The Paving of Wall Street in Eastern Europe: Establishing the Legal Infrastructure for Stock Markets in the Formerly Centrally Planned Economies

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I. INTRODUCTION

The Cold War has ended, and by all accounts, Eastern Europe has spurned the yoke of communist domination.(1) Idealists celebrate the advent of democracy in Eastern European nations such as Hungary, Poland, and Czechoslovakia, and newly independent, sovereign states have emerged from the once monolithic and omnipotent Soviet Union. While some people in these formerly planned economics enjoy by the fruits of capitalism, the road to economic and political reform has not been easy. Although state socialism may have been rejected, the Eastern European states have accepted capitalism only begrudgingly; difficult transition predominates in Eastern Europe and the former Soviet Union.(2)

A lack of capital has been one of the most formidable obstacles to a sustainable free market.(3) Industry and agriculture, both vita components of a functioning economy, rely on capital to generate output, replace broken parts, and modernize outdated, inefficient processes. Modernization is particularly essential as nations compete more with each other in an increasingly integrated global economy; a national economy in today's world must be able to effectively compete with other national economies or risk economic isolation. Accordingly, each nation must implement the latest technological innovations. This task is impossible without marking capital.

A variety of sources generate working capital: foreign and, borrowing, and equity markets are key sources. For developing nations, foreign aid has typically been a source of capital, taking the form of direct grants from industrial nations or international organizations. Arguably a form of charity foreign and has its drawbacks. First, it is finite and generally fails to impact the recipient nation substantively. Second, fickle, prevailing politics influence the flow of funds. Third, recipients of foreign and frequently misallocate the funds. Foreign aid may be channeled to industries lacking the ability to effectively utilize such aid or to unscrupulous government officials who pocket the funds. Nevertheless, the major drawback of foreign and is that, far from enabling a nation to become economically self-sufficient, it tends to foster dependency.(4)

Borrowing also carries a number of negative implications. As demonsstrated by the problems of Latin American nations in the 1980s, debt obligations can burden a national economy and contribute to persistent government deficits.(5) Furthermore, banks and foreign governments are often hesitant to lend money to borrowers who have no demonstrable ability to repay the loans. This fact points to a conundrum: nations and businesses need funds to generate economic development, yet only economic development enables these nations to acquire such loans.

Equity markets, otherwise known as stock markets,(6) provide a source of capital for economic development without the drawbacks associated with foreign and and borrowing. Increased foreign debt obligations and concern for steady capital inflows have led many developing countries to focus their efforts on building viable stock markets.(7) Several nations have implemented measures to shift domestic business reliance away from loans and toward greater equity investment.(8)

Using stock markets as a source of capital for economic development makes sense in the current international financial environment. Although banks continue to play the major financing role in some nations,(9) there is a definite global trend away from reliance on the traditional bank lending system(10) toward a liquid securitized(11) financial system.(12)

For East European economies to integrate themselves into the free market environment, they must develop sustainable securities markets, particularly, stock markets. These markets can generate the funds necessary to fuel economic development and permit integration into the global economy. Until such change occurs, the specter of Communism, which lies dormant, ready to reassert itself if the transition to a free market system falters, will not be completely eradicated. …