Political Connections and Financial Constraints: Evidence from Transition Countries

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Late banking transitions: Comparing Uzbekistan to earlier reformers

“…Banks' business models need to transform to discourage the reliance on public sector funding and its repercussions for hampering efficient credit allocation and much-needed deposit mobilization. Privatization and restructuring of state-owned commercial banks can ensure more efficient allocation of capital to productive investments and wind down the practice of distortive directed lending that enables the survival of unviable (and politically connected) firms (Bussolo et al 2019).…”

“…The shortcomings in bank governance, "hidden" policy lending, and the low competitiveness of banks translate into banking sector inefficiency that drives credit and credit and capital misallocation (Barth et al 2009;Bussolo et al 2019). As a result, some sectors may receive much less credit than is desirable for their productive growth (figure 9).…”

“…These credit growth rates cannot be achieved with proper underwriting-not even in more advanced banking systems. The combination of weak governance and internal controls, and hidden policy lending, provides for double trouble when banks recklessly push out money and misallocate capital in parallel (Barth et al 2009;Bussolo et al 2019;Melecky 2021).…”

Corruption, cash holdings and firm performance: empirical evidence from an emerging market

“…(2014) determine that a firm's bank loan cost is negatively associated with strong political ties. In this direction, politically connected firms have easier access to external finance (Bussolo et al. , 2019) and hold less cash since they are exposed to lower financial constraints (Hill et al.…”

“…Firms with stronger ties to political power usually have lower equity costs (Boubakri et al. , 2012b), greater access to bank loans (Bussolo et al. , 2019) with lower external financing costs (Houston et al.…”