Imagine a country where thousands are leaving their country in search of a better life, traveling across deserts and oceans without thinking for fractions of second about the consequences of doing such illegal and unsafe journey.
In a nation with higher rate of population growth, and lower rate of national productivity, one can expect higher rate of unemployment that will result in illegal migration and political unrest. According to Dr. Abush Ayalew, who is the author of a book entitled ‘Stock Market and Investment’, currently, national unemployment rate has reached more than 19 percent while urban unemployment reached 26 percent, which is one of the highest in the world.The solution would have been simple and straight forward. The government should have focused on boosting national productivity through creating an environment for industrialization, innovation and competitiveness.
Scholars of social anthropology have been instructing that three of the most powerful human motivations are the pursuits of wealth, power and status. Basically, wealth has been remained to be the prime mover of both status and power. That is why wealth inequality is regarded as punishingly painful as it is often associated with the inequality of both power and status among citizens. It is because of the drive of status and power that gives western industrialists the capability to push the frontiers of corporate excellence.
“When we see the global dominance of Western corporations, we can understand that how focusing on national productivity has been playing a great role for such phenomenal success. One of the key factors behind this has been the emergence of capital market which gives them a competitive edge to maximize corporate efficiency through providing less costly and highly accessible financing instruments. They are these corporations that have brought both civilization and prosperity for the Westerners through creating highly paying jobs in abundance.”
According to Dr. Abush , capital markets (sometimes called stock markets) are where individuals and institutional investors come together to buy and sell shares and bonds in a public venue. Stocks or shares of a company represent ownership equity in the firm, which gives shareholders voting rights as well as residual claim on corporate earnings in the form of dividends, interest rates and capital gains from stocks and bonds, commonly called securities.
Capital market can be divided in to two, namely primary and secondary capital markets. In the primary capital market, investors buy directly from the issuing company whereas, in the secondary market, investors trade securities (stocks or bonds) among themselves. When a company goes public, it sells new stocks and bonds for the first time, and usually that sale takes the form of initial public offering commonly called an IPO, he elaborated.
Ethiopia has not had both primary and secondary stock market since the fall of the Hailesilassie regime. “I would rather say that Ethiopia so far has experienced a private placement in which startup companies float shares through formulating their own prospectus.
But due to the absence of a well regulated and organized primary stock market, so many Ethiopians have lost the hope of having a dividend income or the growth of their wealth through capital gain for the good reason that they were fallen victim at the hands of some manipulators and unfair traders who had used the weakness of the old trade law of the country.”
As a result of having no one to safeguard their hard earned money, most Ethiopians nowadays have lost trust on buying shares of startup companies. This could by its own be a reason to start a regulated stock market both for the benefit of startup companies that need money to grow and for the citizens at large to maximize their capital productivity.
So far, limited financial supply together with higher lending interest rate of up to 25 percent will only escalate the debt stress and competitiveness for companies in the private sector. Moreover, a rise in interest rate could by itself increase the inflation rate that will farther destroy the wealth of the society.
As the country has a number of small companies that need capital to grow, stock market will bring an easily accessible and cheaper sources of finance. When small companies expand their capacity and become bigger, their efficiency will be multiplied through economies of scale which can in turn increase their price based competitiveness. Besides, when companies grow in size, they will create a huge demand for labor thereby contribute to decrease the unemployment rate, he remarkrd.
Moreover, in a country where average inflation rate has been galloping at whooping rate of 16percent, the only mechanism for the people to preserve the value of their money has been through bank saving. But in reality, the 7 percent saving rate can only preserve 50 percent of the face value of a Birr.
For a populous country like Ethiopia with the supply of labor far greater than the demand for it, wage rate could not be expected to rise at a pace even to match 50 percent of the rate of inflation. As far as wage rate will remain much less than the rate of inflation, stock market could bring solutions as it provides different investment alternatives that bring a return rate that could safeguard the mass from the negative effect of inflation.
Despite the fact that Ethiopian economy has brought lots of opportunities for innovative and risk seeker entrepreneurs to build their wealth with annual rate of return far greater than the rate of inflation, it will not be a fair idea and a good logic to advise all people to follow similar steps.
Because, most people are by nature conservative and prefer guaranteed source of income to playing a high risk game for the promise of having higher returns, that is why a widening income inequality has been observed and has become a challenge by its own. For such a case, stock market is regarded as one of the best tools to redistribute wealth and reduce the rate of growth of income inequality through creating investment opportunities for the general public, he underscored.
“As a nation we have been poor not because we have been devoid of resources. Nonetheless, we have been poor because we have been poor in wealth literacy and intelligence. A typical capital market will serve not only as a market for security exchange but will bring the knowledge of investments and financial literacy to change the status quo of bad saving and unwise spending culture.”
In his conclusion, Dr. Abush indicated that, it is at this pivotal time that establishing a stock market will be an excellent solution for the government, the private sector and the public at large. The government and the private sector will get additional alternatives to raise fund through selling and buying bonds and stocks, whereas the people will get a chance to choose among the different investment medium that the stock market could bring.
What makes stock market more sensible will be that different individuals with different risk appetite can have the chance to choose among different investment instruments that will suit their investment goals and level of risk tolerance. It is in this way that the people can raise their capital productivity far better than the bank saving rate and the wage rate and at the same time to command a better return rate that can offset the negative effect of inflation rate.
It is for all these reasons that it is much better sensible for the Ethiopia government to open up a vibrant stock market just now, he opined.
The Ethiopian Herald August 7/2019
BY LEULSEGED WORKU
