Credit Markets, Credibility, and Economic Transformation

This paper focuses on the special role that capital markets play in the transformation of centrally planned economies into well-functioning market economies. We demonstrate that underdeveloped credit markets inhibit the effectiveness of price reform, monetary and credit policies, and trade liberalization. We explore various ways to overcome the difficulties associated with the underdeveloped credit markets. In this regard, we examine the implications of "cleaning" the balance sheets of enterprises and banks from nonperforming loans, as well as ways to enhance credibility. The paper concludes with a brief discussion of sequencing of economic reform measures.