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Reforming finance in transitional socialist economies : avoiding the path from shell money to shell games


  • Caprio, Gerard Jr.
  • Levine, Ross


In the late 1980s, transitional socialist economies (TSEs) in Central and Eastern Europe were only somewhat more sophisticated than shell money systems: savings books or currency had to be used for most transactions and there was no risk assessment, information monitoring and acquisition, or portfolio management. The TSEs have moved toward a two-tiered banking system but they lag in the development of competitive, market-based financial systems. In several TSEs the financial system seems to be part of a shell game to hide the losses of the real economy. The authors argue that rapid, successful economic reform requires putting the shell game to an end. They review several contentious issues of financial reform in the TSEs, especially issues involving macrofinance, corporate finance, the internal debt problems, and the need to build efficient banks. The authors contend that the banks should be"cleaned up"when they are privatized, to prevent the quick reemergence of debt problems. They believe that either of the proposed alternatives for shaping financial systems in the TSEs - very highly capitalized banking or narrow banking - would minimize the need for future support. Either alternative would reduce leverage in the TSEs and provide more financial stability. But taking concerns about moral hazard to an extreme - prohibiting debt finance - could starve new firms for credit and limit economic growth.

Suggested Citation

  • Caprio, Gerard Jr. & Levine, Ross, 1992. "Reforming finance in transitional socialist economies : avoiding the path from shell money to shell games," Policy Research Working Paper Series 898, The World Bank.
  • Handle: RePEc:wbk:wbrwps:898

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    References listed on IDEAS

    1. Long, Millard & Sagari, Silvia B., 1991. "Financial reform in socialist economies in transition," Policy Research Working Paper Series 711, The World Bank.
    2. Peter Isard & Michael P. Dooley, 1991. "Establishing Incentive Structures and Planning Agencies That Support Market-Oriented Transformations," IMF Working Papers 91/113, International Monetary Fund.
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    Cited by:

    1. Caprio Jr, Gerard & Atiyas, Izak & Hanson, James, 1993. "Financial reform lessons and strategies," Policy Research Working Paper Series 1107, The World Bank.


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