Titlepage

Building Sound Finance in Emerging Market Economies

Edited by

Gerard Caprio,

David Folkerts-Landau,

and Timothy D. Lane

Proceedings of a Conference held in Washington, D.C.

June 10 -11, 1993

International Monetary Fund

World Bank

Copyright

© 1994 International Monetary Fund

Library of Congress Cataloging-in-Publication Data

Building sound finance in emerging market economies : proceedings of a conference held in Washington, D.C., June 10-11, 1993/ edited by Gerard Caprio, David Folkerts-Landau, and Timothy D. Lane.

• p. cm.

Includes bibliographical references.

ISBN 1-55775-380-6

1. Finance—Developing countries—Congresses. 2. Banks and banking. Central—Developing countries—Congresses. 3. Central planning—Europe, Eastern—Congresses. 4. Privatization—Mexico—Congresses. I. Caprio, Gerard. II. Folkerts-Landau, D. F. I. (David Fokke Ihno), 1949– III. Lane, Timothy D. (Timothy David). 1955– .

HG63.B85 1994

332’.09172’4-dc20

94-7903

CIP

Price: US$27.50

Address orders to: International Monetary Fund, Publication Services

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Foreword

In the process of transition from central planning to a market economy, one of the key tasks facing authorities is to create the conditions for a sound financial system. Price stability, which can come only with stable macroeconomic management, is essential for market activity—and finance—to flourish. Needed improvements in fiscal and monetary policies, however, must go hand in hand with structural reforms, including reforms of the financial system and restructuring of the real sector. If the essence of transition is to increase the private sector’s share of economic activity, the task of the financial sector is to fund this process, that is, both to mobilize funds by offering attractive rates of return and to allocate capital to its most efficient uses based on the signals sent by the market. Building a sound, efficient financial system is thus critical to ensuring that prudent macroeconomic policies will translate into sustained economic growth.

The importance of structural reforms in the financial area has been clearly recognized through the Fund’s extensive technical assistance programs in many economies in transition, as well as the World Bank’s support for financial and real sector restructuring. It is likewise essential for our institutions to be engaged in this process at another level: the development, discussion, and dissemination of ideas. Transition is a new phenomenon, one that can benefit from the application of general principles, combining the insights of economic analysis with the experience of both industrialized and developing countries, as well as the early experience of the economies in transition themselves. It is in this spirit that the Conference on Building Sound Finance in Emerging Market Economies was held, under the auspices of the Fund and the World Bank.

The conference attracted a distinguished gathering of academic experts and policymakers from both industrialized countries and economies in transition, as well as staff members of the two international financial institutions. The papers presented during the conference, which are collected in this volume, provoked lively and thoughtful discussion—a good part of which is included here—on a wide range of issues. These included methods of dealing with the legacy of bad debts, the appropriate design of a payment system, fostering a financial structure best suited to the changing landscape that will characterize transitional economies over the next decade, and an analysis of disruptions in credit supply that have been seen in some economies in transition. Although, in the end, there are still many questions on which there is not general agreement, the exchange of views has been useful in advancing our understanding of these issues.

Michel Camdessus

Acknowledgments

The papers collected in this volume were presented at the Conference on Building Sound Finance in Emerging Market Economies, which was sponsored jointly by the International Monetary Fund and the World Bank and held at IMF Headquarters in Washington, D.C., June 10-11, 1993.

The editors are especially indebted to Elin Knotter of the Fund’s External Relations Department, who edited the entire manuscript and coordinated the production of this volume. Norma Alvarado provided expert word processing assistance.

Finally, the editors thank all the participants in the conference, who contributed to two days of stimulating discussions.

Contents

• Foreword

• Acknowledgments

  • 1. Introduction

    • Gerard Caprio, David Folkerts-Landau, and Timothy D. Lane

  • Part I. Old and New Debts

  • 2. Financial and Enterprise Restructuring in Emerging Market Economies

    • Steven M. Fries and Timothy D. Lane

    • Comment—Georg Winckler

  • 3. Dealing with Bad Debts—The Case of Poland

    • Stefan Kawalec, Slawomir Sikora, and Piotr Rymaszewski

  • 4. Financial Underdevelopment and Macroeconomic Stabilization in Russia

    • Barry W. Ickes and Randi Ryterman

    • Comment—Jacek Rostowski

  • Part II. The Central Bank and the Payment System

  • 5. Payment System Reform in Formerly Centrally Planned Economies

    • David Folkerts-Landau, Peter Garber, and Timothy D. Lane

  • 6. The Russian Payment System

    • Bruce J. Summers

    • Comment—David B. Humphrey

  • Part III. Creating a Sound Financial Structure

  • 7. The Role of Financial Institutions in the Transition to a Market Economy

    • Hans J. Blommestein and Michael G. Spencer

    • Comment—Jacob S. Dreyer

  • 8. Strengthening the Russian Banking System: The International Standard Banks Program

    • Millard F. Long and Samuel H. Talley

    • Comment—Peter Garber, Carl-Johan Lindgren, and Henry Schiffman

  • 9. Revising Financial Sector Policy in Transitional Socialist Economies: Will Universal Banks Prove Viable?

    • David H. Scott

    • Comment—George G. Kaufman

  • 10. Lessons from Bank Privatization in Mexico

    • Guillermo Barnes

    • Comment—Diana McNaughton

  • Part IV. Credit Provision in Transitional Economies

  • 11. Credit Market Imperfections and Output Response in Previously Centrally Planned Economies

    • Guillermo A. Calvo and Fabrizio Coricelli

    • Comment—Rudiger Dornbusch

  • 12. China’s Collective and Private Enterprises: Growth and Its Financing

    • Shahid Yusuf

    • Comment—Linda M. Koenig

  • Part V. Roundtable on Financial Reforms and Their Implementation

  • 13. Roundtable on Financial Reforms and Their Implementation

    • Manuel Guitián

    • Ian Plenderleith

    • Salvatore Zecchini

  • List of Participants