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Reforming finance in transitional socialist economies

This article envisages four central strategies to guide reforms of the financial sector: (a) building an infrastructure based on clear and enforceable property rights, modern accounting and auditing standards, reliable payments systems, sound prudential and enforcement regulations, and professionals trained in finance; (b) ending the shell game of trying to hide the losses of state-owned enterprises, and separating government decisions to finance priority firms from the allocation decisions of independent financial institutions; (c) privatizing some financial institutions early - although not necessarily precipitously - in concert with the privatization of firms and supervisory capabilities, meanwhile cleaning up bank loans to maximize the changes that firms and banks will succeed as private entities; and (d) improving the tax system and stressing a prudent interest rate policy to reduce uncertainty, distortions, and excessive repression of the financial sector.