For decades, the rise of a stock exchange, the opening of the capital account and access to international bond markets were presented as almost automatic signs that a country had entered economic modernity. An economy capable of attracting foreign investors, financing its companies through equity and issuing debt in major financial centres appeared to have crossed a decisive threshold. Capital became more abundant, savings were allocated more efficiently and development, at least in theory, moved within reach.

The history of emerging-market crises has fractured this linear vision. The same markets that bring in resources can trigger their sudden withdrawal. They may lower financing costs before making them prohibitive. They allow governments to extend their debt maturities, but can also expose national budgets to fluctuations in the dollar, global interest rates and risk appetite. They give companies access to new capital while subjecting their valuations and governance to decisions made thousands of kilometres away.

Financial markets are therefore neither a promise of development in themselves nor an inherently destabilising force. They are an infrastructure of power whose effects depend on their architecture: the currency in which debt is issued, the depth of domestic savings, the diversity of investors, the quality of institutions and, above all, the destination of the capital being mobilised. For an emerging economy, the challenge is not simply to attract financial markets, but to integrate them without surrendering control over its economic trajectory.

The infrastructure of scale

No economy can sustainably finance industrialisation, infrastructure, the energy transition and corporate expansion through public budgets and bank credit alone. Banks play a central role in emerging economies, but their resources are constrained by the maturity of deposits, prudential requirements and the concentration of risks. They may finance a profitable company or a property development, but they are less suited to certain long-term, uncertain or capital-intensive investments.

Markets complement this architecture. Equity issuance provides companies with capital that does not have to be repaid at a fixed date. Bonds diversify creditors and extend financing maturities. A liquid government debt market establishes a yield curve against which loans, corporate bonds and many other assets can be priced. Money markets, repurchase agreements and derivatives help manage liquidity needs as well as interest-rate and currency risks.

This function is particularly important for companies whose growth depends less on immediately recoverable physical assets than on technology, skills or intellectual property. A bank is more likely to lend against land or a factory than against an idea whose value remains uncertain. Equity markets, by contrast, can distribute that risk among investors willing to accept potential capital losses in exchange for higher growth prospects.

Markets can also provide alternative financing when banks restrict credit. During major crises, listed companies have sometimes been able to raise new equity or issue bonds while bank balance sheets were under pressure. This shock-absorbing function explains why market-based finance is often described as the financial system’s spare tyre. Globally, the OECD estimates that corporate financing through listed equity and bonds was equivalent to 116% of world GDP at the end of 2023, compared with 71% for credit to non-financial corporations. This depth, however, remains highly uneven across countries and regions.

Financing is not development

The existence of a stock exchange does not necessarily mean that an economy possesses a genuine capital market. In many emerging countries, indices are dominated by a handful of banks, telecommunications operators, extractive companies, state-owned enterprises or family-controlled conglomerates. Market capitalisation may appear substantial while the proportion of shares actually available for trading remains limited. Transactions are concentrated in a few securities, initial public offerings are rare and smaller companies remain almost entirely dependent on bank credit or internally generated funds.

An active secondary market can facilitate the trading of existing shares without providing new resources to the productive economy. A rising stock index may enrich asset holders without generating additional investment, innovation or employment. Conversely, a relatively small financial centre can play a genuine economic role if it allows companies to raise capital, improves accounting transparency and provides savers with long-term investment instruments.

The essential distinction is therefore not between countries that have a stock exchange and those that do not, but between markets that finance economic activity and those that merely establish valuations for a limited number of assets. Finance becomes a driver of development when it transforms savings into productive capacity. It plays that role far less effectively when it primarily fuels property speculation, consumer credit, the acquisition of existing assets or the recurring financing of public deficits.

This ambiguity is particularly visible in bond markets. A deep sovereign yield curve is essential to the functioning of the financial system. Yet if banks, insurers and pension funds devote an increasing share of their resources to government debt, the market can eventually divert savings away from companies. The public sector’s borrowing capacity then improves at the cost of gradually crowding out private investment.

