Financial sector reform and monetary policy in Central and Eastern Europe

Abstract

The development of a competitive financial market based on private property rights is of crucial importance for the transformation of planned economies. The key issue is to ensure that mobilised savings are efficiently allocated. The past record of Central and Eastern European economies — including those which pursued more decentralised decision-making, such as Hungary, Yugoslavia and Poland — shows that both state-owned enterprises and firms in self-management systems invested savings and used existing capital stock much less efficiently than private enterprises in market economies.1 Clearly defined private property rights are indispensable for a well-functioning financial system because they provide the right incentives to save and invest in a dynamic world characterised by risks, innovation and new opportunities. Without a market-based system of financial intermediation, new businesses will have difficulties to survive or to operate in an efficient fashion because of obstacles in getting the necessary debt financing or in raising risk capital. Lack of new external funds may also threaten the survival of already privatised enterprises and may, therefore, constitute a major obstacle to the planned mass privatisation schemes under consideration in the Central and Eastern European countries (CEECs).