But the problems involve more than just financial crises. In some of the countries of Eastern Europe and the former Soviet Union, we have learned that without adequate capital market regulation, capital markets do not serve to mobilize capital, distribute risk, allocate scarce capital to its most efficient uses and ensure that those entrusted with capital use it well. Rather, capital markets have become a forum for private rent seeking, with adverse effects as great as any seen in the arena of public rent seeking. Competition and regulatory policy are vital for a market economy. The fundamental theorems of welfare economics, the results that establish sufficient conditions for the efficiency of a market economy, assume that both private property and competitive markets exist within the economy.
Many countries especially developing and transition economies lack both.
Until recently however, emphasis was placed almost exclusively on creating private property and on privatizing public assets. A well-designed privatization, where a good regulatory framework already exists, can raise enormous revenue as it increases services and lowers prices. The low revenues obtained from the partial privatization in Russia demonstrate how poorly designed privatizations can turn over valuable national assets to the private sector for a fraction of their potential value. In some countries, privatization has been followed by increases in the scope of telephone coverage and reductions in price. In other countries, the experience of privatization has been more disappointing.