The limited role of small stock exchanges in economic development: A case study of Mozambique and Swaziland

Abstract

The establishment of a successful stock market in a developing economy can provide a major source of development finance, both channelling domestic savings and attracting foreign investment. But small markets generally fail. Two micro-markets, Mozambique and Swaziland, provide an interesting case study to examine the features of new markets in sub-Saharan Africa that differ in a number of ways, including colonial legacy, membership of the Common Monetary Area and the dynamics of the political economy that defines the links between the citizens, the local elite and the state. In both countries, the operational aspects of the stock exchange are clearly inadequate as a means of promoting international investment. Thus, gains from regional integration initiatives or foreign investment are unlikely, as the market's small size and incomplete institutions currently offer limited potential for either domestic or international risk diversification. However, the political economy in both countries is the real barrier to growth.

Keywords:

• political economy
• frontier stock markets
• Mozambique
• Swaziland

Acknowledgements

The authors thank Keith Jefferis for valuable help and comments.

Notes

¹The CMA is based on the fixed peg between each country's nominal currency and the rand, and the Southern African Customs Union on the collective imposition of high customs tariffs on imports from outside its member countries.

²The Group of Thirty encourages standardisation and improvement in global securities administration. In 1989, the following recommendations were agreed on: (i) brokers should match trades on day after deal date (T + 1); (ii) trade confirmation on trade day plus two days (T + 2); (iii) central depository for safe keeping of shares; (iv) net basis settlement of cash and stock; (v) settlement takes place as delivery vs payment or receipt vs payment; (vi) settlement in same day funds; (vii) settlement effected on trade date plus three days (T + 3); (viii) securities lending should be permitted; (ix) international securities numbering system must be adopted (ISIN code).

³GDP per capita in 2005 = PPP US$4291 in Swaziland, PPP US$1105 in Mozambique and PPP US$9885 in South Africa (World Bank, 2008). (‘PPP’ refers to the assumption of purchasing power parity holding between the national currency and that of US$. GDP is thus expressed in constant prices and converted to US$.)