Obstacles to Financial Development in Transition Economies: A Literature Survey

Authors

  • James E. McNulty,

  • Joel T. Harper


James E. McNulty, Department of Finance, College of Business, Florida Atlantic University Boca Raton, FL 33431 (561) 297–2708, jemcnult@bellsouth.net

Abstract

This survey of approximately 70 studies considers five causes of weak financial system development in transition economies. These are: problem loans and inadequate capital; the absence of a credit culture, giving rise to perverse incentives to continue to make bad loans; inadequate regulatory systems; deposit insurance; and weak legal systems. There results a perverse feedback loop across the various problem areas that constrains the development of solutions. Policy recommendations include a focus on basic contract law as a way to break the perverse feedback loop.

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