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The Future of Domestic Capital Markets in Developing Countries

edited by Robert E. Litan, Michael Pomerleano, and Vasudevan Sundararajan

Publication Year: 2003

The Future of Domestic Capital Markets in Developing Countries addresses the challenges that countries face as they develop and strengthen capital markets. Based on input from the world's most prominent capital market experts and leading policymakers in developing countries, this volume represents the latest thinking in capital market development. It captures the views of a global gathering of experts, with perspectives from developing and developed countries, from all regions of the world, from the public and private sector.

This volume should be of interest to senior financial sector policymakers from developed and developing countries in securities and exchange commissions, regulators, central banks, ministries of finance, and monetary authorities; private sector executives in stock exchanges, bond markets, venture capital markets, and investment funds; and researchers and academicians with an interest in capital market development in emerging markets. What are the key factors threatening the development and survival of stock exchanges in developing countries? What domestic strategies are needed to protect the future of local markets? Should exchanges consider linkages or alliances? Merging with, or buying up, other exchanges? Demutualization? The volume provides practical guidance on strategies such as nurturing issuers, improving rules and institutions, addressing regulatory challenges, and sequencing reforms. The contributors address a variety of country experiences, and suggest steps that policymakers and practitioners in emerging markets can take to promote an orderly transition toward efficient, well-regulated, and accessible capital markets.

Contributors include Reena Aggarwal (Georgetown University), Alexander S. Berg (World Bank), Alan Cameron (Sydney Futures Exchange), Olivier Fremond (PSACG), Amar Gill (Credit Lyonnais Securities Asia), Gerd Hausler (IMF), Jack Glen (International Finance Corporation), Peter Blair Henry (Stanford University Graduate School of Business), Patricia Jackson (Bank of England), Ruben Lee (Oxford Finance Group), Robert Litan (Brookings Institution), Clemente Luis del Valle (Securities and Exchange Commission of Colombia), Sanket Mohapatra (Columbia University), Alberto Musalem (World Bank), Dilip Kumar Ratha (World Bank), Ajit Singh (University of Cambridge), Philip Suttle (DECPG), V. Sundararajan (IMF), Thierry Tressel (IMF), Philip Turner (Bank for International Settlements), and Piero Ugolini (IMF).

Published by: Brookings Institution Press

Title Page

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pp. v-viii

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pp. ix-x

Limited access to capital presents a critical challenge to growth and stability. Well-functioning markets ensure that corporations efficiently mobilize capital for growth and that markets price risk well, so that valuable projects will be financed. Most important, countries that do not have access to equity capital face higher costs of capital, often leading to segmentation of markets. ...

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Chapter 1. Introduction

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pp. 1-18

It is now well understood that economic development requires healthy growth of a nation’s financial sector. Initially, nations tend to channel their savings and investment primarily, if not almost exclusively, through banks. But over time, savers in search of higher returns and firms seeking capital provide the foundation for the development of capital markets. ...

PART I. Capital Market Development around the World

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Chapter 2. Trends in Developing-Country Capital Markets around the World

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pp. 21-44

One of the key structural changes in a growing number of emerging markets has been the rapid development of local securities markets since the mid-1990s. This change has reflected both policy efforts by the authorities in major emerging markets and trends in global financial markets. In this paper, we review some of the trends in the development of ...

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Chapter 3. The Development of Domestic Markets for Government Bonds

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pp. 45-76

The World Bank and International Monetary Fund (IMF) agree that the development of domestic bond markets deserves high priority on the financial sector development agenda.1 On the one hand, bond markets are essential for a country to enter a sustained phase of development driven by market-based capital allocation and greater avenues for raising debt capital. ...

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Chapter 4. Bond Market Development: What Are the Policy Issues?

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pp. 77-111

Why should governments want to issue bonds in their own markets? The simplest reason historically is that bonds have become more attractive or feasible than other methods of finance. Under the highly regulated financial regimes prevalent before the 1980s, governments in many emerging markets could meet much of their borrowing needs by simply ...

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Panel Summary: Country Experiences with Capital Market Development

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pp. 113-121

Clemente Del Valle, chair of the panel and chairman of Colombia’s Securities and Exchange Commission, initiated the discussion by commenting that financial systems in most developing countries are fundamentally banking systems and that developing-country governments now recognize the need for capital markets. Yet despite this understanding, ...

PART II. Integrated Supervision

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Chapter 5. Market Discipline and Financial Stability

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pp. 125-152

This paper contributes to understanding the role that capital markets play in fostering financial stability by considering the channels through which the markets, including debt and equity markets, can exert discipline on banks. In particular, it explores whether market discipline is effective in influencing bank behavior. ...

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Chapter 6. Supervision at the Micro Level: Do Disclosure-Based Regimes Work?

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pp. 153-177

My background is as a former practitioner of regulation, now subject to regulation, rather than as an academic, but in recent years, since giving up the active practice of regulation, I have been fortunate to observe very closely capital market regimes in both developed and emerging markets. This experience has convinced me that disclosure-based regulation ...

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Chapter 7. Domestic Capital Market Reform and Access to Global Finance: Making Markets Work

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pp. 179-214

Over a decade ago, Robert Lucas asked the following question: Why doesn’t capital flow from rich to poor countries? His point was simple. Poor countries have lower capital-to-labor ratios than do rich ones. Under standard neoclassical assumptions, the rate of return to capital in poor countries should be higher than in the developed world, attracting capital until ...

