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The Importance of Emerging Capital Markets by Richard M. Levich Stern School of Business New York University First Draft: November 20, 2000 Revised Draft: December 15, 2000 Current Draft: March 1, 2001


Prepared for the Brookings-Wharton Papers on Financial Services, 4 Annual Conference on “Integrating the Emerging Market Countries into the Global Financial System,” Washington, D.C., January 11-2, 2001.



The Importance of Emerging Capital Markets by Richard M. Levich _________________________ 1. Introduction In a little under two decades, the spread of market-oriented policies has turned the once so-called lesser-developed countries into emerging markets. In 1982, the 32 developing country stock markets surveyed by the International Finance Corporation (IFC) had a market capitalization of $67 billion representing about 2.5% of world market capitalization. By the end of 1999, the IFC identified 81 emerging stock markets with total market capitalization exceeding $3,000 billion or 8.5% of world equity market capitalization. In 1999, the value of outstanding domestic debt securities trading in emerging markets exceeded $1.4 trillion, representing 4.7% of the global bond market and a several-fold increase over the total 20 years earlier. On the other hand, bank lending to emerging markets in 1999 totaled only $783.7 billion (11.9% of consolidated international claims of BIS reporting banks), a relatively small increase over the $517.6 billion (36.9% of the total) in claims held by banks in 1980. Many forces underlie these broad trends. The debt crisis of the early 1980s cooled bankers’ appetite for sovereign loans to developing nations. The financial crises in the second half of the 1990s (in Mexico 1995, Asia 1997, and Russia 1998 along with other hot spots) brought a fresh reminder of the perils of cross-border lending. In contrast, public financial markets for equity and debt securities were encouraged by market-oriented policies to...