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A Taxonomy of Post-Socialist Financial Systems: Decentralized Enforcement and the Creation of Inside Money
Working paper
Enrico Perotti
November 1993 |
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This paper offers a classification of credit markets in transition economies. It describes a continuum of systems by identifying its polar cases: countries where the entire financial system still relies on outside money, mostly republics of the former Soviet Union; and those where a more decentralized intermediation system is developing (Central/Eastern Europe).
We belive that different outcomes of financial reform depend on several factors, such as initial macroeconomic conditions and a different ability of enterprise to restructure. However, we submit that the major element is the different degree of institutional development. Our thesis is that outside money continues to dominate in circumstances when decentralized enforcement of credit is unreliable. The inability to enforce credit conditions is a more basic challenege than the scarcity of ability to assess ceditworthiness. As a result, there is no reintermediation of private savings, and the central bank remains teh lender of first report. The resulting money creation potentially leads to hyperinflation and capital flight, which further compromise the development of a private intermediation circuit. Ultimately, firms are induced to capture the banking sector, and more generally to build lobbying power to attract refinancing credit. |
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| Last updated on: 12/19/2006 |
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