Financial intermediation and the rule of law in the transitional economies of Central and Eastern Europe

We explore the level of intermediation in the 17 (out of 29) transitional economies of the former Soviet Union and Central and Eastern Europe for which data are available. We find that, ceteris paribus, the levels of financial intermediation relative to GDP are between 21 and 28 percentage points below our sample of developing countries. In addition, we find that the former Soviet countries have lower levels of intermediation than the non-Soviet Eastern European transitional economies. We document that rule of law and legal enforcement increase intermediation and conclude that economic growth in these countries will be more constrained because such growth is more difficult to achieve without a developed banking system. (C) 2005 Board of Trustees of the University of Illinois. All rights reserved.