Building Supervisory and Regulatory Capacity in the Transition Economies
As several chapters in this volume have already indicated, the costs of regulatory failure in a number of the transition economies have been substantial. These costs range from the immediately apparent, for example the increased burden that resolving banking crises places on already strained government budgets, to the less obvious and indirect, including those that arise from the inefficiencies resulting from ineffective or unnecessarily burdensome regulation. The absence of effective regulation may impede the development of a modern financial sector in other ways, particularly since markets that appear to favour well-connected insiders will not be attractive to foreign investors and firms. Hence building effective supervisory capacity is central to building a market-based financial system and to the successful integration of the transition economies with world financial markets. This chapter reviews some of the main policy-related problems that can arise in a transition economy context as they attempt to construct this capacity.
The development of effective regulatory institutions belongs to what has come to be termed the ‘second generation’ of institutional reforms. The first generation of reforms were intended to create functioning markets through the abandonment of central planning combined with economic liberalization and market opening, including withdrawal of the state from ownership and from intervention in market entry, market exit and pricing. By contrast, second-generation reforms instead attempt to build institutional capacity with a view to cementing and enhancing the welfare gains achieved through the first-generation