Wednesday, April 2, 2014

Inequality and the Capital Markets in sub-Saharan Africa

There are many linkages between international securities organizations and emerging capital markets in East Africa: how financial globalization encourages financial integration in the global economy: which institutions influence that integration in the African capital markets: and what kinds of inequalities might be understood or unearthed in the context of that current arrangement.

Securities related international organizations such as International Organization of Securities Organizations, the World Federation of Exchanges, promulgate best practices in the securities industry regulation for world stock exchanges and are part of an interrelated network of international organizations that influence stock exchange activity and regulation including: the World Bank, the International Monetary Fund and the Organization for Economic and Co-operative Development. Similar to the establishment of Stock Exchanges in economies with no financial infrastructure or investment culture to support them, these best practices are implemented wholesale by East African Exchanges with the promise of membership in a global economic community. Functionally, however, the best practices do not take into account local capacity or conditions. 

As Professor Andrew Hurrell stated, “Institutions reflect, but also actively shape, communities.” This paper describes the international securities organizations and considers how they influence regulation in emerging markets and is a preliminary attempt to understand that role in terms of inequality.

This year the International Organization of Securities Commissions published its first Securities Market Risk Outlook[1] with a narrow focus on securities markets and the potential systemic risks currently existing or could develop, threatening the financial system as a whole. International organizations promulgate best practices in the securities industry regulation for world stock exchanges. Frontier, emerging, and developing exchanges comply with these recommendations wholesale frequently without the resources to customize them.[2] Currently, the developed exchanges and international organizations setting those best practices are dominated by the West. African financial markets have lagged behind others for most of the twentieth century.[3] 

The global financial crisis underscored the need for the developed world to review its existing legal and financial frameworks and changes were enacted: Dodd-Frank, establishment of the Financial Stability Board to name a few. However, those same organizations still serve as gatekeepers to entrance in the global financial markets. The world realized the fragility of the governance of its banking system and the global connectivity we already existed in. The rules and regulations that governed our capital flows were connected to our mortgages and our jobs: law, society and economy in complete overlap. The reforms addressed multiple layers of that overlap. (FSB, IOSCO)  The powerful nations who caused the crisis struggled, and continue to struggle, with their legal response to it. And yet, that response will have ramifications for developing markets who may or may not have had the same risk factors leading to the crisis, but may need to adopt reforms, for example new rules for derivatives[4], as a new standard for best practices. Those regulations reflect a political and social reality that does not yet exist for many developing exchanges and for most of the markets considered in this Article. Securities regulation for emerging markets is best understood as the confluence of sociological, economic, political and legal discussion. Markets involve investors, companies, brokers,

The very existence of markets in developing economies raises questions about development, political will of the society and the rules that will regulate those markets presumably creating investor confidence and ultimately attracting outside investors to further support growth and development. The overlap of disciplines are belied by the literature. Capital markets in the developing world and the regulation of them are frequently written about from an economic or wealth maximizing perspective.[5] This literature focuses on the markets as vehicles for growth or economic development as well as quantifying that growth. Indeed, much of the economic literature is from the World Bank whose economic publications, researched by Economists from the United States and Europe, have served to promote and drive the debate over economic policies.[6] How do concepts of law fit into this discussion and what role does law play in this arena? The rules and regulations, promulgated by international organizations, are surely more than just orders or commands with respect to markets.[7]

I will be writing about these ideas and thoughts in the next few weeks and will share them here.

[1] IOSCO Securities Market Risk Outlook 2013-14 available at (last accessed..........) The purpose of the report is to “assist national regulators in implementing IOSCO’s two new principles on identifying,assessing and mitigating systemic risk (Principle 6), and on reviewing the regulatory perimeter (Principle 7) Id page 6.
[2] Cite my paper
[3] Financial Regulation in Africa: An Assessment of Financial Integration Arrangements in African Emerging and Frontier Markets,  Iwa Salami, Ashgate 2012. Foreward by Rosa Lastra
[4] IOSCO new principles
[5] Pistor and the La Plante
[6] Sebastian Edwards, as well as The Global Diffusion of Markets and Democracy, Eds Beth Simmons, Frank Dobbin, and Geoffrey Garrett, Chapter Introduction: the diffusion of liberalization, p 16.
[7] H.L.A. Hart, The Concept of Law, Claredon, 2nd edition, 1997, p.13.