Creating Capital Markets in Central and Eastern Europe
Authors: Pohl, Gerhard; Jedrzejczak, Gregory T.; Anderson, Robert E.
Publication date: October 1995
Some of the countries of Central and Eastern Europe have made remarkable progress in privatizing their enterprises by transfering ownership from the state to private citizens. This has created millions of new shareholders. It is estimated that more citizens now own shares of enterprises in Russia than in the United States and Great Britain combined. This initial distribution of share ownership will change over time as millions of citizens and financial institutions buy and sell shares. The countries of Central and Eastern Europe need to develop the stock markets and related institutions such as brokerages, clearing and settlment organizations, and regulatory agencies to handle the large volume of share trading that is likely to occur after privatization. This study attempts to answer two basic questions. The first question is the role of capital markets in the new market economies of the region. Is the role merely to provide a convenient and low cost market for buying and selling shares? Alternatively, will capital markets be a source of badly needed new equity capital to help with the restructuring of enterprises in the region? Will capital markets encourage managers of enterprises to undertake the needed restructuring and discipline them if they do not, for example, through low share prices or hostile takeovers? The second question is how and to what extent the governments in the region should encourage the development of capital markets. A laissez faire approach would be to let the market participants develop for themselves the best institutions and arrangements for trading shares. Stock exchanges will arise spontaneously as the need for them arises. A more active approach would be for government to sponsor the creation of stock exchanges and establish the overall legal and regulatory framework.