Institutional Reforms and Capital Market Deepening in Frontier Economies: A Comparative Policy Analysis.

In the current study, the correlation between institutional reforms and capital market deepening is examined using the methodology of comparative case study and a policy-focused analytical approach. Many frontier markets continue to be shallow, marked by low liquidity and low levels of participation. In light of these considerations, the following research questions are stated: Do institutional reforms lead to capital market deepening? Why do similar reforms have different effects in various countries? Under what circumstances are institutional reforms most effective? Based on IMF, World Bank, and financial sector data of the respective countries, an analysis of institutional, macroeconomic and financial sector factors will be conducted in the context of a structured analytical approach. Results show that institutional reforms foster the development of capital markets primarily if they are credible, enforceable, and are made under macroeconomic stability. Investor protection and market transparency reforms tend to be more effective than general governance reforms. However, weak enforceability, sequencing issues and macroeconomic instability greatly limit the positive influence of reforms. Financial sector liberalization measures in turn produce inconsistent results when not complemented by institutions. Cross-national analysis reveals that the varying enforcement capabilities, reform sequencing, and the structure of domestic financial sector explain a considerable part of the differences in results. The significance of the study consists in its focus not on institutional variables but on the implementation of policies. From this perspective, the study provides implications for practitioners on how reform measures should be formulated in order to ensure effective capital market deepening in frontier economies.