THE ROLE OF STOCK MARKET IN THE ETHIOPIAN ECONOMY
This paper deals with some ideas of stock market by comparing the present situation in Ethiopia. The paper does not cover the whole area, but raises some aspects of the stock market approach.
In this short paper, we shall first concentrate on the concepts of stock markets and in the second section, we shall discuss its relevance to the Ethiopian economy.
THE CONCEPT OF STOCK AND STOCK MARKET
Maybe some of us are familiar with the term "Stock exchange" or "Stock market" from news papers, other forms of mass media or from any other information sources. For those who have taken basic courses in Economics or Business, it would be very familiar. At any rate, let me start from the simplest idea. What are stocks?
To begin with the definition, stocks are equity claims on net income and assets of a corporation. To make clear the concept of equity let us put the equity this way. Equities are interests in, claims upon, assets. Stocks, in the context of this topic, refer to particularly corporate stocks which are one of the principal capital market instruments. A capital market is designed to finance long-term investments, but not short-term investments, by businesses, government and households. Business can start a new or expand by obtaining funds directly from households. One way to do so is by selling common stock to the public.
A common stock is an evidence of part ownership in a corporation. It entitles the owner to vote on certain corporate decisions and to share in any profits. There is also another way to obtain funds - by issuing bonds. Bond is an evidence that a promise has been made by a corporation to pay a specified amount of money in recognition of a loan to the business.
Who are the suppliers and demanders of funds in the capital market? The principal suppliers and demanders of funds in the capital market encompasses well-established and lesser known individuals, institutions, pension funds, insurance companies, households, saving and loan associations, commercial banks, different businesses, and government. Families and individuals, for example, tap the capital market when they borrow to finance a new home or automobile or some other personal or business matters. The largest segment of the capital market is devoted to mortgage loans on both commercial and residential properties. Mortgages are loans to individuals or business firms to purchase housing, land, or other real structures, where the structure or land serves as collateral for the loan. In other words, mortgages are a certificate evidencing a loan in which real property - land, buildings, or equipment - serves as security for repayment of the loan.
SOME ASPECTS OF CAPITAL MARKET
What are the main criterion to establish such capital markets in the economy - particularly in the case of Ethiopia? The following are the most important criterion.
- That of the existence of many private companies and individual firms. Those firms should be free from government influence. Individuals should have the right to buy and sell their own properties without the pressure of official authorities.
- Land and house should not be in the hands of the government. On this aspect, in Ethiopia almost all land and houses are under the control of the government. The changing of these policies is vital to any privatization process.
- Infrastructure such as communication lines, information exchange ways etc. should be accessible.
- Political stability on the country is important for foreign investors.
- All economic sectors such as trading, industry, service, agriculture must be out of the government hand. Individuals, in any one of the economic sectors, have an ultimate contribution to the economic development.
- Small scale firms must be established and encouraged since those firms are the backbone of the economy.
- Government policy, particularly to economic construction, is a very dominant and important to the improvement of infrastructure.
Those points seem simple slogans but they are the necessary realities toward the economic development in Ethiopia. The country like ours, nowadays, political stability and positive political policy is the key question as the economic policies are the output of political stability.
"Assumption" in economics is honorable concept or term. Let us assume that the above criterion are fulfilled. What is the effect in the economy?
Trading of funds in the capital market makes possible the construction of factories, office buildings, highways, bridges, schools, homes, and apartments or in other words the construction of infrastructure. The capital market trades in both wholesales loans and securities and retail loans and securities. It might be very difficult to predict what would be the consequences of the outcome. But one thing is true. It does not have any negative implications.
To see some of the optimistic features:
- It creates jobs and hence is a remedy to a decline in employment levels.
- It has a significant contribution to the general health of economy, to infrastructure construction etc.
- It increases the competition among business firms.
- It smoothes the conflict among different people groups (i.e. nationalities), since the concept of "everything is business" will be sculptured in peoples mind.
1) Frederic S. Mishkin, The Economics of Money, Banking and Financial Markets, 3rd Edition,1992. pp. 54-56.
2) Roger H. Hermanson, James Don Edwards & L. Gayle Rayburn. Financial Accounting, 3rd edition, 1987 pp. 511-525.
3) Peter S Rose, Money & Capital markets, The Financial System in the Economy, 2nd edition, 1986, pp. 555- 586.
4) Roger LeRoy Miller, Robert W. Pulsinelli, Modern Money and Banking, 1985, pp. 56-59