Abstract
Building on Vinhas de Souza (and Vinhas de Souza and Tudela), this chapter briefly describes the historical process of financial liberalization and integration of Baltic and Central European Countries (BCECs) since the 1990s. It investigates the hypotheses that the type of financial integration chosen by the BCECs played an important role in enabling liberalization to deliver welfare-enhancing outcomes.
The views expressed are solely those of the author and do not necessarily represent the official views of the European Commission.
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Notes
- 1.
The opening up and liberalization of financial services in developing countries would yield, in principle, both static and dynamic gains: static, one-shot efficiency gains from optimally allocating the available resources (i.e., developed, capital abundant nations would export capital to the developing, capital scarce ones; also domestically, deeper, more effective financial systems would facilitate the linkages between domestic savers and investors, reducing information asymmetries and scale problems), and dynamic ones because the growth rate would be shifted upwards by the increased capital stock created by the greater investment (temporarily, later adjusting again to the long-run growth trend).
- 2.
In the Baltic states, already in 1987, as part of the Gorbachev reforms, the monobank Gosbak (which formed the financial system, together with an emissions bank) had spun-off five specialized banks in all URSS republics (Savings, Agriculture, Social, Industry and Construction and Foreign Trade: a somewhat similar specialization was to be found in most other centrally planned economies, with, at least, a “central bank”, a savings bank and a foreign trade one).
- 3.
Levine (2002), after performing a panel analysis of large number of countries, concludes that either bank or market-based (i.e., via stock markets) financial systems can be growth-enhancing: what actually is relevant is the overall development of financial sector and, specially, the quality and effectiveness of the institutional framework (contract enforcement, investor protection, etc.).
- 4.
Sometimes almost comically so: as an example, in the early 1990s, Latvia allowed the creation of a bank—appropriately called Olympia Bank—just to finance the Latvian Olympic team.
- 5.
This figure does not include FDI flows. Namely, “total funds provided to the region grew from around US$200 billion in 2002 to some US$1 trillion in 2008 or 25 percent of regional GDP. About half comprised funding for banks (in particularly their CESEE subsidiaries), mostly in the forms of loans. The other half of the financing took the form of crossborder loans to non-banks”. See IMF (2013).
- 6.
However, even if Swedish banks were dominant, the level of concentration in the three Baltic markets was different: in both Estonia and Latvia, a single bank, Swedebank, was the clear market leader (see Scope Ratings 2019).
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Vinhas de Souza, L. (2021). Models of Financial Integration: The Experience of the Baltics and Central Eastern Europe. In: Landesmann, M., Székely, I.P. (eds) Does EU Membership Facilitate Convergence? The Experience of the EU's Eastern Enlargement - Volume II. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-57702-5_6
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