Rush to develop stock markets has huge downside

Mar 05, 2010

France had the first one back in the 12th century. In 1980, less than 60 existed worldwide. But since then, the number had doubled.

Stock markets, once a way to manage debt and create capital for companies, have seemingly become a status symbol for some nations, or are used as a means for countries to access international funds for development.

But Michael Lounsbury, in the University of Alberta's School of Business, argues that the global rush to develop modern financial institutions-including stock markets-has had a huge downside.

Lounsbury says that, in many cases, especially since the fall of the Soviet Union, there has been an inexorable push to create markets, where they, or even countries for that matter, did not previously exist. While the creation of these markets in many underdeveloped countries has not necessarily contributed to the , their creation and the accompanying development of other market institutions did likely contribute to the recent .

"In countries like the Czech Republic, for example, there was a strong need to not only create a apparatus but also to employ certain kinds of policies that mimicked U.S. economic policies, which often did not fit their societal context," said Lounsbury. "The result has been disastrous for some countries."

Lounsbury cites the example of the fall of the Soviet empire and the rush by American experts to try to "capitalize" Russia. He says American economists "parachuted" into Russia, armed with plans and policies dictated by institutions like the International Monetary Fund. Under their direction, former state-controlled industries were privatized and ownership spread around the state to citizens in the form of stocks.

"Most of these newly privatized companies were taken over by mafia-like organizations that ran things like oligarchs," said Lounsbury. "Russia did not have a foundation to become a U.S.-style market economy."

Lounsbury also decries the purely symbolic development of markets. He notes that these markets are created for the sake of appearance, in order for the governments of these countries to access funds from groups such as the IMF or the World Bank to support their social policies. Lounsbury notes that such approaches often do little to foster real economic growth and development.

"In many cases, these markets serve no important function in the societies or economies of these countries," said Lounsbury. "The vast majority of stock markets have little substantive trading activity or infrastructure to support the use of a stock market to propel growth and development."

Lounsbury, who favours socio-economic approaches to markets, notes that the latest financial crisis has enabled new conversations about approaches to markets that account for substantive social welfare concerns, and such a shift in policy is a positive step that would serve to address many inequalities found in society. While some may cringe at the idea of more government involvement in markets, he says that more government-instilled policies are necessary to build a stable economy and a stable, equitable and productive society, as well as to prevent financial crises from having such a massive impact on all segments of society.

"The economy should be conceptualized more as an appendage to the society that we want, not as a kind of unfettered dictator that unravels society," said Lounsbury. "If the financial crisis taught us anything, it's important to have rules and oversight; you can't just have a market take away all the rules and let it run amok."

Explore further: Not just the poor live hand-to-mouth

add to favorites email to friend print save as pdf

Related Stories

Lessons from the past can clarify banking crisis

Nov 14, 2008

Stricter regulation of the financial services sector is likely to result from the latest upheaval in national and global markets. It is being demanded by politicians of all parties while the Financial Services Authority, ...

Green firms rewarded by financial markets

May 29, 2008

When a company improves its environmental performance, it is common to think that the accompanying economic improvements are based on the company's more efficient use of resources. However,

Recommended for you

Not just the poor live hand-to-mouth

4 hours ago

When the economy hits the skids, government stimulus checks to the poor sometimes follow. Stimulus programs—such as those in 2001, 2008 and 2009—are designed to boost the economy quickly by getting cash ...

Which foods may cost you more due to Calif. drought

Apr 17, 2014

With California experiencing one of its worst droughts on record, grocery shoppers across the country can expect to see a short supply of certain fruits and vegetables in stores, and to pay higher prices ...

Performance measures for CEOs vary greatly, study finds

Apr 16, 2014

As companies file their annual proxy statements with the U.S. Securities and Exchange Commission (SEC) this spring, a new study by Rice University and Cornell University shows just how S&P 500 companies have ...

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

5 / 5 (1) Mar 05, 2010
If a bloated, blood sucking parasite is essential to the operation of Democracy here in the US, why won't it work just as well in any other country? Is this guy trying to stand in the way of Globalization? Good luck, pal.

More news stories

Not just the poor live hand-to-mouth

When the economy hits the skids, government stimulus checks to the poor sometimes follow. Stimulus programs—such as those in 2001, 2008 and 2009—are designed to boost the economy quickly by getting cash ...

Male-biased tweeting

Today women take an active part in public life. Without a doubt, they also converse with other women. In fact, they even talk to each other about other things besides men. As banal as it sounds, this is far ...

Archaeologists, tribe clash over Native remains

Archaeologists and Native Americans are clashing over Indian remains and artifacts that were excavated during a construction project in the San Francisco Bay Area, but then reburied at an undisclosed location.

Math modeling handbook now available

Math comes in handy for answering questions about a variety of topics, from calculating the cost-effectiveness of fuel sources and determining the best regions to build high-speed rail to predicting the spread ...