The Great Divide and Beyond - Financial Architecture in Transition

Berglöf, Erik and Patrick Bolton
Authors registered in the RePEc Author Service: Erik Berglof

No 3476, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A growing and deepening divide has opened up between countries where economic development has “taken off†and those caught in a vicious cycle of institutional backwardness and macroeconomic instability. This “Great Divide†is visible in almost every measure of economic performance, such as GDP growth, investment, government finances, growth in inequality and general institutional infrastructure, and increasingly in measures of financial development. Countries that have made it to the “right†side of the divide (Hungary, Poland, Slovenia, the Baltic States) have pursued a remarkable diversity of policies aimed at financial development. Yet, strikingly, the basic financial architectures of these frontrunners today are remarkably similar: strongly dominated by commercial banks, increasingly foreign owned, which lend primarily to government. Stock markets are highly volatile and illiquid, and their sustainability is in question as the numbers of listed firms are stagnating or even falling. Enterprises rely most on internally generated funds, and essentially all external long-term finance comes from foreign direct investment. This article finds little evidence that finance has lead to increased growth in the transition countries; in fact, financial expansion has in some countries lead to soft budget constraints and undermined growth. Financial development and growth appear to be jointly determined by fiscal and monetary discipline, at the macro level, and contract enforcement, at the micro level. These factors, in turn, seem related to underlying variables like income inequality and recent experience of rule of law.

Keywords: Financial development; Rule of law; Economic transition; Fiscal discipline (search for similar items in EconPapers)
JEL-codes: G20 O16 (search for similar items in EconPapers)
Date: 2003-02
New Economics Papers: this item is included in nep-dev and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: The Great Divide and Beyond: Financial Architecture in Transition (2002)
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