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VI. A. Macroeconomic Stability: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?

Guest post by: International Monetary Fund

Article Overview: The previous section has provided enough evidence to make a convincing case that stock market development at least creates the enabling environment for a successful economic growth. The policy question, therefore, is what determines stock market development? The literature suggests that sound macroeconomic environment, well developed banking sector, transparent and accountable institutions, and shareholder protection are necessary preconditions for the efficient functioning of stock markets in Africa.

VI. A. Macroeconomic Stability: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?

The previous section has provided enough evidence to make a convincing case that stock
market development at least creates the enabling environment for a successful economic
growth. The policy question, therefore, is what determines stock market development? The
literature suggests that sound macroeconomic environment, well developed banking sector,
transparent and accountable institutions, and shareholder protection are necessary
preconditions for the efficient functioning of stock markets in Africa.
A. Macroeconomic Stability
A stable macroeconomic environment is crucial for the development of the stock market.
Macroeconomic volatility worsens the problem of informational asymmetries and becomes a
source of vulnerability to the financial system. Low and predictable rates of inflation are
more likely to contribute to stock market development and economic growth.7 Both domestic
and foreign investors will be unwilling to invest in the stock market where there are
expectations of high inflation. Garcia and Liu (1999) finds that sound macroeconomic
environments and sufficiently high income levels—GDP per capita, domestic savings, and
domestic investments—are important determinants of stock market development in emerging
markets.

IMF Working Paper
African Department
Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges
Prepared by Charles Amo Yartey and Charles Komla Adjasi
August 2007

Related Articles
  VI. B. Banking Sector Development: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  6.1 Macroeconomic policies for diversification: Economic Report on Africa 2007
  VIII. SUMMARY AND CONCLUSION: Stock Market Development in Sub-Saharan Africa
  Introduction: Stock Market Development in Sub-Saharan Africa
  2.5 Conclusion: Economic Report on Africa 2007

Article Tags: banking sector, convincing case, critical issues, determinants, domestic investments, economic growth, emerging markets, foreign investors, imf, informational asymmetries, liu, macroeconomic stability, macroeconomic volatility, necessary preconditions, policy question, shareholder protection, stable macroeconomic environment, stock market development, stock markets, sub saharan africa



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