Capital market development and mass privatization are logical contradictions: lessons from Russia and the Czech Republic

The introduction of mass privatization policies in Russia and the Czech Republic depended on the creation of impersonal capital markets to finance the needs of privatized companies and to provide a secondary market for the trading of securities. Yet, mass privatization created the contradictory conditions of generating millions of poorly informed shareholders, with no efficient markets for the sale of the shares. The absence of financial markets created systematic pressures to move assets by illegal or non-transparent means to users who value them more. Privatization created the incentives to destroy the financial markets critical to its success. A comparative case analysis of post-privatization market formation in both these countries demonstrates that the functional necessity for these markets does not engender their own creation. In the absence of institutional mechanisms of state regulation and trust, markets become arenas for political contests and economic manipulation. The irony of these policies is that a principal lesson has been that market reforms cannot create viable markets, only institutional formation can.