Problems of creating stable monetary systems in post‐communist economies

POST-COMMUNIST ECONOMIES (PCEs) usually enter the transition to capitalism with a high rate of inflation. This is, first, because price liberalisation without a hard budget constraint or unemployment must lead to high inflation (Rostowski, 1989). Second, the weakening of communist political power in the period before the overthrow of communist governments has often led to a weakening of such budget constraints as there were in the Soviet-type economy-particularly in relation to wages. Post-communist governments are thus often faced with the need to tackle high or very high inflation just at the time when they also have to guide the country through the transition to capitalism. Creating stable monetary systems in PCEs is thus vital both in the short and the long term. Yet a major hindrance in the achievement of this aim is the nature of banking systems in these countries. This article analyses banking reform in the countries in which the transition is more advanced (particularly Hungary and Poland) and offers conclusions which have policy implications for what one can call the 'second wave' reformers (the countries of the former Soviet Union and some of the Balkan states). In particular, we consider whether the present generally accepted 'main sequence' of banking reform is likely to result in the creation of stable banking, and therefore monetary, systems. What we call the 'main sequence' consists in: (1) splitting up the traditional Soviet-type monobank into a number of state-owned commercial banks (SCBs);