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The rush to open a stock market

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A.B.A. |
Stock marketWhat is the purpose of the stock market? The question is not as silly as it looks: if a country wants a stock market at any price, that may lead to a disaster.

Stock markets are established as a way to create capital for companies. However, in some countries they became a status symbol or they are used as a mean to access international funds for development. However, this is fundamentally wrong. For example, France had the first stock market in the 12th century, 20 years ago around 60 stock markets existed in the world, a now there are more than 120 of them. That global rush to develop modern stock markets has a huge downside.

In many cases, especially since the fall of the Soviet Union, there has been a great push to create markets, where they did not previously exist. In some cases even the countries didn't exist. In some countries, the Czech Republic is a good example, there was a strong need not only to create a stock-market system but also to employ certain kinds of policies that mimicked U.S. economic policies, which often did not fit their societal context and the result has been disastrous for some countries.

After the fall of the Soviet Union American economists rushed 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. But, most of these newly privatized companies were taken over by mafia-like organizations that ran things like oligarchs. Russia just didn't have a foundation to become an American-style market economy.

The other reason for establishing a stock market are foreign funds. 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. Those approaches often do little to foster real economic growth and development.

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

From the socio-economic point of view, 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. At this time of global interconnections more government-instilled policies are necessary to build a stable economy and a stable society, as well as to prevent financial crises from having such a massive impact on all segments of society.

If the financial crisis taught us anything, it's important to have rules and oversight: You can't just establish a stock market and hope that it will regulate itself.

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