Developing Commercial Law in Transition Economies: Examples from Hungary and Russia

Implementing decentralized legal frameworks requires reasonable laws, adequate institutions, and market-oriented incentives. All three must exist together. In transition economies, not only must new laws be drafted but they must be accompanied by the growth of supportive institutions. And they must be accompanied by economic reforms - whether privatization or banking reforms - that separate actors from the state and reinforce market-based incentives. The authors of this paper use two case studies - Hungarian bankruptcy law and Russian company law - to illustrate the interaction of these three elements in practice. These cases illustrate their general view that Central Europe is somewhat further along on all three dimensions than Russia. As for incentives, in both countries relevant actors exert weaker demand for proper implementation of the laws on the books than one would expect in more mature market economies. The cases belie any simplistic notion that the rule of law can be mechanically dictated from above. Top-down reform of bankruptcy law in Hungary appears to have been at least marginally successful in changing expectations and behavior, partly because it stimulated the growth of new supporting institutions. Finally, top-down reform of company law in Russia has had little impact to date on either institutional development or firm behavior.