The cash-flow problem
After the mass privatization process ended IPFs had to survive with the acquired portfolio. Several trends were obvious in both countries. First of all, the number of IPFs decreased significantly. In Russia from the 650 licensed IPFs only 350 were active in 1995, according to a governmental estimate. There were 67 mergers among IPFs and 69 of them transformed into joint-stock companies. Overall the analysts consider that only 25-30 of them have played an important role on the stock market and managed to acquire an active portfolio with long-term perspectives of survival. Since many of the IPFs were relatively small this trend is not surprising. Many of them simply went out of business.
Many of the funds simply have not managed to earn sufficient profits to survive. One important reason for this is the illiquidity of the securities markets and of the market for the funds’ shares. Although the mass privatization programs ended, state continued to maintain control over major economic players. In Czech Republic, Banks dominated the creation of the IPFs. But they were controlled by the state which postponed the privatization of the banking sector. This impacted negatively on the efficiency of banking sector, which was unable to support the restructuring of the newly privatized companies. As a result their efficiency did not improve significantly. They were unable to pay dividends which translated in illiquid financial markets and further on the profitability of the investment funds. Read more
The specific of the Czech mass privatization program
Mass privatization in Czech Republic was dominated by large state-owned at that time banks. They sponsored the establishment of IPFs. The result was a hybrid between German bank oriented system and Anglo-Saxon system. The main difference between Czech system and German Model is that German Banks are the owners of the stakes in private companies while in Czech Model, Bank only control the IPFs which in turn own stakes in privatized companies.
Specific to the Czech Model is the phenomenon of cross-ownership that has resulted after the mass privatization. As explained earlier, banks sponsored IPFs which invested voucher capital in privatized companies. But the again banks were privatized (although maybe only later) and the existing IPFs had the possibility to buy stakes in competing banks. The legislation in place concerning IPF specifically precluded this phenomenon. However, Banks found ways to elude the regulation. One way to do that was to established subsidiaries, which in turn established IPFs.
Cross-ownership phenomenon implied a potentially collusive systems where disputes in companies’ boards could led to a stalemate. The potential winner of such a situation was the management and ultimately the state provided that the later still maintained stakes in privatized companies. One hypothesis is that the government, although at first was taken by surprise by the cross-ownership problem, it finally tacitly approved it. Read more
Opposition to Inflation
Broadly based political support for using monetary policy for the medium term control of inflation despite short term pains (Goodhart, 1994) makes an independent central bank able to reach this goal. All agents who prefer low inflation will support the idea of an independent central bank.
According to Posen (1993) opposition to inflation is due to its redistributive effect. Financial intermediaries as a group are harmed by inflation as banks are nominal net creditors. The longer term relations they have, the stickier their nominal net asset values are. As the actively traded securities are not subject to the same extent of loss from inflation as intermediates assets, the opposition to inflation should reflect the share of lending in its total activities. Financial sectors having universal banking are expected to have stronger anti-inflationary sentiment than those without. Besides this, it is easier to universal banks to unify their political voice as they already face unified regulations and markets. The opposition to inflation depends in inverse proportion to the regulatory power of the central bank over the financial sector. As monetary authority has the power to restrict credit or lending rates, financial firms may come in conflict with the CB. Read more
Macro Functions of Central Bank
The Phillips curve model with expectations developed into a short and a long run version. In the short run the trade-off between unemployment and inflation exists, but in the long it doesn’t. According to this model although both monetary and fiscal policy commits to low inflation once private agents enter with expectations the authorities get incentives to deviate with unexpected inflation, causing inflationary bias, that referred to time inconsistency. In the question of output maximization we have to know how unemployment and inflation is connected to output.
Unemployment is tightly related to output: one can say that high employment means automatically high output, and low employment means low output. Output and inflation seems to be positively correlated, but the reasoning is much more complicated. Because of the short run trade off, unexpectedly lower inflation means higher unemployment, so lower output. In the long run this direct proportionality does not work if vertical Phillips curve assumed, economy is in potential output (inflation does not affect output). Read more