Imported vulnerability

Financial openness responds to a genuine constraint: many emerging economies lack sufficient domestic savings to finance infrastructure, industrialisation and social needs simultaneously. Foreign capital can help close part of that gap. It also provides the foreign currency needed to pay for imports of energy, technology and capital goods.

Yet not all forms of capital produce the same effects. Direct investment in a factory, logistics network or domestic company generally commits the investor for several years. An equity investment can lose value without imposing an immediate repayment obligation on the company or the state. Bond debt, by contrast, must be refinanced or repaid on a predetermined date. When it is denominated in dollars or euros, its domestic burden automatically rises if the national currency depreciates.

Much of the vulnerability of emerging economies is formed within this combination of debt, foreign currency and maturity structures. During periods of abundant global liquidity, low interest rates and the search for yield encourage investors to purchase riskier assets. Domestic currencies appreciate, risk premiums decline and governments and companies are encouraged to borrow more. When major central banks raise rates or a geopolitical shock triggers a flight to safety, these flows can reverse rapidly. The currency falls, refinancing costs rise and foreign-exchange reserves come under pressure at the very moment when economic activity is slowing.

The market’s verdict is not always related to a deterioration in the country concerned. An international fund facing redemptions may sell its most liquid emerging-market assets, including those located in relatively sound economies. Financial integration therefore transmits decisions made at the centre of the global monetary system to countries that have no influence over their origin.

The resulting burden is far from abstract. According to the World Bank, low- and middle-income countries paid $741 billion more to their external creditors between 2022 and 2024 than they received in new financing. In 2024 alone, their interest payments reached $415 billion. When some of these countries regained access to bond markets, the rates demanded hovered around 10%, approximately twice their pre-2020 level. A market can therefore reopen without financing becoming sustainable again.

The return of local currency

The Asian, Latin American and Russian crises of the 1990s demonstrated the dangers of carrying substantial foreign-currency debt. Since then, many emerging economies have developed local-currency bond markets, accumulated foreign-exchange reserves, adopted more credible monetary frameworks and allowed their currencies to fluctuate more freely. This transformation partly explains why several recent shocks have not produced mechanical repetitions of earlier crises.

Local-currency financing profoundly changes the distribution of risk. Governments no longer need to obtain dollars to repay debt issued in their own currency. Exchange-rate depreciation does not directly increase the nominal value of their domestic obligations. The authorities also retain greater room to intervene in order to stabilise market liquidity.

In its October 2025 report, however, the IMF estimated that public debt among the 56 emerging and developing economies it examined had more than doubled within a decade, approaching $30 trillion. Greater issuance in domestic currencies improved resistance to external shocks, but it also increased the need for domestic investors capable of absorbing that debt.

The historical problem of foreign-currency borrowing has therefore not disappeared entirely; it has changed form. When foreign investors purchase local-currency bonds, they assume the exchange-rate risk but retain the ability to sell. A stronger dollar or a rise in global risk aversion can prompt their withdrawal, weaken the domestic currency and push bond yields higher. The Bank for International Settlements describes this phenomenon as a new version of “original sin”: currency risk is no longer embedded in the sovereign debt contract, but re-enters the system through investor behaviour and the pressures that capital flight can generate.

When risk comes home

To reduce their dependence on foreign capital, governments logically seek to mobilise domestic banks, insurers, pension funds and asset managers. This domestic base can stabilise the market when international investors withdraw. It represents one of the main financial achievements of the strongest emerging economies.

But locally held debt does not cease to be debt. It merely concentrates its effects within the national economy. If banks accumulate government securities, a fiscal crisis weakens their balance sheets. If the state depends on banks to absorb its bond issuance while the banks depend on the central bank for liquidity, sovereign, banking and monetary risks begin to merge. Rising yields reduce the value of bonds already held, while public financing needs can restrict the credit available to businesses.

The same logic applies to pension funds. Their long investment horizons make them natural stabilising forces, but excessive concentration in sovereign debt exposes retirement savings to the country’s fiscal position. If authorities require financial institutions to purchase more public securities or artificially hold yields below inflation, the apparent stability of the market rests on a concealed transfer from savers.

