Banking Sector Liberalization and Reform in the Post-Communist Region after 1989: Assessing the Impact of Domestic Politics, International Conditionality, and Economic Development

Abstract: This paper connects the literature on market liberalization in advanced industrialized countries and that on economic reform in transitional countries. It tests three important theoretical frameworks in the analysis of policy change - domestic politics, international pressures, and economic development - using time-series cross-section analysis of 25 post-communist states. The findings reveal a complex causal pattern where factors from all three theoretical frameworks are substantively important. On the domestic level, curbing corruption is strongly related to more banking sector liberalization. The higher the presence of foreign banks in the country, the more banking sector liberalization. On the international level, exposure to stricter IMF conditionality has a positive effect on the extent of banking sector liberalization. The analysis also confirms the salience of structural factors: Measures of economic development such as GDP per capita and stock market capitalization are important predictors of the extent of banking sector liberalization.;