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
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International Monetary Fund
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The IMF is an international organization
of 185 member countries. It was
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monetary cooperation, exchange stability,
and orderly exchange arrangements; to
foster economic growth and high levels of
employment; and to provide temporary
financial assistance to countries to help
ease balance of payments adjustment.
Since the IMF was established its purposes
have remained unchanged but its
operations—which involve surveillance,
financial assistance, and technical
assistance—have developed to meet the
changing needs of its member countries in
an evolving world economy.
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