Privatization, Bank Reform And The Soft Budget Constraint Of Enterprises

Soft budget constraint is an important encouraging mechanics under planned economy in socialist society. Before the revolution and opening up of economic system in transitional countries, soft budget has ever appeared in finance subsidies and default of tax. The constant subsidies to state owned enterprises and the tolerance of their default of tax lead to low efficiency in socialist society with planned economy system. This has been a well known phenomenon in middle and east European countries as well as in China and it is also a common key character in all countries with planned economic system.The reform of hardening budget constraint begins with the privatization of transitional countries and its financial relationship with the government has been cut off since the privatization of enterprises. The privatized enterprises depend on private funds to collect money for their projects. As the funds provider, the banks only care their profits, so the"father's act"under the socialist planned economy society will not exist. Thus, as to all kinds of reforms of hardening budget constraint, privatization reform is the most important foundation and sticking point and it is also over the other reforming measures. In other words, without the privatization reform, all the other related reform can't be carried on.We can observe from the real experiences that soft budget constraint of enterprises still exists in the transitional economy after privatization, especially under the circumstance when privatization carries on interiorly, rent-seeking activities and default of bank loan are far more serious compared with the time before transition. Thus, privatization can't eradicate soft budget constraint of enterprises.Soft budget constraint exits in the form of bad debt of banks after the privatization of enterprises, so the reform of hardening budget constraint in this period is centered by the reform of the banks. Decentralization of bank credit is an important mechanics of hardening budget constraint. So to strengthen the interior governance structure and the censor of the quantity of loans will help to harden budget constraint of enterprises. With many foreign direct investments'swarming into domestic market in the process of privatization, even the thriving new projects will make banks lose heart to rescue them and this incredibly harden the budget constraint of enterprises.As experience study, through depicting of soft budget constraint status and reform process of middle and east Europe, south east Europe, Commonwealth of Independent States and the transitional period of China, and through the comparison analysis of the data of the discussed countries, this paper summarizes the reasons that influence the soft budget constraint status in the discussed countries and the different effect that brought by different reform path of enterprises privatization and banks. This paper has five parts. The first part talks about the history and status quo of soft budget constraint problem and summarizes the study status of the problem. The second part reviews the status of soft budget constraint in planned economy system and its change in transitional period using the data from 1992 to 2002. It also analyses the different circumstances of soft budget in the process of enterprises privatization and reform. The third part discusses the important effect to hardening budget constraint brought by privatization by using hardening budget constraint as the most important and direct factor. The fourth part discusses the influence brought by decentralization of credit in bank reform, the coming of foreign banks and the inflow of foreign direct investment. It says that different reform policies in the discussed countries will lead to different or even the contrary influence. The fifth part is the conclusion. It gives a review and a summarization and points out the contribution and drawback of this paper.