Establishment of Capital Markets in Least Developed Countries (LDCs):The case of Ethiopia

Despite a surge of global investor interest in the 1980s and 1990s, Africa has been bypassed by the massive international capital flowing to developing economies. Most of the economies in the region didn’t efficiently mobilize their domestic financial resources either. African countries, particularly those in Sub-Saharan Africa (SSA) remain the only developing region in which development assistance flows exceeds private capital flows. Except a few countries (such as South Africa, Mauritius, Botswana), most of the economies in the SSA region are not still doing anything good. These phenomenons can in part be attributed to lack of a well developed financial sector (such as capital markets, banks, and other financial institutions) and the poor economic policies and incompetent “institutions” in African countries. The purpose of this thesis is to conduct a qualitative research on whether capital market establishment and development is an alternative towards the economic growth of least developed countries such as Ethiopia and investigate the role of institutions towards the establishment, development and performance of capital markets and identify whether such institutions exist in Ethiopia or not. In addition the research also integrated the importance of domestic financial resource (households’ savings) to the performance of capital markets in Africa.The result which is based on the review, description and analysis of the existing literature (theory and empirical studies) suggests that despite the different thoughts (1. a thought that positively correlates capital markets and economic growth and 2. a thought that negatively correlates capital markets and economic growth ) as to the capital market and economic growth linkage; capital market establishment and development could lead to the economic growth and prosperity of least developed African countries as well, including Ethiopia provided that it’s backed by capable institutions of all sorts (rules, laws, constitutions; social values and norms; financial, political etc) and domestic resources (Smaller households’ savings) are efficiently mobilized through strengthening the formal sector ( e.g. banks and microfinance institutions) and the informal financial institutions.

Author: Amare Walle

Source: Blekinge Institute of Technology

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