i s t e r i a l p r e s e n c e in t h e i r s h a r e h o l d e r s ' a s s e m b l i e s , l e a d i n g to a p e r p e t u a t i o n of c e ntral a d m i n i s t r a t i v e control on e n t e r p r i s e cap i t a l .
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A t h i r d p o s s i b i l i t y can be i m a g i n e d , of r e l y i n g on a c o m p e t i t i v e v a l u a t i o n of e n t e r p r i s e a s s e t s , g e n e r a t e d w i t h i n t h e s t a t e s e c t o r , as a b a s i s f o r an i m p l i c i t v a l u a t i o n of e n t e r p r i s e s h a r e s , w i t h i n d i v i d u a l s b a r r e d f rom o w n e r s h i p but a b l e to t a k e r i s k s and a s s o c i a t e d r e w a r d s and p e n a l t i e s by m e a n s of l o a n s and d e p o s i t s i n d e x e d to the p e r f o r m a n c e of s h a r e s of t h e i r c h o i c e (or by m e a n s of bets s u c h as can be t a k e n t o d a y in c a p i t a l i s t e c o n o m i e s on a s h a r e i n d e x ) . S u c h c o m p e t i t i v e v a l u a t i o n of e n t e r p r i s e a s s e t s w o u l d s t a r t f r o m a s e l f - a s s e s s e d v a l u a t i o n by e n t e r p r i s e m a n a g e r s . R e a l i s t i c v a l u a t i o n s of a s s e t s w o u l d be o b t a i n e d if m a n a g e r s w e r e f o r c e d to sell t h e m to o t h e r e n t e r p r i s e s t h a t m i g h t w i s h to buy t h e m at t he d e c l a r e d p r i c e s or to r e v i s e p r i c e s so as to m a k e s u c h t r a n s a c t i o n s u n a t t r a c t i v e ( c a p i t a l t a x a t i o n b e i n g u s e d to a v o i d o v e r v a l u a t i o n by m a n a g e r s ; for a m o r e d e t a i l e d d e s c r i p t i o n and a c c o u n t of t h e p o s s i b l e m o d e of o p e r a t i o n of s u c h a s c h e m e s e e Nuti , 1 9 8 7 and 1988). S u c h s i m u l a t i o n of ca p i t a l m a r k e t s w o u l d not v i o l a t e any of t h e s y s t e m i c - i d e o 1o g i c a 1 r e s t r i c t i o n s i n d i c a t e d above, y e t w o u l d h ave no s i d e e f f e c t s o t h e r t h a n t h o s e of a t r u e c a p i t a l m a r k e t . A l t h o u g h t h e e f f e c t s on e f f i c i e n c y a nd d i s t r i b u t i o n of s u c h a s i m u l a t e d m a r k e t w o u l d be q u a l i t a t a t i v e l y s i m f l a r to actual c a p i t a l m a r k e t s w i t h p r i v a t e s h a r e h o l d i n g s , the i m p a c t of i n d i v i d u a l g a m b l i n g on s h a r e v a l u a t i o n s w o u l d be r e g u l a t e d at will by g o v e r n m e n t p o l i c y t h r o u g h t he a g e n c y or a g e n c i e s e n t e r i n g i n d e x e d t r a n s a c t i o n s or t a k i n g b e t s w i t h p r i v a t e i n d i v i d u a l s . The b a s i c e q u i v a l e n c e of actual and p r o p o s e d c a p i t a l m a r k e t s has an i m p o r t a n t c o r o l l a r y ; if ca p i t a l m a r k e t s can be r e p l i c a t e d w i t h o u t v i o l a t i n g the s t r i c t e s t s y s t e m i c / i d e o l o g i c a l c o n s t r a i n t s , in t h i s w ay or in s o m e o t h e r w a y t h e y o u g h t to and m o s t p r o b a b l y will be i m p l e m e n t e d . R E F E R E N C E S
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C A R R E.H. and D A V I E S R.W. (1969>, F o u n d a t i o n s of a p l a n n e d e c o n o m y , 1 9 2 6 - 2 9 , Uol. 1, M a c m i l l a n , L o n d o n D A U I D D I R. ( 1 987), " M o n e t a r y r e f o r m s in B u l g a r i a " , C o n f e r e n c e p aper, EUI, F l o r e n c e D I M I T R I E U I C D. and M A C E S I C H G. (1973), M o n e t a r y f i n a n c e in c o n t e m p o r a r y Y u g o s l a y i a , P r a e g e r , New Y ork D I M I T R I E U I C D. and M A C E S I C H G. (1983), M o n e y and f i n a n c e in Y u g o s l a u i a , P r a e g e r , N ew Y o r k E C K S T E I N U . (1980), T he r o l e of t he b a n k s in c o r p o r a t e c o n c e n t r a t i o n in W e s t G e r m a n y , Z e i t s c h r i f t f ur die g e s a m t e S t a a t s w i s s e n s c h a f t , 136, pp. 4 6 5 - 4 8 2 . E L L M A N M. (1987), " C h i n a ' s OTC m a r k e t s " , C o n f e r e n c e P a p e r , S S E E S , L o n d o n ; f o r t h c o m i n g in ACES. F U R 0 B 0 T N E.G. (1980), "The s o c i a l i s t 1 a b o r - m a n a g e d f i r m and b a n k - f i n a n c e d i n v e s t m e n t : s o m e t h e o r e t i c a l i s s u e s " J o u r n a l of C o m p a r a t i v e E c o n o m i c s , Uol. 4, n.2, pp. 184 - 1 9 1 . F U R 0 B 0 T N E.G. and P E J O U I C H S. (1972), " P r o p e r t y r i g h t s and e c o n o m i c t h e o r y : a s u r v e y of r e c e n t l i t e r a t u r e " , Jo u r n a l of E c o n o m i c L i t e r a t u r e , voi. 10, n. 3-4, pp. 1 1 3 7 - 1 1 6 2 . G A R U E Y G. (1966), M o n e y , b a n k i n g and c r e d i t in E a s t e r n E u r o p e , New York, Fe d e r a l R e s e r v e Bank of New York.
