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Stock exchanges burgeoning in many Third World countries


CHICAGO -- Every weekday at 1 p.m., the Stock Exchange of Montevideo in Uruguay opens for business. One hour later it closes. And that's it for the day.

The Big Board it ain't. Uruguay's government still controls many major industries, and Montevideo isn't exactly a world financial center. The exchange's total market capitalization is only about $44 million -- compared to capitalization of the New York Stock Exchange of about $4 trillion.

But from Argentina to Zimbabwe, countries that once based economies on socialism or state capitalism are discovering the joys of a market economy and the virtues of a stock exchange. One example of the fervor: More than 600,000 people jammed into Shenzhen last year to get tickets that would have let them enter a lottery to buy shares in China's two markets.

There are at least 54 emerging markets, as such Third World stock exchanges are known, and they're booming. Their total capitalization exploded from $67 billion in 1982 to $643 billion in 1991, the most recent figure available.

Some exchanges are very old. Argentina's was founded in 1854. Others are very new -- Poland's is two years old. Even Vietnam hopes to have a real stock exchange within two years.

Some are big and bustling. Exchanges in South Korea, Mexico and Taiwan each have a market capitalization of more than $100 billion. And some are very small -- the exchange in Fiji deals in only four stocks.

Emerging markets are volatile, and it takes a lot of sporting blood to play. Most years, some of them, as measured by the World Bank's International Finance Corp., or IFC, far outperform the New York Stock Exchange and its stately sisters in London, Tokyo and other financial capitals.

But what goes up with a whoosh comes down with a thump. The Zimbabwe Stock Exchange, for example, was among the best performing markets in 1990. In 1992 it was the worst, with a 61.6 percent decline in its index.

The growth of Third World stock exchanges mirrors the worldwide trend to market economies. This is obviously true in such former communist nations as Hungary, but no less valid for countries, such as many in Latin America, that have been officially capitalist.

"A lot of smaller countries trying privatization [of state-owned firms] find it's hard to do without a stock market," said Deborah Farrell, the IFC's regional capital markets manager for Asia. "To find equity, a country has to have a stock exchange."

At first, the move to establish stock markets was a "fad" for new nations that wanted the images of prestige, says David Gill, former director of the IFC's capital markets department. First, a battleship. Then an airline. And next a stock exchange, "as a symbol of commercial sophistication."

But leaders of many of those nations saw no real economic role for the exchanges. Some saw the exchanges as symbols of a rapacious capitalism; others distrusted the foreign capital that can jump-start a small exchange. The result: a stunted exchange that generated little capital or equity, says Antoine W. Van Agtmael, president of Emerging Markets Management in Washington.

Most investment came from huge companies that were part of the military-industrial-governmental complexes running many Third World countries. Such companies had access to international money markets or direct links with local banks. So, well-heeled insiders had it made, but virtually no one else had access to capital.

Foreign investment, when it came, usually came from the multinationals such as Coca-Cola or General Motors, which could finance direct investment without tapping local equity markets.

Privatization and the move to market economies cracked this ossified structure and created a need for local markets where small companies could raise equity funding. And the success of such nations as Singapore, South Korea and Chile attracted imitators.

Meanwhile, Mr. Gill said, emerging nations adopted the policies necessary to help stock exchanges thrive.

First came a "legal structure for investor protection," including financial disclosure by companies, fair trading practices and contract laws came into being. Among emerging markets, only Argentina and the Philippines had true securities commissions 20 years ago. Now 21 countries have them, although, as Van Agtmael says, "none of them is as well regulated as the [Securities and Exchange Commission]. There are still a lot of crooks and fly-by-nights out there."

Next came a favorable tax environment encouraging equity investment instead of debt. By this time, the third step -- growing willingness of businesses to finance expansions through stock issues -- appeared.

There's still a long way to go, Mr. Gill said, especially in encouraging emerging countries to overcome fear of foreign capital so they can court international investment.

And some of the lessons in a free market may come hard. In some countries, popular enthusiasm outruns the market's capacity and the public's knowledge of capitalism. There is little understanding of risk, and that raises fears of a backlash when investors, expecting to get rich, find they can just as easily go broke.

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