Finance and development in Southeast Europe in the interwar period

How do financial systems affect economic growth? How effective were international financial flows in promoting economic development in Southeast Europe in the Interwar Period? A large literature argues that financial systems evaluate prospective entrepreneurs, mobilize savings to finance the most promising productivity-enhancing activities, diversify the risks associated with these innovative activities and reveal the expected profits from engaging in innovation rather than the production of existing goods using existing methods. Important part of the theoretical literature also argues that foreign capital, in contrast to other available sources of funding – like domestic financial sector and state capital - is more effective in monitoring performance, in promoting better corporate governance, promoting technological improvements and ensuring access to export markets for developed and large scale enterprises - but less effective in alleviating asymmetric information problems and ensuring access to funds to small and medium sized enterprises. This paper provides a review of the theory behind the above claims and argues that asking similar sorts of questions in relation to the economic development of the Balkans can be a very fruitful line of research. It proceeds to present aggregate data on international financial flows and their relative importance for industrial growth for the four Balkan countries of Bulgaria, Greece, Romania and Yugoslavia during the 1920s and 1930s.