How does the organization and regulation of the financial system, notably the role of banks, influence critical dimensions of domestic and international economic performance through the process of corporate control? That is, how does the institutional design of the financial system influence the character of the capital-allocation process, national economic performance, and international economic and financial relationships? In order to address this question, we must first consider alternative stylized models of financial-industrial control structures as well as alternative stylized models of banking organization. We can then apply the models to four quite different approaches of bank-industry linkages—the Japanese, German, French and Anglo-American. Each can be evaluated against a set of performance benchmarks of the real sector of the economy, with the role of financial institutions as the centre-piece of the discussion. Finally, each can be assessed by its implications for the liberal international economic order that has been so painstakingly constructed over almost half a century, particularly in international structural adjustment, trade liberalization and market access, and the evolution of international finance and capital markets.

Banks as a Central Element in Corporate Control Systems

Corporate control has to do with the management of enterprises. A classic assumption underlying market capitalism is that management acts consistently in the best interests of shareholders, maximizing their long-term wealth as measured by the stock price. Agency problems—defined in terms of potential divergence between the interests of owners and those of managers—do not arise. Managers consistently meet their fiduciary responsibilities to owners in a firm's purchasing and marketing decisions, in investment projects and financing decisions, in the use of human resources, and in maximizing available economies of scale and scope.

In the real world, of course, agency problems can and do arise, and present one of the most difficult problems in market economics. How these problems are resolved, therefore, is of great importance, whether the issue is assessing the performance of mature market economies, or designing and executing effective privatization in the Eastern European or Asian transformation economies.