Capital Market Development and Emergence of Institutional Investors in the Asia-Pacific Region

This paper was prepared for ESCAP by Hans Genberg. It is generally agreed that capital markets has an important role to play in the intermediation of funds from savers and investors. While banks have traditionally been a mains source of finance for investments in developing and emerging markets, it is recognized that active bond and equity markets serve an important complementary role. The view that a vibrant financial sector has a positive effect on economic growth and development has long been uncontroversial. Recently, however, and as a reaction to the financial crisis in the United States and Euro Area, some economists have argued that if it grows beyond a certain size, the financial sector may become so large that its marginal contribution to growth is negative. The size at which this occurs appears relevant mostly for advanced economies and is far beyond the current state of financial development in developing and emerging markets in general and in the Asia-Pacific region in particular. This paper thus proceeds on the premise that further development of capital markets in developing and emerging markets is beneficial, and asks what can be done to encourage growth in bond and equity markets. Particular emphasis is put on what measures might be taken induce financial markets to channel funds to infrastructure and sustainable development investments and on the role that institutional investors may play in this process.