Politics, power, and institution building: Bank crises and supervision in East Central Europe

Abstract

Over the past 10–15 years the debate about the creation of economic governance institutions has shifted from an emphasis on the state rapidly implanting optimal incentives to a state capable of acting strategically and regulating. But how a government with little prior relevant skills or resources actually achieves the latter is still unclear. This article examines how different political approaches to transformation shape the creation of new institutional capabilities by analyzing bank sector reforms in the 1990s in three leading postcommunist democracies—Hungary, Poland, and the Czech Republic. Politicians create different political strategies that shape the organization of policymaking power, which, in turn, can facilitate or hinder the ability of relevant public and private actors to experiment and learn their new roles. With its emphasis on insulating power and rapidly implementing self-enforcing economic incentives, the ‘depoliticization’ approach creates few changes in bank behavior and, indeed impedes investment in new capabilities at the bank and supervisory levels. With its emphasis on distributed authority and rules of information sharing, the ‘participatory restructuring’ approach appears to have fostered innovative, cost-effective monitoring structures for recapitalization, a strong supervisory system, and a stable, expanding banking sector.

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