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October 11, 2004
On Foreign interference and Mercedes
I was just reading over an American (read USAID financed study) analysis of a local stock market in the region, and the suggested “action plan” for “reforming it” and got a bit motivated to comment. My immediate reaction was, “what navel gazing blather.”
Why? Well, primarily because it was rife with assumptions that were utterly unsupported by any empirical data, nor even clear thinking, and second because it rather presumed, ipso facto, that an American market structure would be the most appropriate choice. Not that this is a particularly American sin – doesn’t everyone usually think their way of doing things is the best? Rather as in religion, if you don’t think you’re doing things the best way possible, then why the bloody hell would you do it that way? And as in religion, there is a marked tendency to think one’s way of getting things done is really the best way for all. Very natural.
Now, in my opinion, given the lack of success of American style capital market development (by which I mean the same generalized share holding/trading culture and mechanisms) in rather more advanced markets, I would think that reports on developing markets might have pause to ask if the American model is truly generalizable.
The problems here are multiple and I haven’t the inclination or time to really write about them in any detail or depth (nor to be sure should I claim a real expertise, as opposed to some vague operational knowledge and experience profound enough to give me sharply held opinions but really objectively speaking somewhat superficial). Nevertheless, the key issues are clear. Regional markets suffer liquidity issues (low trading volumes, restricted potential supply of securities, etc), have issues re poor enforcement of extent disclosure requirements, which themselves fall short of (ahem) “international best practices” (which I will translate for you to mean some masturbatory ideal), and overall lack robust protections for the individual investor. All quite agreed upon and all quite clear.
What does that really mean, however?
Well, I don’t know for certain, but this fine report that set me off, seems to think that all this means that these markets – at the time of writing of the report in a slump – should get right up to American standards. All the sicknesses of the markets are attributed to lack of transparency and enforcement.
Except of course in 2003 and this year the market rebounded like a fucking bitch on coke.
Now clearly the rebound has extra market reasons, but then so did the bear market.
Let’s leave that aside, with the simple acknowledgement that (i) the markets do indeed face liquidity issues, (ii) that reforms are indeed necessary to address them, such that the capital markets become an attractive alternative to bank finance, but (iii) that an American model of capital markets may not be truly applicable (and see non Anglo-American capital markets as examples), (iv) developed world levels of transparency have costs associated with the same
Now this fine… analysis, or should I rather say, “regurgitation of late 1990s American prejudices re their financial markets” simply assumes that for this developing market that ipso facto the correct course of action is to look to the American model and adopt the latest disclosure laws, etc.
Great, super, wonderful.
Except the following:
(a) the paper utterly ignores the costs of added disclosure and simply assumes the benefits, in the context of the local market. It assumes, a priori that greater disclosure is going to attract more capital. Ipso facto.
(b) Asserts a number of points regarding retail and other investors that I absolutely know to be questionable – that is if they are right they desperately need validation. I would assert that if anything one should understand from the 1999-2001 period that even in developed markets, investor preferences and structures are different enough that merely assuming that greater “disclosure” will attract retail and other investors, etc. etc. is to simply engage in navel gazing. That is not to say that non-anglo-american investors do not value data as others, but rather the preferences and risk tastes may very well be fundamentally different, and the existence of quarterly reporting in a certain format is, to be frank, unlikely to change that.
a. A good place to start in this context is not simply asserting “international [American] best practices” are needed, but rather to actually learn something about local investor preferences, and look to see how these may be dealt with in terms of ‘best practices.’
b. For example, while a Mercedes quality of disclosure might very well be required for attracting international portfolio investment, it may not either be desirable or cost effective to impose this if in fact the mass of local savings one wants to mobilize (i) does not necessarily value this disclosure in the same way (versus “alternate” disclosure, read personal connections), (ii) may not give sufficient value to the disclosure to off set the perceived cost of the disclosure, or more clearly, the majority of investors may not value the information enough to make the effort of being listed and public (with all that implies tax and otherwise in an emerging market) really worth while.
In this context, the American solution to the problem might be very well to create a Mercedes that can’t be sold on the local market, i.e. aggravates the problem.
I suppose I hope my comments get me disinvited from this conference which the paper is for – some dumbass US Securities and Exchange Commission bullshit. They just had some dumbfuck conference in
Posted by The Lounsbury at October 11, 2004 02:04 PM
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Aug-Dec 2004
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