For its speed, scope, and openness, the Czechoslovak mass privatization program is considered the model to be followed by economies in Eastern Europe and elsewhere grappling with stalled or tentative public–sector reform programs. Yet there are two unexpected developments in the Czech economy that warrant explanation. First, despite fears that voucher–based privatization of state enterprises would produce a system of diffuse ownership, ownership in the Czech economy is actually heavily concetrated in the hands of a few large, formerly state–owned financial institutions.. Second, contrary to the belief of privatization authorities that universal banks would form the crux of an efficient, German–style system of corporate governance, banks and bank–owned investement funds have proven to be poor enterprise monitors. This paper examines and interprets this evidence, arguing that the present bank–centered system of enterprise ownership in the Czech Republic has its origins in a political compromise reached between reformist politicians and state–owned banks between 1990 and 1991. By this compromise, large–bank "loyalty" to the voucher schemem was assured in exchange for banking and securities legislation that left the financial sector largely unreformed.
Working Paper 96–02, Weatherhead Center for International Affairs, Harvard University, 1996.