Domestic Capital Market Reform and Access to Global Finance: Making Markets Work
Peter Blair Henry, Peter Lombard Lorentzen
NBER Working Paper No. 10064
Contrary to the predictions of standard economic theory, capital market liberalization has been a mixed blessing for many countries. Liberalization of debt inflows exposes economies to the risk of crises stemming from sudden changes in investor sentiment. Equity market liberalizations, on the other hand, have promoted growth in almost every liberalizing country. Yet equity market liberalizations have not had as strong an effect as might be expected. To convince outsiders to invest, countries must put in place laws and supporting institutions to protect the rights of minority shareholders. Countries with such protections tend to have larger, more efficient, and more stable stock markets than those that do not.
Published: Litan, Robert E., M. Pomerleano, and V. Sundararajan (eds.) The Future of Domestic Capital Markets in Developing Countries. Baltimore, MD: Brookings Institution Press, 2003.