Building a framework for sustainable, long-term economic growth is a key goal underlying policy reforms during the transition from socialism to a market economy. In many countries, the early stages of the transition lead to declining output as state-owned enterprises (SOEs) face market forces through price and trade liberalization, competition, and the eventual elimination of most state subsidies. Processes of privatization, marketization, and corporatization1 all seek to redefine property rights and enterprise managerial structures for establishing effective ownership and corporate governance and to institute incentive structures appropriate for a market economy. Simultaneously, financing and budgetary reforms force a shift from reliance on "soft" state-subsidized funds to "hard" market budget constraints. One key element of financial reform is restructuring the financial sector to create functioning market-based channels for enterprise financing in order to replace these soft funds. During the early stages of the transitional period, large SOEs are likely to demonstrate decreasing output as they focus on core competencies, close inefficient production facilities, and eliminate excess labor. During this restructuring process, small and medium enterprises (SMEs) are likely to be among the firms most responsive to available economic opportunities, and to serve as an important source of economic dynamism and employment creation. However, these SMEs will demand capital for investment and growth, as will the SOEs once they have achieved significant corporatization and reoriented to market forces. Delivering this capital through a nascent financial services sector can be particularly problematic.
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