the late 1990s, capital markets can serve as an important “spare tire” at times of market stress.<sup>5</sup> Of course this begs the questions of what constitutes a capital market and how a successful one can be created. Formal organized stock exchanges have been established in many countries in recent years. However, many of these exchanges could not be characterized as successful, either in terms of performance indicators (i.e., liquidity, turnover, new issues, market capitalization, etc.), or in terms of their contribution to domestic economic growth. In many small emerging markets, stock exchanges simply have failed to thrive. They have only a few listings, new public offerings are rare, and there is hardly any trading. While trading frequently also occurs outside of the formal stock exchange on informal over-the-counter markets, these too have failed to generate equity market development on a significant scale.

Globalization and technology, in many ways forces for modernization and development, have contributed to this bleak picture. Where they are able, larger issuers from more advanced emerging markets sometimes escape their domestic constraints and dual list on global markets, particularly the New York Stock Exchange and the London Stock Exchange. For example, “by March 1995, over 87%, 54%, 62% and 71% of the Mexican, Argentine, Chilean and Brazilian local market indices, respectively, were available for trading in the United States in the form of ADRs.”<sup>6</sup> A recent World Bank study of capital markets in Latin America found, disturbingly, that domestic market reforms resulted in a larger proportion of issuers going abroad, and led to less liquidity and weaker markets at home.<sup>7</sup> If emerging markets are unable to serve as a major source of capital for their leading issuers, perhaps, in the face of globalization, their strategic focus should be instead on serving the smaller, less well-known domestic issuer.<sup>8</sup> Indeed, small and medium sized enterprises (SMEs) form the economic backbone of most emerging market economies. Instead of focusing on prime issuers who, it appears, may leave

> 5 A. Greenspan 2000. “The failure to have alternative forms of intermediation was of little consequence so long as the primary means worked. That is, the lack of a spare tire is of no concern if you do not get a flat. East Asia had no spare tires.”

6 K. Hargis, 2000. “International Cross-Listing and Stock Market Development in Emerging Economies,” International Review of Economics and Finance 9, p. 103. In Brazil alone, there has been extensive migration abroad (mainly to the U.S.) since the mid 1990s, particularly of the larger and more prestigious companies.

7A. de la Torre, and S. Schmukler, 2004. Of course, even if dual listings detract in theory from the potential liquidity of the domestic market, they can in practice help make a domestic market more liquid than it would be absent the dual listing. By piggybacking on the higher volumes of a large international market, dually listed shares may be able to be traded more efficiently on the domestic market than they would be otherwise. _See, e.g.,_ K. Hargis, 2000, who argues that the expansion of cross-listings in Latin America paralleled and contributed to increasing market capitalization. “[I]nternational cross-listings have been instrumental in the development of stock markets in Latin America since 1989, increasing stock prices and issuance of equity and enhancing liquidity.” _Id.,_ at p. 103.

8 Another possible response to the decline in domestic markets is for issuers to turn instead to regional markets. The development and advantages and disadvantages of regional markets is beyond the scope of this paper. Nonetheless, the authors do not believe that regional markets will contribute much to domestic economic growth, at least not for many years.

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