Financing Strategies in Transitioning Economies

Because of the presence of substantial informational asymmetries between borrowers and lenders, and an incomplete legal framework dealing with creditors' rights and bankruptcy, many debt financing vehicles which are used in developed market economies are poorly suited to economies that are in the transition from being centrally-planned to market-- driven. Our analysis indicates that asset leasing is an effective and efficient solution to the financing needs of borrowers in such countries, in that it lowers the risks and monitoring costs borne by lenders as compared with more traditional loans. INTRODUCTION Since the lifting of the Soviet Union's control over the former communist states of central and eastern Europe approximately a decade ago, and the subsequent dissolution of the USSR itself, the countries affected-- some of which have only recently been created--have been in the process of making the transition from centrally-planned to market-driven economies. In that process, they have been the recipients both of financial support and economic advice from the developed nations of the West. Among the critical choices the countries have had to face is the speed with which they should seek to accomplish their respective transitions. That has been a contentious domestic political issue in virtually every instance, and has been the subject of differences of opinion among the nations' Western advisors as well. Some have recommended taking the decentralization and privatization plunge immediately and comprehensively, while others have argued for a more deliberate pace. The choices made and the results achieved have varied widely across jurisdictions. While the debate about the most appropriate pace of transitioning continues, there appears to be general agreement that the creation of a well-functioning capital market at some point along the way is integral to the success of the effort. This involves more than simply setting up a securities exchange. It necessitates the establishment of ownership and control rights, transfer procedures, disclosure requirements, provisions for investor protection, bankruptcy laws and creditors' rights--and an effective regulatory and judicial system to enforce the rules fairly and reliably. These of course were and remain among the least-developed features of all the previously-socialist economies. The issue we address here is the means by which firms in such countries might most logically arrange to finance the acquisition of capital assets during the current early stages of the transition of their economies, when financial markets are in an embryonic state. We argue that leasing provides a near-ideal solution to firms' financing problems in that setting. LAWS, CAPITAL MARKETS, AND ECONOMIC DEVELOPMENT The overriding goal of privatizing the stateowned enterprises of a transitioning economy is to promote increased economic efficiency by exposing those enterprises to the discipline of competition in both the product and capital markets. There is evidence from a number of studies that privatization in fact generally accomplishes this objective. In the vast majority of cases, output and employee productivity rise, cash flow and profit margins improve, capital expenditure rates increase, debt levels are reduced, and more workers are ultimately employed (Boardman and Vining, 1989; Galal, Jones, Tandon, and Vogelsang, 1992; Megginson, Nash, and van Randenborgh, 1994; Pohl, Anderson, Claessens, and Djankov, 1997). In order to achieve these gains, not only goods and services but also the ownership claims to the newly-privatized corporate assets must trade freely among consumers and investors in the marketplace. The trading of those claims is what enables the economy's factors of production to be priced, and its assets thereby to be allocated to their most productive uses. The more efficient the marketplace for the claims, the better the resulting allocation. …