Government ownership
Many countries in the world neglected one of the important aspects of financial sector - the government ownership of banks. The attitude toward government ownership of banks was different across time. In 1960s and 1970s government ownership of banks was strongly supported by economists. But recent economic views support benefits of private ownership of banks.
Supportive views consider banking sector as ‘strategic economic sector’ along with utilities, education, etc. (Hawtrey, 1926) and point out that the government can improve the functioning of this sector, since the government can overcome market failures, exploit externalities and invest in socially desirable projects.
The supportive view includes three more narrow views:
1. The Social view argues that government plays the important roles in compensating of market imperfections that leave the socially desirable investments under-financed (Atkinson and Stiglitz 1980; Stiglitz 1994).
2. The development view focuses on the necessity of financial development for economic growth and stresses governments’ development goals. This view is associated with Alexander Gerschenkron (1962). He argues that in some countries private banks can channel funds for economic growth, but there are some countries where private banks are not able to attract sufficient funds to engage in financing profitable investment projects, because of public distrust to banking sector and absence of honest business practices. He stresses that government has sufficient information and incentives to promote socially desirable investments and in such countries it can help the development of lending to the private sector or simply subsidize private banks. As a consequence government ownership of banks promote the development of institutions of lending and the whole banking sector.
3. Macroeconomic view argues that government ownership makes monetary policy more effective. Private banks may frustrate expansionary monetary policy because they do not have incentives to increase lending to push the economy out of recession. Although this problem can be solved by government subsides, it will take time for legislative and materializing actions. Also, government owned banks could be used in crisis to solve various problems, for example to absorb the bad loans of restructured banks.
The supportive view claims two main arguments why direct government ownership is so important and it can not be replaced by prudential regulation. First, government is not able to provide enough incentives for private sector to produce socially desirable goods and services by regulation, but it can easily provide incentives to public bureaucrats (Holmstrom and Milgroms, 1991). Second, regulation may works in developed countries, but government ownership is beneficial when weak government makes regulation more difficult.
The theories discussed above are reasonable when the government maximizes social welfare. But the government often have political goal: first, the politicians usually try to maintain political support and they transfer resources to supporters (Shleifer and Vishny, 1994, 1998; Bennedsen, 1998); second, politicians are also interested in their own income, including bribes. Except taking politics into account, private ownership becomes further optimal, when competition between suppliers (reduce costs, innovation) and reputation mechanisms (do not want to produce bad quality on the expanse of cost reduction) are brought into play.
The contradictory view argues that banking sector is not necessarily different from other markets and includes two more narrow views:
1. The agency view emphasizes that government promotes effective allocation of resources in the presence of market imperfections but agency costs between government bureaucracies may more than offset the social gains from government ownership of banks.
2. The political view emphasizes political objectives of the government. Politicians channel funds to politically desirable investments and maximize their personal objectives (La Porta, Lopez-de-Silanec, and Shleifer, 2002). They provide employment, subsides and other benefits to supporters, who return the favor in the form of political contribution (Kornai, 1979; Shleifer and Vishny, 1994). In case of difficulties, state owned banks receive subsidies from government and they are never identified as being in a crisis. This is the case in the countries with underdeveloped financial sector, where government do not have to compete with private sector. Thus government ownership politicizes resource allocation, softens budget constraints and slows down economic development.
According to both broad views the government finances the projects that would not be financed in the private ownership. And both imply that government ownership of banks is wider in poorer countries with underdeveloped financial markets. But the goals of the government are different in these theories. The supportive view stresses that government finances socially desirable project, while opposing view underlines its politically orientation and suggests that market failures and promotion of development can be better addressed with regulation and supervision of banking sector by government than with direct government ownership of banks.
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