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This paper was presented at the International Economics Study Group Conference in Birmingham, England, September 10–12, 1997, and is forthcoming in World Development. I am indebted to Maxwell J. Fry, Victor Murinde, Delisle Worrell, a number of colleagues at the IMF, and an anonymous referee for helpful comments and suggestions. Kiran Sastry provided research assistance.
In this paper the term “transition economies” denotes the countries of eastern Europe, the Baltics, Russia, and the other countries of the former Soviet Union that are currently in the process of deep structural reform from central planning to market-based resource allocation. “Developing countries” are countries other than the industrial and transition countries. This paper refers to developing and transition economies (DTEs) and “emerging market” economies interchangeably.
An empirical analysis of the determinants of developing country current account deficits during this period is given in Khan and Knight (1983).
For a discussion of recent financial system reforms in the Baltics, Russia, and other countries of the former Soviet Union, see Knight (1997).
A recent study by the World Bank (1997) argues that institutional investors could continue to increase expected returns and reduce overall risks until the share of their portfolios allocated to emerging markets reached a level three times as high as it is today.
Empirical work on these issues is limited. However, a recent paper by González-Hermosillo, Pazarbasioglu, and Billings (1997) provides interesting evidence that microeconomic factors are of primary importance in determining the likelihood of unsoundness in DTE financial institutions, while macroeconomic shocks are relatively important in determining the timing of failures.
“Moral hazard” is defined as the tendency for economic agents to be less careful when they do not expect to bear the full consequences of their behavior.
As of May 1997, 22 developing and transition economies had notified the IMF of their intention to subscribe to the SDDS. The remaining 20 countries that subscribe to the SDDS are advanced industrial countries. The IMF has a total of 182 member countries.