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Deepening capital markets in emerging economies

By Nitin Jain, Fumiaki Katsuki, Akash Lal, Emmanuel Pitsilis, and Joydeep Sengupta

Engaging at three levels can help to accelerate growth in Asia.

Deeper capital markets in emerging Asia could free up an additional $800 billion every year1 in funding, mostly for midsized to large corporations and infrastructure, accelerating economic growth and potentially lifting millions out of poverty. Instead, these emerging economies lack access to predictable capital-market funding at scale, their investors lack avenues to deploy long-term savings, and capital markets still play a poor role in efficiently allocating resources. Addressing these issues and freeing up this potential depends on policy makers’ ability to build vibrant capital markets. This is easier said than done. While the building blocks of well-functioning capital markets are well understood and documented, policy makers lack both the tools for a detailed diagnostic and a change-management approach to implement the necessary changes. This paper is based on research we conducted to fill this gap.

Building vibrant capital markets requires policy makers around the world to diagnose performance at a granular level, design markets for sustainable rather than fast development, and implement a nationwide change-management approach.

1. Diagnosing performance at a granular level

Traditional approaches to benchmark capital markets compare size with GDP. We have developed the McKinsey Asian Capital Markets Development Index to help policy makers better benchmark their markets. We addressed three fundamental questions:

  1. Can issuers raise affordable capital at scale through capital markets?
  2. Do capital markets provide attractive and diverse avenues to deploy short- and long-term domestic savings?
  3. Do capital markets deliver high-quality pricing information to maximize the efficiency of resource allocation?

We concluded that emerging markets are significantly behind developed markets, with considerable financial, human, and social costs.

2. Architecting markets for sustainable rather than fast development

Incremental changes to market design and infrastructure can bring about short-term performance improvements. But sustainable improvement can be achieved only through changes in economic (and sometimes social) policies that alone can underpin long-term growth. Markets that promote growth at all costs inevitably suffer from bouts of volatility and liquidity crisis, and markets that leave no space for risk and experimentation do not develop fast enough.

Policy makers can embed sustainability in their growth models by focusing on building the foundations required for longer-term market growth. This requires decisions at two levels:

  • Policy making. Make a small number of critical policy decisions to enable and set the foundation for longer-term growth.
  • Market architecture and design. Define the required regulatory framework, institutional setup, legal structure, tax environment, and market infrastructure.

Both levels are critical and need to work hand in hand. The policies related to capital-market development are deep and far reaching—they require executive, legislative, and popular support, and hence unavoidable time and commitment. Market architecture and design is a constant work in progress in both developed and emerging markets and can only be effective if the right policies are in place.

3. Implementing a nationwide change-management approach

Many emerging-market policy makers and their advisers understand what needs to be done to deepen capital markets. How to implement those measures is another matter. Sequencing and implementing a large number of interdependent initiatives over a long period requires a change-management mind-set and approach with which few policy makers are familiar. Many lessons can be learned from a successful transformation, such as the one Singapore launched and implemented for its capital markets.


We hope that this paper and the research behind it will meaningfully contribute to how policy makers understand the nature of the challenge of building capital markets. We believe that at its heart this is not a technical issue but a nationwide (and in some cases, regionwide) change-management challenge that calls for a new mind-set. The stakes are enormous and make it worthwhile to step back and examine how to better work on deepening capital markets.

About the author(s)

Nitin Jain is a senior expert in the McKinsey Knowledge Center in Gurgaon, Fumiaki Katsuki is a partner in McKinsey’s Tokyo office, Akash Lal is a senior partner in the Mumbai office, Emmanuel Pitsilis is a senior adviser to McKinsey, and Joydeep Sengupta is a senior partner in the Singapore office.

The authors wish to thank Soumya Gupta, Aakash Jhaveri, Ryutaro Kawai, Aisa King, Anamika Mukharji, Noorain Nadim, and Rachel Rui Zhang for their contributions to this report.
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