Debt as a control device in transitional economies: the experiences of Hungary and Poland

Herbert L. Baer and Cheryl W. Gray

No 1480, Policy Research Working Paper Series from The World Bank

Abstract: The basic economic challenge in the transition from socialism to capitalism is creating incentive structures and institutions that promote enterprise change and restructuring. This is the motivation for most of the reforms debated during the transition - whether privatization, demonopolization, trade reform, or financial sector reform. Most research on corporate governance and privatization has focused on the role of owners - whether on the problems inherent in the separation of ownership and management (most Western literature) or on the need for true owners who represents the interests of capital (most literature on transition economies). But debt is also an important control device, as Western literature on corporate finance increasingly recognizes. The authors explore debt's role as a control device in transition economies, focusing especially on Hungary and Poland, which are relatively far along in the reform process. They ask, first, in what ways creditors exert control over firms in advanced market economies and how such control interacts with that exerted by equity holders. They then ask whether creditors in Central and Eastern European countries play similar roles and, if not, what roles they should play, and what can be done to give them the capacity and incentives to play those roles. They focus on three fundamental requirements for debt to function as a control device: information, proper incentives for creditors (including banks, suppliers, and government), and an efficient legal framework for debt collection (including collateral, workout, and bankruptcy regimes). While both countries are making progress in all three areas, there is still much to be done. Hungary and Poland illustrate only two of many approaches. Other transitional economies, such as the Czech Republic, Estonia, and Russia, are following different approaches that should be explored in future analysis.

Keywords: International Terrorism&Counterterrorism; Banks&Banking Reform; Payment Systems&Infrastructure; Environmental Economics&Policies; Financial Intermediation; Banks&Banking Reform; Environmental Economics&Policies; Financial Intermediation; Financial Crisis Management&Restructuring; Housing Finance (search for similar items in EconPapers)
Date: 1995-06-30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi0page.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:1480

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().