Financial institutions in transition: the long view

This article is an attempt to contribute to the broader debate on growth theory in academic economics on the basis of empirical experience of two decades in transition countries. It analyses whether financial sector reform is urgent and thus should be sequenced from the very outset of transition or, alternatively, is important rather than urgent. If the latter is the case - and in view of the technical sophistication of the task - it should be sequenced later but by no means dodged. The basic questions of the current analysis are that there seems to be a trade-off between the two, and whether or not underdeveloped financial markets are bound to have an unfavourable impact on long-term growth. We then analyse, one by one, the role of monetary and fiscal institutions, exchange rate and tax regimes, as well as capital markets and special SME agencies across the region. Finally we examine whether the model based on foreign strategic ownership of intermediation is dead after the 2007-09 financial meltdown.