Development Finance in the Baltic States and the Process of Europeanization

Abstract

The Central and Eastern European (CEE) region, where European structural funds make up the lion share of national budgets, provides an opportunity to study how “development financing” is defined and operationalized in the context of dependency on external financing from the European Union (EU). The three Baltic republics (Estonia, Latvia, Lithuania) represent a region with a particular socio-political history, similar economic structures and equally similar asymmetrical relations with the EU, which makes the entire notion of development finance institutions quite different from existing “strategic” qualities attributed to promotional banks as discussed in current literature. We aim to demonstrate that policy trajectories, largely shaped by the EU, and especially an overdependence on EU structural funds, result in a set of incentives that hinder the development of a more strategic approach to economic policies and policy-related finance in particular. We also argue that bureaucratic competences developed within such a context of external financing resemble a “managerial” type of Development Finance Institutions rather than “strategic” investing agents.

Linking Institutional Factors with the Financial Soundness of Banks. Evidence from the CEE Region

“…Thus, the sense of the indicators analysed indicates that difference between the cases appears by the linkages with indicators representing the 'Public sector performance' and the 'Stability of financial system'. These results correspond with the previous research experience, where researchers highlight the role of state for ensuring stability and development of the banking sector and indicate on necessity to improve public sector performance in the CEE region (e.g., Mérő & Piroska, 2016;Agoraki & Kouretas, 2021;Mikheeva & Juuse, 2021). The present study demonstrates that the CEE region lags behind the "top 10" countries in terms of linkages between the public sector performance and the soundness of banks.…”

“…Additionally, Agoraki and Kouretas (2021) show the role of regulatory measures and supervision activities for the development of loan activities. Mikheeva and Juuse (2021) argue that bureaucratic approach to financing-related decisions may hinder development of strategic vision to economic policies. In conclusion, it is noteworthy to indicate that the CEE region follows overall trends that are necessary for of the sound banking system (see Figure 2, Table 2).…”

“…This is result from variety of factors directly and indirectly affecting the soundness of banks in every case depending on characteristics of institutional quality. For example, scientists take into account institutional quality and reforms (e.g., Fang et al, 2014;Mérő & Piroska, 2016;Bermpei et al, 2018;Mikheeva & Juuse 2021;Shabir et al 2023), as well as institutional framework (e.g., Chan et al, 2015), when studying the soundness of banks. Special attention in scientific studies is devoted to transition countries (e.g., Setiawan et al 2021;Fang et al, 2014) as, for example, the CEE region is.…”