The Local Financial System and Sustainable SME Development in South-East Europe

Abstract

One of the most important pre-conditions for the sustained expansion of the SME sector in South-East Europe is to have in place a set of cost-effective, accountable and transparent local financial institutions, instruments and credit markets, which together constitute a healthy local financial system (EBRD, 1999; World Bank, 1999; 2000). This is certainly not an easy task. The difficult conditions prevailing in the region — economic collapse, lack of resources, persistent inter-ethnic antipathy, isolation, rising inequality and poverty, endemic criminality — continue to frustrate financial sector reform. Moreover, the inheritance of past financial sector malpractice continues to weigh heavily on the latest generation of policy-makers, who are attempting to upgrade the efficiency of a range of financial institutions long used to an environment of “soft budget constraints”. Also proving to be a barrier to progress are the many elite groups that emerged and benefited handsomely from political connections and financial sector irregularities under communism and during the first post-communist governments. These groups are quite determined, and sometimes very violently inclined (for example, in Albania), to hold on to the power and wealth that they have unjustly accumulated.

The chapter is based on a research project funded under ACE research contract P97-8016-R, for which the authors offer their thanks. Naturally, the opinions contained herein are those of the authors alone. A preliminary version of this chapter was presented at the University of Rijeka SME Policy Workshop, Rijeka, Republic of Croatia, September 21–22, 2000.