Transitional Economies: Banking, Finance, Institutions

YelenaKalyuzhnova and MichaelTaylor

It is already more than a decade since the former centrally planned economies began a major shift towards market-based financial systems. On the way they were faced with the challenges of adapting to a series of new developments, with new rules of the game as well as with the legacy of the previous period of central planning. It has affected all spheres of the national economies, but the burden of these factors is most clearly recognizable in the financial sector.

Before transition, socialist countries had centrally planned economic systems and undeveloped or non-existent capital markets. The move to a market-based economic system required transitional governments to introduce radical changes, including the development of a financial sector that was capable of allocating capital according to market incentives rather than the requirements of the central plan. The challenges of this transformation have been – and remain – enormous, and are highly dependent upon other sectors of the economy (for example macroeconomic conditions, industrial development and so on).

Without financial sector reform further macro- and microeconomic improvements and economic growth will be inhibited. A well-managed, well-regulated and prudently run financial sector can boost the effectiveness of the allocation of capital and hence the development of the real economy.

Throughout the book the authors have highlighted four essential key elements of a sound financial system for the transitional economies, namely: an effective institutional framework; an adequately functioning banking sector as the core of the financial system; the creation of a

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