Capital markets in developing countries : A model for capital market diagnostics, with a field study implementation in Georgia

This thesis starts with a research overview of the relationship between financial system development, capital markets and economic growth. The general consensus among economists is that financial system development contributes to economic growth and that both banks and capital markets are important in that development. These findings justify the interest that aid agencies and international organisations show for assisting financial development in developing countries. The authors go on to create a model for Capital Market Diagnostics (CMD) that could be used by such organisations to evaluate the level of development of the capital market in a developing country. The model consists of three steps. Step one determines whether necessary conditions, such as security and rule of law, exist in the country. Step two lists factors that can improve or impede the development of the capital market, focusing on the availability of capital, the availability of investment opportunities and macro environment factors that affect these two. The third step consists of an evaluation of the financial institutions in the country, providing checklists for interviews and site visits. To test the model it was implemented during a field study in Georgia. The conclusions from the test were that the final model, having been improved during the field study, meets the requirements for accuracy and usability and can be utilised as intended. The evaluation also resulted in conclusions on the development of the Georgian capital market. The level of development is low, mainly due to a lack of investment opportunities. There are few companies using the capital market in Georgia, and the ongoing privatisation process is not changing this but instead creates privately held companies with few owners. Another cause for the low level of development is a lack of capital, due to low interest and level of knowledge from domestic investors and a pension system that does not channel investments to the capital market. However, the institutions of the capital market are sufficiently developed for the current level of market activity and do not limit capital market development at this stage