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Abstract
Policymakers in the formerly centrally planned economies face the formidable task of creating functioning market economies in environments in which market mechanisms have been suppressed for decades. In this task policymakers face a conflicting set of objectives: although the transformation toward a market economy implies that the government should withdraw from its dominant role in the economy, a multitude of new tasks exists for which government action is needed. The development of a market-based financial system is such a task. These economies already possess significant concentrations of specialized productive capacity for which the kinds of informal sources of finance that characterized early capitalist development in the developed market economies are insufficient. Yet they lack most of the important institutions of market economies: competitive markets for most factors, goods, and services; a well-capitalized and competitive financial system; and the legal and regulatory framework to safeguard the financial system.
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