Bridging the "Great Divide"

Abstract

During 1995-2002, The CIS-7 countries grew faster, on average, than other transition economies although they started with lower per capita GDPs in 1995. Their faster growth thus represents a partial catching up with other transition countries But the divide in financial development has not shrunk In 2002, the CIS-7 countries recorded the lowest monetary depth, as measured by the average ratio of M2 to GDP, and the lowest depth of banking intermediation activity, as measured by the ratio of total banking sector assets, deposits, and credit to the private sector, to GDP. In fact, the gap between the CIS-7 and the best-performing transition economies-Central and Eastern European countries and the Baltic States (CEE+B)-has widened since 1995. This matters greatly because a sustainable growth path for the CIS-7 may well hinge, in large part, on jump-starting financial development. Why are these countries lagging other transition economies? The root of the problem lies in weaknesses in their institutional infrastructure, which hamper their ability to intermediate savings between lenders and borrowers. Although the CIS-7 have taken some steps to correct their institutional weaknesses, they must do much more if they are to catch up with their more successful peers. Policymakers in these countries must turn their attention to strengthening the legal and judicial framework, implementing accounting and auditing standards, improving governance in the banking sector, and privatizing state-owned banks.