What strategies can developing countries use to improve financial market efficiency?

3 Reduce transaction costs and risks

A third strategy for improving financial market efficiency is to reduce transaction costs and risks that impede the smooth functioning and diversification of financial markets. Transaction costs include the fees, taxes, and other expenses that are incurred when engaging in financial transactions. Transaction risks include the uncertainties and losses that arise from market volatility, information asymmetry, moral hazard, and adverse selection. Developing countries can reduce transaction costs and risks by investing in infrastructure and technology, such as roads, telecommunications, and internet, that facilitate the connectivity and accessibility of financial markets. They can also introduce market-based instruments, such as derivatives, hedging, and securitization, that enable the transfer and mitigation of risks among market participants.

4 Encourage innovation and competition

A fourth strategy for improving financial market efficiency is to encourage innovation and competition in the financial sector, which can foster the development and diversification of financial products and services, enhance the quality and availability of information, and stimulate the responsiveness and efficiency of financial intermediaries. Developing countries can encourage innovation and competition by creating a conducive environment for entrepreneurship, research and development, and foreign direct investment in the financial sector. They can also implement policies that support the entry and exit of financial institutions, prevent market concentration and dominance, and protect consumer rights and interests.

5 Foster regional and international cooperation

A fifth strategy for improving financial market efficiency is to foster regional and international cooperation among developing countries, which can provide them with opportunities to learn from each other's experiences, leverage their comparative advantages, and access larger and more diversified markets. Developing countries can foster regional and international cooperation by participating in regional and multilateral initiatives, such as the Association of Southeast Asian Nations, the African Union, and the World Trade Organization, that aim to promote financial integration, harmonization, and coordination. They can also engage in bilateral and multilateral agreements, such as trade and investment treaties, currency swaps, and debt relief, that can enhance their financial stability and resilience.

6 Monitor and evaluate outcomes and impacts

A sixth strategy for improving financial market efficiency is to monitor and evaluate the outcomes and impacts of the policies and interventions that are implemented to enhance the performance and development of financial markets. Developing countries need to establish and use indicators, benchmarks, and feedback mechanisms that can measure and assess the effectiveness, efficiency, and equity of their financial market policies and interventions. Moreover, they need to conduct regular reviews and audits, and make adjustments and improvements based on the evidence and lessons learned. This can help them to ensure accountability, transparency, and learning in their financial market development process.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?