| This study is about the political economy of public sector banks' performance and reform in India. The study has four objectives: first, it examines the contention that private sector banks function more efficiently than public sector banks; second, it weighs the strengths of four competing explanatory variables--ownership form, interest group power, leadership, and path dependency--in predicting performance variation among banks; third, it evaluates, on the basis of micro-level findings, the comparative likelihood of efficiency gains from privatization and different types of public enterprise reforms; and fourth, it hypothesizes on optimal reform strategies for banks given political constraints.;The dissertation thus revisits the old debate over the link between ownership and enterprise performance (Alchian, 1965, Alchian & Demsetz, 1972, Jensen & Meckling, 1976, Kornai, 1981, Olson, 1982, Leroy Jones, 1983, Stiglitz, 1985, Vickers & Yarrow, 1991, Waterbury, 1993). It tests, by conducting a controlled branch-level analysis, the different theoretical reasons advanced by scholars to suggest superior private enterprise performance and uses this understanding to suggest a strategy for implementing public sector bank reforms in India today.;The study finds that private sector banks perform better than public sector banks across a range of indicators. It argues that this is because private ownership supplies a simple profit maximizing goal. A profit maximizing goal allows private banks to properly evaluate performance, set up appropriate managerial incentives, and devise a suitable organizational structure. In India, public sector bank performance was poor because public sector bank managers were asked to achieve "growth" goals--growth in branches, growth in advances, growth in deposits. The variation in performance among public sector banks followed from differences in their leadership and history (North, 1993, Putnam, 1993).;The study proposes a number of steps to improve public sector bank performance in the short run, but argues that over the long run, under public ownership, political leaders will be tempted to use public sector banks (adversely affecting their performance) to dispense patronage again. The study recommends private ownership to improve performance and suggests a gradual, unobtrusive, enterprise specific privatization strategy for India. |
