Banking socialism in transition: the experience of the Czech Republic

The paper focuses on specific interference by government in the banking and corporate sectors during transition in the Czech Republic. The paper argues that the influence of the government in the Czech economy was higher than what the government officially conceded during the 1990s. The transitional design, originally conceived to decouple the economy from state control, actually led to what this study calls banking socialism. Banking socialism, as defined here, is a type of privatisation that results in the indirect control of privatised companies by banks, which are controlled by the government. The paper explains the origins of banking socialism in the Czech Republic and addresses the consequences of such links between the state, banks, and enterprises. There is particular focus on the resulting incentives for moral hazard.