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Finance, law and growth during transition: a survey

Listed author(s):
  • Ralph de Haas

    (De Nederlandsche Bank)

This paper surveys the economic literature on the links between finance, law and growth in the Central and Eastern European transition countries. The literature that is surveyed at the outset of the paper shows that if a financial system is based on an adequate legal system it can positively contribute to economic growth. However, the financial system in CEE appears to have been restrained in making such a contribution. The theoretical and empirical results discussed further on in the paper partly ex-plain this by showing that privatising is in itself not enough to improve the functioning of the local banking systems. An adequate legal and institutional environment proves to be a necessary condition as well. The insufficient quality of institutions has manifested itself in the continuation of soft budget constraints for (formerly) state- owned enterprises combined with credit rationing of small and medium sized private enterprises. During the last years, formal institutions have been upgraded remarkably fast in some countries. In principle, this has improved the operating environment of many financial institutions. However, such “paper” improvements turn out to have only a limited effect as long as the en-forcement of the new laws and the rejection of corrupt practises have not yet reached the level of an average market economy.

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Paper provided by EconWPA in its series International Finance with number 0209001.

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Length: 27 pages
Date of creation: 14 Sep 2002
Handle: RePEc:wpa:wuwpif:0209001
Note: Type of Document - Acrobat PDF; prepared on PC; to print on HP; pages: 27; figures: None. Published as DNB Staff Reports 2002, nr. 74. For the complete series, please visit
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