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© 1994 International Bank for Reconstruction and Development / The World Bank

research-article

REFORMING FINANCE IN TRANSITIONAL SOCIALIST ECONOMIES

Gerard Caprio, Jr. and Ross Levine

Financial reforms initiated in most transitional socialist economies do not yet adequately provide many of the financial services associated with market-oriented financial systems. Such services—mobilizing resources, selecting firms and allocating capital, monitoring firm managers, and facilitating the management of transactions and risk—are a necessary condition for economic reform to improve living standards.

This article envisages four central strategies to guide reform of the financial sector:

• Building an infrastructure based on clear and enforceable property rights, modern accounting and auditing standards, reliable payments systems, sound prudential and enforcement regulations, and professionals trained in finance

• Ending the shell game of trying to hide the losses of state-owned enterprises, and separating government decisions to finance "priority" firms from the allocation decisions of independent financial institutions

• Privatizing some financial institutions early—although not necessarily precipitously—in concert with the privatization of firms and supervisory capabilities, meanwhile cleaning up bank loans to maximize the chances that firms and banks will succeed as private entities

• Improving the tax system and stressing a prudent interest rate policy to reduce uncertainty, distortions, and excessive repression of the financial sector.


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