In emerging economies, the current fashion for setting up a stock market is no substitute for genuine economic reform

There was a time when no developing country felt as if it could face the world unless it had both its own national airline and a huge hydroelectric dam. Many of those same countries have since spent much of their time trying to pay off the loans and losses incurred by these folies de grandeur. Nowadays another superficially far nobler status symbol is in vogue: a national stockmarket. Africa alone now has 15 exchanges, with two more promised this year in Tanzania and Uganda. Tiny Nepal has its own stockmarket; so does Ecuador, Oman and Mongolia. In Eastern Europe, no capital city feels as if it has really shrugged off the vice-like grip of Karl Marx until it has its own trading floor.

To their supporters, these stock exchanges bring nothing but good. They provide a way for capital to be channelled efficiently from savers to companies. In countries where economies used to be state-run, setting up an exchange sends a clear message to business people and to small investors that capitalism is no longer a dirty word. And set alongside all those expensive dams and airlines, stock exchanges cost next-to-nothing to set up. Surely they should be welcomed?

In fact, the effectiveness and desirability of a stock exchange depends enormously first on the state of the country concerned, and then on the nature of the stockmarket proposed. Economists disagree about how much a stockmarket helps a developing economy, particularly a very young, small one - like many of those in Africa, Latin America and Asia.

In many developing countries banks are a more important source of finance. Many poor–country stockmarkets are illiquid and thus volatile. There were riots in Bangladesh following that stock exchange’s rise and fall. Volatility can also be increased by relying disproportionately on skittish foreign investors who may sell their shares for reasons that have nothing to do with local companies, or sometimes even the local economy. By contrast, foreign direct investment, such as factories, is much less likely to move.

In many circumstances stockmarkets are indeed like airlines; rather than setting up their own ones, poor developing countries could do better borrowing other people’s. To be fair, regional exchanges take time to emerge. But in theory, the four capital-hungry companies listed on Swaziland’s exchange and the one listed on Malawi’s might well be better off if they were listed on Johannesburg or even Harare.

Don’t just do it; do it well.

More important than merely setting up an exchange is the hard work of making it a good one. Successful emerging markets, such as Chile, have complemented their stock markets with other reforms – notably reorganizing the pension system.

However, in many other places, a spanking new stock exchange has been an excuse not to change other things. The Russian government, for example, has been slow to establish the legal title and good accounting standards without which no investor (either foreign or domestic) can feel particularly safe. Neither India nor Nigeria has done much to curb political corruption and insider trading – both of which put off both investors and would-be listers.

A particular concern common to many emerging economies is the protection of minority interests. Many publicly traded companies are controlled by one owner, with a relatively small proportion of the shares trading on the exchange. In many cases directors have no legal duty to protect the outsiders’ interests. In the Czech Republic, the opaque way in which the local stockmarket is organized may have sullied the country’s reformist credentials.

In short, a stockmarket, no less than an airline or a hydroelectric dam, can be a fine thing for an emerging country to possess; but it will certainly not be an automatic success. And above all it is no substitute for genuine economic reform.

The Economist

Notes

1. folie de grandeur – мания величия

2. vice – тиски

3. Harare – the capital of Zimbabwe

4. minority interests - the interests of small investors (миноритарные интересы)

5. insider trading – заключение незаконных сделок на основе конфиденциальной информации

Vocabulary

stock market - рынок ценных бумаг( фондовый рынок); to set up a stock market – создать, открыть рынок ценных бумаг

stock exchange – фондовая биржа; national (regional) stock exchange – центральная (региональная) фондовая биржа

trading floor – торговый зал биржи (т.е. сама биржа); to trade the shares – совершать операции по покупке и продаже ценных бумаг; проводить торговлю ценными бумагами

to list on the stock exchange (market) – получить право котировки акций на фондовой бирже; a would-be lister – перспективный участник фондовой биржи; listing– листинг: допуск ценной бумаги к официальной торговле на фондовой бирже

illiquid stock market – рынок неликвидных ценных бумаг - тех, которые трудно реализуемы и не имеют активного вторичного рынка

volatile – неустойчивый, переменный, колеблющийся; volatile market – рынок с быстро меняющимися ценами;volatility – неустойчивость, изменчивость (цен)

minority interests – интересы миноритарных инвесторов (не имеющих контрольного пакета акций)

accounting standards – стандарты бухгалтерского учета

insider trading – заключение незаконных сделок на основе конфиденциальной информации

publicly traded company – публичная компания: компания, акции которой предлагаются широкой публике и свободно обращаются на фондовом рынке

Stockmarket indices