The Global Spread of Stock Exchange, 1980-1998

Nations opened local stock exchanges at a rapid pace during the late 1980s and 1990s, creating a channel for investment capital from wealthy industrial nations to "emerging markets" as well as a mechanism for institutional change in local economies. This study examines the local and global processes by which exchanges spread, examining all nations "at risk" during the 1980s and 1990s. We find that local factors influencing the creation of stock exchanges included the size of the economy (overall and relative to population size); the legacy of colonialism; and a recent transition to multi-party democracy. Global factors associated with creating exchanges included levels of prior investment by multinationals; IMF "structural adjustment" aid; centrality in trade flows; and regional "contagion." In contrast to prior work in financial economics, we find no evidence for the influence of legal tradition, and contrary to the implications of dependency theory, we find no sign that foreign capital penetration affects the creation of exchanges. We also find no consistent evidence for the influence of stock exchanges on inequality or human development at the national level, above and beyond their effect on economic and population growth. The results indicate that globalization is usefully construed as a process analogous to institutional diffusion at the organization level.http://deepblue.lib.umich.edu/bitstream/2027.42/39725/3/wp341.pd

A Skeptic’s Case for Sovereign Bankruptcy

This essay describes fundamental flaws in the sovereign debt restructuring regime, but questions the prevailing arguments for sovereign bankruptcy. The author concludes that efficient debt outcomes may well come about without bankruptcy, but that a statutory regime is necessary to achieve sovereign autonomy and political legitimacy

Alternative frameworks for providing financial services

Drawing on country experience, the authors analyze alternative frameworks for providing financial services. Scope of permissible activities: The integrated banking model (commercial banking fully integrated with other financial services, including investment banking) benefits both financial institutions and consumers. Potential costs, such as extending the safety net to non-deposit financial services, can be mitigated with safeguards and firewalls, which require regulatory enforcement and monitoring. Internationally, countries are moving toward the integrated model. The wider scope of services appears to improve financial stability and mitigate the risk of a banking crisis. Degree of competitiveness and contestability (openness to competition): Competitiveness need not only require many financial institutions; a concentrated system can be competitive if contestable. Allowing the liberal entry of foreign banks lowers the franchise value of (domestic) institutions, but the evidence suggests that on balance foreign entry provides important benefits. Systems should not be over-competitive, however. They should allow enough franchise value that future profits give institutions an incentive to behave prudently. Design of safety net: the design of the safety net is important in the tradeoff between ensuring the safety and soundness of financial institutions and allocating resources efficiently. A well-functioning safety net minimizes regulatory forbearance and gives banks incentives to act prudently. Owners of financial institutions behave more prudently if they have much at risk, in the form of capital, future expected profits, or their own jobs. The wrong safety net, especially the wrong deposit insurance, entails great moral hazard. Large deposit holders are more likely to provide market discipline if they are not covered by deposit insurance (explicit or implicit), if disclosure is extensive, and if the accounting framework is adequate. Supervision: Best international practice suggests that supervision of the financial conglomerate should probably be consolidated in one agency. Supervisors should have incentives both to monitor and to take appropriate action. Supervisory salaries should be sufficient, relative to those in the private sector, to attract and retain competent and motivated staff.Payment Systems&Infrastructure,Banks&Banking Reform,Environmental Economics&Policies,Financial Intermediation,Labor Policies,Banks&Banking Reform,Financial Intermediation,Environmental Economics&Policies,Knowledge Economy,Education for the Knowledge Economy