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Chapter 8. Capital Market Development and Nurturing the IPO Market

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pp. 215-231

Strong securities markets are necessary for the economic growth and development of any country. Efficient raising of capital and allocation of financial resources is an integral part of economic development. Recent literature documents the direct link between capital market development and economic growth. It also documents the essential role played by ...

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Chapter 9. Managing Risks in Financial Market Development: The Role of Sequencing

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pp. 233-272

Domestic financial markets are a critical pillar of a market-based economy. They can mobilize and intermediate savings, allocate risk, absorb external financial shocks, and foster good governance through market-based incentives. As such, they contribute to more stable investment financing, higher economic growth, lower macroeconomic volatility, ...

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Panel Summary: Does Integrated Supervision Work in Emerging Markets?

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pp. 273-279

Alan Cameron, chair of the panel, deputy chairman of the Sydney Futures Exchange, and a consultant with Dawson Waldron, asked the panel to discuss the use of integrated supervision in developing countries as a response to the growing complexity of the financial industry from conglomeration, globalization, and the blurring of distinct financial industries. ...

PART III. Securities Trading

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Chapter 10. Changing Market Structures, Demutualization, and the Future of Securities Trading

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pp. 283-303

It is widely recognized that the pressures of competition, globalization, and technological change are threatening the development, and in some instances the very survival, of many developing capital markets. This chapter examines some options for responding to these pressures that are open to policymakers with regard to their trading infrastructure and exchanges, ...

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Chapter 11. Corporate Governance Issues and Returns in Emerging Markets

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pp. 305-316

This paper shares my views on corporate governance in emerging markets, focusing on Asia, the region covered by my company. CLSA, a subsidiary of the French banking group Credit Lyonnais, has produced its fourth report on corporate governance. We issued our first report in 2000, just after the financial crisis hit Asia, in response to the belief of our ...

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Chapter 12. Capital Structures and Control Rights: Patterns, Trade-offs, and Policy Implications

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pp. 317-346

Capital structures and voting arrangements define how control is distributed among shareholders in the corporation. Capital structures may consist of a single class of shares where every share has one vote or several classes of shares with different voting rights. This chapter contributes to the one share, one vote debate by showing that “one size does not fit all” ...

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Chapter 13. Identifying Vulnerabilities, Promoting Financial Stability, and Other Challenges

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pp. 347-363

The international community has attached increasing importance to identifying vulnerabilities in the financial architecture, finding solutions to address these potential risks, and focusing on other developmental needs. In particular, the Asian financial crisis of 1997 and subsequent, well-publicized market events have highlighted the need to strengthen the functioning ...

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Panel Summary: Approaches to Securities Trading

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pp. 365-370

Ruben Lee, chair of the panel and managing director of Oxford Financial Group, opened the discussion by asking Emmanuel Zamble of the Bourse Regionale des Valeurs Mobiliers in West Africa why West Africa sought to create a regional exchange serving eight countries, one of the few places in the world where such a structure has been attempted. ...

PART IV. Private Equity

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Chapter 14. Capital Structure, Rates of Return, and Financial Corporate Growth: Comparing Developed and Emerging Markets, 1994-2000

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pp. 373-415

This chapter seeks to establish stylized facts and, where possible, to explain differences between emerging-market corporations and developed- market corporations with respect to accounting ratios derived from balance sheets and income statements. In addition to examining relationships among accounting variables, such as capital structure, asset structure, ...

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Chapter 15. Corporate Financing Patterns and Performance in Emerging Markets

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pp. 417-455

The sustainability of financial flows to developing countries depends heavily on the health of the corporate sector, which has been at the center of several recent crises. Corporate borrowers now account for more than a fifth of cross-border debt flows, compared with less than 5 percent in 1990, and flows of foreign direct investment (FDI), the dominant form ...

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Panel Summary: The Role of Private Equity in the Development of Capital Markets

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pp. 457-468

Michael Barth, chair of the panel and chief executive officer of the Netherlands Development Finance Company, initiated discussion by defining private equity as a medium- to long-term financial commitment in equity or quasi-equity in illiquid securities with the expectation that future performance of the company will generate both profits and an ...

PART V. Looking Forward

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Chapter 16. Institutional Savings and Financial Markets: The Role of Contractual Savings Institutions

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pp. 471-501

Contractual savings (the assets of pension funds and life insurance companies) have been growing at much faster rates than gross domestic product (GDP) in many developed countries (for example, the Netherlands, the United Kingdom, the United States, and Switzerland) and developing countries (for example, Chile, Malaysia, Singapore, and South ...

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Panel Summary: The Future of Domestic Capital Markets in Developing Countries

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pp. 503-513

Cesare Calari, chair of the panel and vice president of the World Bank’s Financial Sector Division, stated that the panel was going to revisit the model of capital market development followed by the World Bank Group and the International Finance Corporation (IFC) in the 1970s and 1980s. This model was based on relatively large middle-income countries such as ...


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pp. 515-516


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pp. 517-532

E-ISBN-13: 9780815796107
E-ISBN-10: 0815796102

Page Count: 400
Publication Year: 2003