Study On Bank Privatization In Global Perspective

Arthur Lewis(1955), Alexander Gerschenkron(1962) and several other prominent development economics'writings in the 1950s and 1960s tended to agree that the state should play a key role in the banking sector. Influenced by this idea, many developing countries nationalized the banks. However, the recent researches on the state-owned bank performance suggest decreasing the government intervention to increase bank efficiency (see Laporta et al(2002), Barth et al(2001)). The time saw a sea change in the view of the state's role in the economy in 1990s, so the bank privatization became the very center in most countries, especially in developing countries.Advocates point out that bank privatization through foreign banks or strategic investors entry can improve the efficiency , decrease the intervention of government(Otchere,2005;Beck et al,2005). But some other critics argue that bank privatization is not a single restriction to improve the bank performance, other factors will also have greater influence(Clarke George N.G., et al., 2005), so bank privatization does not mean better bank performance in practice.China itself has pledged that foreign banks will be allowed to operate freely in China in five years after join WTO. Foreign banks or strategy investors will be permitted more deeply and freely to compete with domestic banks after 2006. Therefore, the increase in efficiency and internationally accepted banking practices will be a long aim. From this year, private capital is encouraged involving banking sector reform to accelerate four major banks reform in China, which can complement the state-bank ownership reform, and ensure that they are able to compete with the foreign banks. The key question explored in this paper is whether there is justification or successful experience for such a massive bank privatization in other developing countries, which can guide the reform of state-banks of China.In this light, the paper will follow the process of bank privatization, to better understand the mechanism of bank privatization to improve bank performance. This paper is organized as follows: the introduction of bank privatization in the first chapter; the relevance of bank privatization is outlined in the second chapter, which focuses on why most countries selected bank privatization and decreased the government intervention in banking and economy in 1990s. In chapter 3, the relationship of bank privatization route and bank performance is analyzed. Firstly, bank privatization will be a dynamic process, as it will redistribute the resources which have been owned by different profit-groups. The government should regulate the process, to equal the different profits, to plan a suitable strategy, and to ensure the efficient reform. Secondly, the route of privatization will influence the bank performance at last, through changing bank its own governance structure and market structure. Therefore, the focus of discussion is put on how the government should control the bank privatization, playing an important role without distorting the route of improving bank efficiency.From chapter 4 to chapter 6, the influences of privatization on bank efficiency and even the whole economic efficiency are analyzed by case studies of different countries, including developed countries, transition countries and other emerging-market countries. The conclusions are that a suitable and correct strategy in bank privatization is only one of ample conditions that improve bank performance; the surrounding of bank operation as regulation, competition, economic growth etc, will also affect the objectives, especially in no-transition emerging markets.The chapter 7 explores whether foreign banks can play another important role in bank privatization, especially in developing countries. It concludes that foreign banks have a limited effect on improving bank efficiency through statistical regression method. The chapter 8 is the conclusion section. It studies what kind of bank reform would be suitable and practicable in China. And it concludes that bank reform not only depends on economic endowments but also the role of government. When the intervention of government in banking is reduced, it just means that the government will play other roles in bank reform.The paper innovates mainly as follow: (1) it studies bank privatization with interdisciplinary literatures, such as economics, political economics, and institution economics; (2) a statistical regression with wholly emerging-market countries is applied, which expands research cases; (3) a new research view is that in developing countries bank privatization will be a dilemma, on the one hand, the state ownership of bank must be reduced, on the other hand, there should be appropriate government intervention. According to the successful cases, China should select a"gradual"bank reform, both in the process of foreign banks entry and state-bank shareholding reform. Further more, government should regulate and set up a contestable banking market. In the process, government should transform from gradually reducing the ownership of bank, to thoroughly giving up control of bank; and regulation and service will be regarded as the only action of government in the future.