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The Determinants of Stock Market Development in Emerging Economies: Is South Africa Different?

Literature › Works

Yartey, Charles Amo (2008). The Determinants of Stock Market Development in Emerging Economies: Is South Africa Different?. IMF Working Paper WP/08/32. International Monetary Fund, African Department.
Type working paper
Scope Post-1994 South African economy
Method econometric
Period studied 1990–2004
Regions South Africa, 42 emerging market economies
Themes macro fiscal finance debt, comparative theory, methods data sources, business and state
Citation key yartey2008

Argument

Using a dynamic GMM panel of 42 emerging economies (1990-2004), the paper argues that stock market capitalization/GDP is driven by income level, domestic investment, banking sector development (with a non-monotonic, complement-then-substitute relationship), private capital flows and stock market liquidity. It also finds that institutional quality promotes market development by supporting external finance. South Africa is tested with a dummy and interaction terms; the insignificant dummy is read as showing that South Africa is not different and the same determinants apply. The South African discussion is thin and the evidence concerns the post-1990 period, so its relevance to apartheid-era economic history is only contextual.

Evidence and method

Panel of 42 emerging economies, 1990-2004, drawing on World Development Indicators, IMD World Competitiveness Database, IMF staff estimates and the ICRG political risk indicators; descriptive data on the Johannesburg Stock Exchange (JSE).

Findings

  • JSE was founded to finance the mining industry, though most listed firms today are non-mining. (p. 12)

    The Johannesburg Stock Exchange (JSE) was founded in 1887 to enable the new mines and their financiers to raise funds for the development of the fledgling mining industry.

  • South Africa's market capitalization ratio rose over 1990-2004 while the number of listed firms fell as large firms moved primary listings to London. (p. 13)

    the capitalization ratio increased from 120 percent of GDP in 1990 to about 180 percent of GDP in 2004.

  • Loss of listings reflects big South African companies relisting in London. (p. 13)

    The number of listed companies on the JSE decline from 732 in 1990 to 403 in 2004, a reduction of more than 300 corporations

  • The 1995 Stock Exchanges Control Act opened the JSE to non-South Africans. (p. 12)

    the Stock Exchanges Control Act changed the way in which stocks were traded in South Africa, opening the door to non-South Africans

  • Income level is a significant determinant of stock market development in the baseline GMM model. (p. 22)

    a percentage point increase in GDP per capita increases stock market development by 7.23 percentage points.

  • Banking development has a positive but eventually negative effect, indicating a non-monotonic relationship. (p. 23)

    very high levels of bank sector development have a negative impact on the growth of stock markets because stock markets and banks tend to substitute each other as financing vehicles.

  • Private capital flows significantly raise stock market development. (p. 23)

    a percentage point increase in capital inflows induces a 0.25 percentage points increase in stock market development.

  • Political risk resolution matters for stock market development. (p. 25)

    The result suggests that the resolution of political risk is important for stock market development in emerging markets.

  • The South Africa dummy is insignificant, so the paper concludes SA is not different. (p. 29)

    the South African dummy is positive and statistically insignificant. This result implies that the main factors identified in the previous section as determining the development of the stock market in emerging market countries also apply

  • Early pension and insurance industries are offered as an explanation for SA's large market. (p. 29)

    the early development of the pension fund and insurance industries played a great role in developing a large institutional investor base, which probably explains the high level of stock market development.