This section considers the role of the regional body, SADC and the international financial institutions in the establishment of domestic stock markets. The objective is to determine the extent to which the policies of these organisations might have influenced the establishment of stock markets in SADC countries and how that helps to explain low participation in stock markets.
2.4.1 SADC strategies for stock market development
SADC promotes regional integration as the main strategy to overcome the small size of its national markets and as a way to enhance economic growth and development. It is argued that an enlarged and harmonised regional market will enhance competitiveness and motivates investment in the region. The national stock markets are among the institutions earmarked for integration. To facilitate the integration of stock markets the Committee of SADC Stock Exchanges (COSSE) created in January 1997, serve as a subcommittee of the SADC Committee of Central Bank Governors (CCBG), which is responsible for the financial and monetary integration. COSSE is to fast-track the development of capital markets in the region, to harmonise the legal and regulatory instruments, while improving practices and broader participation in the equity markets.13
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SADC Regional Indicative Strategic Development Plan (RISDP):
Through the integration strategy, SADC seeks to:
Achieve development and economic growth, alleviate poverty, enhance the standard and quality of life of the people of Southern Africa and support the socially disadvantaged through regional integration; evolve common political values, systems and institutions; promote and defend peace and security; promote self-sustainable development on the basis of collective self-reliance, and interdependence of the member states; achieve complementarity between national and regional strategies and programmes; promote and maximise productive employment and utilisation of resources of the region; achieve sustainable utilisation of natural resources and effective protection of the environment; strengthen and consolidate the long standing historical, social and cultural affinities and links among the people of the region (SADC Treaty Article 5).14
SADC policies on the development of stock markets emphasise improving the infrastructure and regulatory framework, skills-sharing, dual-listing and cross-border investment within the SADC to accelerate development of a regional capital market. The target was for COSSE to develop and implement programmes and strategies to increase participation by the broader population in the equity markets by 2008. The domestic governments are to play a significant role by encouraging a wider participation in the national stock markets. 7 It is the contention in this thesis that participation needs to be assessed at the local level before other development strategies can be usefully considered.
SADC member countries have recently been reviewing their regulatory frameworks to align the domestic facilities with the higher standards required by the international community. For example, Botswana introduced a revised Companies Act in 2007, which emphasises high corporate governance standards and makes it easier and simple to form a company. Swaziland produced new listing rules in 2005, while in same year Zambia launched the corporate governance code. Mauritius has also reviewed their corporate statutes. Irving (2005:29) observes that Zambian stock exchange is one of the most technologically advanced exchanges in the SADC region. The Namibian stock exchange adopted the South African stock exchange electronic trading system in November 1998. Although it might be early to assess the effect of the restructuring of the market infrastructure, this thesis argues that the regulatory framework addresses the risks but not the capacity to participate, which is likely to be the main impediments in SADC countries.
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2.4.2 The role of international organisations
The international financial institutions‘ (IFI) policies have since the 1980s been promoting the establishments of stock markets as part of the financial development and economic adjustment programmes in developing countries including sub-Saharan Africa (Demirguc-Kunt and Levine 1993:1; He and Pardy 1993:1). The establishment of a capital market is often a prerequisite for the IFI financial assistance a developing country (He and Pardy 1993:1). The IFI according to Singh (1999:344), consider the development of stock markets to be a stage in the natural economic progression of a nation towards industrialisation.
The international organisations, including the IFI, associate poor performance of sub- Saharan countries with their prevailing economic and political structures that tended to be highly centralised and the distrust of the private sector (World Bank 1994). The position of these organisations is that sub-Saharan countries should transform their economies and allow the private sector to improve economic growth. It is argued that private sector has greater incentives and the capacity to improve efficiency in the utilisation of resources and increase production and economic growth. To ensure efficient private sector delivery, governments are advised to create policies and remain committed to ensuring security over private property, have strong regulations, good infrastructure connecting companies and customers, well-functioning financial markets, control on corruption and a competitive environment (World Bank 2005).
In those SADC countries that are judged by the IFI to have poor policies due to their centralised economic and political structures (Malawi, Mozambique, Tanzania and Zambia), the establishment of stock markets is part of the economic adjustment programme with the IFI sponsoring their establishments by proving finance and technical skills. It appears that the involvement of the IFI in the establishment of stock markets in those SADC countries (Botswana, Namibia, and Swaziland) with ―a tradition of better policies‖, therefore not under economic reconstruction (World Bank 1994:36) is limited to a tacit influence. Stock market establishment in the latter countries is initiated by government agencies (Botswana and Swaziland) or the private sector aided by the government legislation (Namibia). This disparity suggests that, in terms of the
IFI policies, the establishment of a stock market in a developing country is not only a stage in economic progression (Singh 1999:344) but also part of a transformation process to correct ineffective systems and recreate institutional culture.
Although the perception is likely to change as indigenous communities adapt and increase participation, in general, there is, doubt with regard to the objectives of the IFI in fostering privatisation of government owned enterprises of which stock markets development is part. The initial reaction of the indigenous communities to the IFI‘ initiated privatisation policies was resentment as the initiative is perceived to be part of the neo-imperialism intended to creative foreign ownership (Malawi and Zambia privatisation reports).15
According to the Malawi Privatisation Commission:
There can be no question that Malawian participation in the programme is most desirable. There are political, social and economic reasons for such participation. Politically, Malawian participation offers a means to gain support for privatisation. In Malawi like in other African countries, the populace, uncertain of the potential consequences of privatisation, has opposed privatisation or, at least, has not actively supported it. By ensuring that citizens receive some direct benefit, the Government stands a chance to win support for the privatisation programme. Socially, their participation offers a way of providing more equitable distribution of wealth in the country, as well as avoiding a perception that the privatisation programme benefits only foreigners, wealthy individuals, or certain groups in society. Economically, broad-based ownership schemes benefit the country by providing a means to expand and deepen capital markets and to improve the efficiency of the country‘s industries.16
In addition to the IFI, other international organisations such as the World Institute for Development Economics Research (WIDER) have also encouraged the establishment of stock markets in developing countries arguing that this will facilitate the flow of foreign capital to boost economic development. To be able to benefit from the flow of foreign capital, developing countries are advised to increase supply of suitable stock and support the market development through among others appropriate regulations (WIDER 1990:4). While the flow of foreign capital might have boosted stock market development and participation in other developing countries (Singh and Weisse 1998:608), the effect on SADC stock markets is not immediately clear. Despite the
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Malawi Privatisation Commission: http://www.privatisationmalawi.org/; Zambian Privatisation Agency: http://www.zpa.org.zm/ accessed on 16/12/2008.
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wide endorsement of stock markets, participation in SADC stock markets, in particular, the post-independence ones established within the 1980s timeframe remains relatively low.