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Obstacles to Financial Development in Transition Economies: A Literature Survey

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  • James E. McNulty
  • Joel T. Harper

Abstract

This survey of approximately 70 studies considers five causes of weak financial system development in transition economies. These are: problem loans and inadequate capital; the absence of a credit culture, giving rise to perverse incentives to continue to make bad loans; inadequate regulatory systems; deposit insurance; and weak legal systems. There results a perverse feedback loop across the various problem areas that constrains the development of solutions. Policy recommendations include a focus on basic contract law as a way to break the perverse feedback loop.

Suggested Citation

  • James E. McNulty & Joel T. Harper, 2012. "Obstacles to Financial Development in Transition Economies: A Literature Survey," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 21(4), pages 203-240, November.
    • Handle: RePEc:wly:finmar:v:21:y:2012:i:4:p:203-240
    DOI: 10.1111/j.1468-0416.2012.00174.x
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