Obstacles to Financial Development in Transition Economies: A Literature Survey


  • 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


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.