Banking and Financial Control in Reforming Planned Economies (review)

Reviews 279 environmental impacts oftechnological improvement will be conducted in his further research. This book appears to be directed to a special audience, but it is no less readable and provocative. Policy makers and scholars in the field ofenvironmental science will be interested in the results ofXie's simulation and the CGE approach itself, while general readers will benefit from his description ofChina's environmental situation and his analysis ofpolicy scenarios. James Zheng Gao Christopher Newport University James Zheng Gao is an assistantprofessor ofhistory specializing in modern China and United States-EastAsian relations. Haiqun Yang. Banking and Financial Control in Reforming Planned Economies . New York: St. Martin's Press, 1996. xv, 336 pp. Hardcover $69.95, isbn 0-312-12724-3. In this book, which carries strong traces ofits origin as a dissertation, the author's stated goal is to persuade policy makers (with academics and businesspeople as a secondary audience) involved with reforming centrally planned economies (RCPEs) to maintain a centrally controlled banking system while decentralizing and marketizing the production system. The author argues that the banking system's main role during the period ofreform should be to provide corporate governance to the newly independent firms. This guidance comes, in part, via credit planning and rationing in accordance with the central bank's and the central leaders' objectives . In RCPEs, a competitive banking system regulated by market-determined interest rates with individual profit-maximizing banks may have lower administrative costs than a centralized banking system, the author asserts, but will have higher disorder costs in the form ofinflation, speculation, and corruption. The financing oflong-term infrastructure projects will be neglected, and excessive financial resources will be diverted to short-term speculative projects. Chapter 1 summarizes a model ofbanking in centrally planned economies T.1998 by.University (CPEs), focusing on the control function ofthebanking systemwith regard to enterprises and the plan. The discussion is brief and a fuller treatment ofthe role of traditional CPE banking is scattered throughout later chapters of the book. In the traditional CPE, the banking system was subordinate and complementary to ofHawai'i Press 28o China Review International: Vol. 5, No. 1, Spring 1998 the plan. CPEs possessed highly developed banking systems that played a key role in plan administration and enterprise governance. Unlike market economies, in CPEs central banking and commercial banking were institutionally united. The banks' efforts to impose financial discipline were limited to the extent that firms received funds through budgetary authorization and were protected by the political powers. The author's summary of the shortcomings of CPEs locates their problems outside the banking system, while noting that the banking system itself suffered from overcentralization. The chapter then sketches the sequence ofbanking reforms in China and in Hungary with little space devoted to describing either country's pre-reform banking system. The chapter concludes by noting that banking in CPEs and in market economies shared a common, essential feature— the control function—stressing that in the CPEs, banks were "the secondary masters of enterprises." This historical role is the foundation for the part banks should play during the transition to a market economy. Chapter 2 advances this theme. It examines the banking reforms in China and in Hungary, asking whether or not the reforming banking systems served their economies well. The author selects these two reforming CPEs because, it is argued, they both followed a gradualist approach to economic reform, compared to the other Eastern European countries and the USSR. Moreover, Hungary, which instituted "a radically commercialized banking system," serves as a useful contrast to China, which retained more centralization of the banking system. The author claims that the "economic results of these two countries are the best test of reform policies and banking reforms" (p. 47). He strongly implies that the difference in performance of these two reforming economies—prolonged recession in Hungary contrasted with robust growth in China—derives from differences in the two countries' banking reforms, and thus supports the proposition that decentralizing production requires continued centralization ofbanking and finance. The general proposition may be correct, but the evidence here needs a much fuller treatment to be convincing, given all of the differences between these two countries that have affected...