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Obstacles to Transforming Centrally-Planned Economies: The Role of Capital Markets

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  • Guillermo A. Calvo
  • Jacob A. Frenkel

Abstract

This paper identifies obstacles hindering the transformation of centrally-planned economies (CPEs) into well-functioning market economies. The analysis is motivated by the recent experience with economic transformation and restructuring in Eastern Europe and the U.S.S.R. The economic system in CPEs is highly distorted. Prices do not represent real social costs, incentives systems are absent, losses of unprofitable state-owned enterprises are automatically financed, legislations vital for the functioning of markets are not in place, private ownership and property rights are underdeveloped, bankruptcy laws are absent, markets are missing, shortages prevail and, occasionally, inflation is high. The obstacles identified relate to (i) anticipatory dynamics, (ii) monetary overhang and the budget, and (iii) underdeveloped credit markets. It is demonstrated that these obstacles inhibit the effectiveness of price reform, monetary and credit policies, and trade liberalization. The analysis focuses on various ways to remove the obstacles. In this regard, a special examination is made of the implications of cleaning the balance sheets of enterprises and banks from nonperforming loans, as well as ways to enhance credibility. In the absence of such measures, privatization will be difficult since the necessary information about creditworthiness of firms is lacking. The paper concludes with a brief discussion of sequencing, safety nets. and their associated obstacles.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3776.

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Date of creation: Jul 1991
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Publication status: published as Transition to a Market Economy in Central and Eastern Europe, proceedings of the OECD-World Bank Conference, Paris, 1992.
Handle: RePEc:nbr:nberwo:3776

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  1. Jacob A. Frenkel & Rudiger Dornbusch & William H. Branson & Ricardo H. Arriazu, 1983. "Panel Discussion on Southern Cone," IMF Staff Papers, Palgrave Macmillan, vol. 30(1), pages 164-184, March.
  2. Lawrence J. Brainard, 1991. "Reform in Eastern Europe: creating a capital market," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Jan, pages 49-58.
  3. Fischer, Stanley & Gelb, Alan, 1990. "Issues in socialist economy reform," Policy Research Working Paper Series 565, The World Bank.
  4. Fisher, S. & Gelb, A., 1990. "Issues In Socialist Economy Reform," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 567, Massachusetts Institute of Technology (MIT), Department of Economics.
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Cited by:
  1. Schmieding, Holger, 1991. "Transforming the financial system in Eastern Europe's market economies: A proposal for clean balance sheets and an institutional transfer," Kiel Working Papers 497, Kiel Institute for the World Economy.
  2. R. Sean Craig & Catherine L. Mann, 1992. "Fiscal implications of the transition from planned to market economy," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 424, Board of Governors of the Federal Reserve System (U.S.).
  3. Schmieding, Holger & Buch, Claudia, 1992. "Better banks for Eastern Europe," Kiel Discussion Papers 197, Kiel Institute for the World Economy (IfW).

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