Barriers and Opportunities for Enhancing Capital Flows

In the COMCEC Member Countries

2 – LEGAL AND INSTITUTIONAL FRAMEWORKS IN THE

COMCEC MEMBER COUNTRIES

The characteristics of COMCEC Member Countries vary significantly across regions and income

levels. Regional groupings are heterogeneous in terms of their income composition and their

degree of adherence to international frameworks for capital account liberalisation.

The clearest similarities are to be found among those COMCEC Member Countries that are

included in the World Bank’s high-income group, many of which are concentrated in the

Middle East. The region has been developing competitive practices to attract international

investors, and a number of common characteristics can be seen among these countries. For

example, in many cases, capital controls are limited, ownership of publicly listed companies is

restricted to a non-controlling share, and GCC-based investors enjoy preferential treatment.

On a more general basis, membership of or proximity to regional blocs with advanced

legislation around capital markets appears to be positively correlated with institutional

advancements. Turkey is an example of this: the country’s proximity to the EU has paved the

way for significant institutional and financial sector development. Turkey has implemented

several principles included in the OECD Code of Liberalisation, and its Capital Markets Law has

brought it in line with several provisions of EU legislation. Free movement of capital, one of the

basic requirements for EU membership, has been introduced.

External shocks have also played a role in driving reforms around capital markets and

investment infrastructure. The 1997-98 Asian financial crisis highlighted several shortcomings

in Asian financial markets, most notably the underdevelopment of domestic bond markets and

deficiencies in corporate governance, transparency and financial regulation. Capital account

openness in underdeveloped regulatory frameworks seriously damaged these economies,

owing to the volatility of short-term capital inflows that were financing longer-term projects.

Following the crisis, a significant number of countries engaged in joint initiatives and reform

processes. Overall, financial safeguard mechanisms and macro prudential frameworks were

enhanced. These countries also improved their capacity to issue debt through a number of

initiatives, notably the Asian Bond Markets Initiative and the Asian Bond Funds, which

strengthened these markets’ capacity to issue debt and mitigated the fact that major global

credit rating agencies do not yet rate many bond issuers in Asia.

There are fewer similarities in trends among countries in the lower-income groups. Overall,

among these countries, governments retain a greater degree of control around international

capital flows. Measures are in place to ensure that foreign capital is channelled properly and a

emphasis is placed on FDI vehicles. However, national institutions tasked with developing

capital markets and attracting international investors have the potential to slow the approval

of planned projects. For example in Mozambique, the processes required to obtain investment

licences may slow the flow of international investment.