The Evolving Importance of Banks and Markets in the Emerging World: Which financial structure is best for the rapid growth markets?
Perhaps the most pressing and critical issue currently facing the emerging economies is the continued development of their financial sectors. Unfortunately, many of them currently lack the financial sector infrastructure (both physical and intellectual) to take their economies to the next stage of sustained economic development.
New research examines the level of financial development among 100 emerging markets in recent years. Some of the key findings in the report include:
Among the RGMs, the average stock market capitalization ratio (stock market value over GDP) rose from 35% in 2000 to 62% by year-end 2012.
Sub-Saharan Africa has the least developed equity markets. Of the 41 countries in the region, only 12 had a stock market in 2011.
It is still practically non-existent in the low-income world but last year the corporate bond ratio (corporate bonds outstanding as a share of GDP) grew to 6% and 15% of GDP in the lower and upper middle income nations, respectively.
The banking system still constitutes the largest part of the financial system in most emerging market economies. It is the major financing source for both the private and public sectors and serves as the crucial engine for economic growth in most of these countries.
Only 11% of emerging market firms relied on banks for their investment in 2002, while the number rose to 35% in 2011.
The paper also examined the optimal financial structure of emerging market countries. If a developing country’s mixture of banks and markets differs significantly from its “optimal” structure, then the financial system will not deliver the appropriate combination of financial services, resulting in a misallocation of capital and slower economic growth over time. The paper finds that evolving toward a market-based financial system is becoming increasingly important for emerging economies in avoiding the “middle-income” trap.
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