Lessons from Bank and Enterprise Restructuring in the Transition Economies of Europe and Central Asia

With the collapse of central planning and the opening of the economies of Central and Eastern Europe, state owned enterprises faced the test of markets for the first time. Economic liberalization brought with it dramatic contractions in output. Many enterprises turned to state-owned banks for credit to allow them to defer restructuring or liquification. Governments have since taken stock of these problems, and there is now general agreement that the problem has to addressed in an integrated manner. The long term effectiveness of reforms will be influenced by: 1. the willingness of governments to impose budget constraints on loss-making banks and enterprises to promote fiscal balance and economic growth, 2. the pace of enterprise and bank restructuring and privatization to improve management, governance, and financial performance, and 3. improvements in institutional capacity, legal and regulatory frameworks, bank supervision, and financial infrastructure to improve the financial enabling environment needed for competitive banking.