Building sound finance in emerging market economies

Building a sound, efficient financial system is at the heart of the transformation from central planning to a market economy. The vital function that the financial system performs in a market economy in allocating resources over time is well recognized. Building sound finance in emerging market economies requires more than observing and imitating the institutions of mature market economies. There are at least four additional considerations that justify further investigation. First, there is the need to come to grips with the legacy of central planning-and, to a certain extent, of the sojourn in the no-man's land between plan, and market. A second consideration is that finance may play a critical role in transforming the economy itself, as distinct from serving a working market economy. A third issue is that formerly centrally planned economies typically face more severe constraints than do mature market economies: given their limited financial and human resources, they cannot incorporate every detail of a sophisticated financial system. A final problem is that the financial systems prevalent in advanced market economies are by no mean all alike, and so there continues to be debate on which version should be emulated. It is important to assess which features of these alternative capitalist systems will be useful for formerly centrally planned economies and which may be less appropriate.