G E S S L E R K O M M I S S I O N (1979), B e r i c h t der S t u d i e n k o m m i s s i o n - G r u n d s a t z f r a g e n der K r e d i t w i r t s c h a f t , S c h r i f t e n r e i h e des BMF No. 28, ( R e p o r t of t he S t u d y C o m m i s s i o n : b a s i c q u e s t i o n s of c r e d i t e c o n o m i c s , BMF S e r i e s n. 28), F r i t z K n a p p U e r l a g , F r a n k f u r t .
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G R O S S M A N G. (1968) (Ed.), M o n e y and Plan, U n i v e r s i t y of C a l i f o r n i a P r e s s , B e r k e l e y and L os A n g e l e s . H O L Z M A N F.D. (1974), F o r e i g n t r a d e u n d e r central p l a n n i n g , H a r v a r d U.P., C a m b r i d g e Mass. H O L Z M A N F.D. (1976), I n t e r n a t i o n a l t r a d e u n d e r c o m m u n i s m : p o l i t i c s and e c o n o m i c s , M a c m i l l a n , L o n d o n K O R N A I J. ( 1980), T he E c o n o m i c s of S h o r t a g e , 2 vols., A m s t e r d a m , N o r t h H o l l a n d . K O R N A I J. (1982), G r o w t h , S h o r t a g e and E f f i c i e n c y , O x f o r d : B 1 a c k w e l 1 . K O R N A I J. (1986), " The s o f t b u d g e t c o n s t r a i n t " , K yklos, voi. 39, n .1, pp. 3 - 3 0 N U T I D.M. (1971), " The e v o l u t i o n of P o l i s h i n v e s t m e n t p l a n n i n g " , J a h r b u c h der W i r t s c h a f t O s t e u r o p a s , Band 3, M u n i c h and U i e n n a , pp. 3 9 5 - 4 3 8 . NUTI D.M. (1986), " H i d d e n and r e p r e s s e d i n f l a t i o n in S o v i e t - t y p e e c o n o m i e s ; d e f i n i t i o n s , m e a s u r e m e n t s and stabi 1 i s a t i o n " , C o n t r i b u t i o n s to P o l i t i c a l E c o n o m y , Uol. 5, pp. 3 7-82. N U T I D.M. ( 1987), ’ " F i n a n c i a l I n n o v a t i o n u n d e r m a r k e t s o c i a l i s m " , EUI W o rking^ P a p e r no. 8 7285, a lso in H u n g a r i a n in K o z g a z d a s a g i S z e m l e , M a r c h 1988. N U T I D.M. (1988), " C o m p e t i t i v e v a l u a t i o n and e f f i c i e n c y of ca p i t a l i n v e s t m e n t in the s o c i a l i s t e c o n o m y " , E u r o p e a n E c o n o m i c R e v i e w , 32, pp. 2-6. P O R T E S R. (1983), " The t h e o r y and m e a s u r e m e n t of m a c r o e c o n o m i c d i s e q u i l i b r i u m in c e n t r a l l y p l a n n e d e c o n o m i e s " , B i r k b e c k C o l l e g e D i s c u s s i o n P aper, no. 161,
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O c t o b e r .
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WORKING PAPERS ECONOMICS DEPARTMENT
86/206: Volker DEVILLE Bibliography on The European Monetary System and the European Currency Unit. 86/212: Emil CLAASSEN
Melvyn KRAUSS
Budget Deficits and the Exchange Rate
86/214: Alberto CHILOSI The Right to Employment Principle and Self-Managed Market Socialism: A Historical Account and an Analytical Appraisal of some Old Ideas
86/218: Emil CLAASSEN The Optimum Monetary Constitution: Monetary Integration and Monetary Stability
86/222: Edmund S. PHELPS Economic Equilibrium and Other Economic Concepts: A "New Palgrave" Quartet 86/223: Gluliano FERRARI BRAVO Economic Diplomacy. The Keynes-Cuno
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86/224: Jean-Michel GRANDMONT Stabilizing Competitive Business Cycles 86/225: Donald A.R. GEORGE Wage-earners’ Investment Funds: theory,
simulation and policy
86/227: Domenico Mario NUTI Michal Kalecki's Contributions to the Theory and Practice of Socialist Planning 86/228: Domenico Mario NUTI Codetermination, Profit-Sharing and Full
Employment
86/229: Marcello DE CECCO Currency, Coinage and the Gold Standard 86/230: Rosemarie FEITHEN Determinants of Labour Migration in an
Enlarged European Community 86/232: Saul ESTRIN
Derek C. JONES
Are There Life Cycles in Labor-Managed Firms? Evidence for France
86/236: Will BARTLETT Milica UVALIC
Labour Managed Firms, Employee Participa tion and Profit Sharing - Theoretical Perspectives and European Experience. 86/240: Domenico Mario NUTI Information, Expectations and Economic
Planning
86/241: Donald D. HESTER Time, Jurisdiction and Sovereign Risk
