Transitional Economies: Banking, Finance, Institutions

By Yelena Kalyuzhnova; Michael Taylor | Go to book overview

7
International Standards and the Transitional Economies

Douglas W.Arner**


Law and financial development

The importance of law and law reform to the process of transition and development has been underlined by the recent financial crises in Mexico in 1994, in East Asia in 1997–98, and in Russia in August 1998. 1 One generally agreed conclusion of the many analyses that have followed on these events is that an underlying cause of these crises, or at least an exacerbating factor, was weaknesses in domestic financial sectors and improper sequencing of the liberalization of international capital flows. 2 This is especially significant in the context of transition economies, where development of a functioning financial sector has been (and continues to be) one of the greatest challenges. In this respect, attention to legal reform is essential to financial stability in transitional economies in that it not only underlies efforts to develop financial systems but moreover can strengthen such systems in order to reduce potential vulnerabilities to financial crises. Legal reform can also help countries resist possible international economic contagion (pressure stemming from adverse investor ‘herd’ behaviour) from financial crises elsewhere which can be extremely dangerous to the development of fledgling financial systems, including those in transition economies.

The financial stability and viability, and hence development, of an economy depend on two fundamental factors. 3 The first factor is the macroeconomic and structural conditions in the real economy which affect financial decisions and form the environment within which the financial system operates. The second factor is the robustness of the financial system itself, comprising the financial markets, institutions and arrangements through which financial transactions are carried out. By their nature, the component elements that comprise a

____________________
*
The opinions expressed here do not necessarily represent those of the EBRD. This chapter was originally prepared as background research for the European Bank for Reconstruction and Development's Transition Report 1998 and presented at a conference at the University of Reading entitled ‘Entering the World Financial Market: East and Central Europe and the CIS Countries’ in September 1998 from which this volume is drawn. The author would like to thank Gerard Sanders, David Bernstein, Anita Ramasastry, Michael Taylor and Steven Fries for their assistance and comments.

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