The losses have not disappeared. They have changed owners and, sometimes, form. Under external foreign-currency borrowing, they appear as default or a currency crisis. In a predominantly domestic system, they may emerge through inflation, currency depreciation, restricted private credit, the erosion of savings or the weakening of banks.

The market as a shock absorber

A market becomes genuinely resilient when it can absorb substantial selling without a collapse in prices and rapidly recover its normal functioning after a shock. This capacity depends on more than size. It requires investors with different horizons, constraints and strategies. If every participant owns the same securities, follows the same indices and reacts to the same signals, a larger number of investors creates only the illusion of depth.

Banks can provide liquidity during periods of stress. Insurers and pension funds bring long-term demand. Active asset managers contribute to price formation, while foreign investors add resources and different perspectives. None of these groups is sufficient on its own. The Bank for International Settlements has shown that, in emerging economies, a deep domestic investor base and developed hedging markets improve the resilience of liquidity to shocks. High foreign participation may increase trading during normal periods, but it can also transmit global movements in risk aversion more rapidly.

Technical infrastructure plays a strategic role. Efficient money markets, repurchase agreements, hedging instruments, reliable custodians and secure settlement systems allow investors to meet liquidity needs without resorting to distressed asset sales. The regular publication of issuance calendars and the concentration of public debt in sufficiently large benchmark securities also improve visibility and tradability.

Liquidity is therefore not created by a decree of liberalisation. It is built over years through monetary credibility, fiscal predictability, legal certainty and confidence in published data. A deep market is less the product of deregulation than the result of prolonged institutional accumulation.

Financing transformation

Building this architecture has become increasingly urgent as the financing requirements of emerging economies expand. Urbanisation, climate adaptation, electricity networks, transport, healthcare, education and digital transformation all require long-term investment that public budgets cannot carry alone. The OECD estimates that the potential cumulative climate-transition financing gap in emerging and developing economies could exceed $10 trillion by 2050.

Markets can help close that gap, but they do not spontaneously create viable projects. A green bond resolves neither regulatory uncertainty nor exchange-rate risk nor the absence of predictable revenues. Securitisation does not turn a poorly prepared infrastructure project into a profitable investment. Mobilising private capital requires governments to establish a sufficiently developed project pipeline, a credible allocation of risks and enforceable contracts.

Multilateral development banks have a distinct role to play. They can provide guarantees, share certain political risks, finance first-loss tranches or support project preparation. Their intervention does not replace domestic markets, but it can make projects investable that the private sector would otherwise reject or finance only at excessive cost.

Mobilising domestic savings nevertheless remains decisive. Pension funds, life insurance and collective investment vehicles can transform dispersed savings into long-term capital. This requires citizens to trust institutions, fees to be transparent, investor protection to be effective and the benefits of financial expansion not to remain confined to a small minority.

From openness to control

The success of an emerging financial market depends less on the speed of its opening than on the order in which its foundations are built. Macroeconomic stability cannot be separated from market quality. Persistently high inflation shortens maturities, raises interest rates and drives economic agents towards foreign currencies. Likewise, no degree of technical sophistication can permanently compensate for opaque public finances, unreliable statistics or a judicial system unable to enforce contracts.

Corporate governance is equally important. Investors are not merely financing projects; they are purchasing rights. The protection of minority shareholders, audit independence, the quality of financial disclosure, the treatment of conflicts of interest and the effectiveness of insolvency procedures determine the market’s true depth. Without these safeguards, sound companies hesitate to list, investors demand higher premiums and trading becomes concentrated around a few already dominant actors.

Openness to international capital must also remain compatible with domestic stability. Even the International Monetary Fund now recognises that targeted capital-flow management measures and macroprudential instruments may be justified when large inflows create imbalances or when foreign-exchange vulnerabilities threaten the financial system. The objective is not to isolate the economy, but to prevent poorly sequenced liberalisation from transforming a need for financing into systemic dependence.

Mastering capital

Financial markets can be — successively and sometimes simultaneously — a driver of development, a source of vulnerability and an instrument of resilience. They become a driver when they direct savings towards productive investment, give companies access to equity and finance transformations that bank credit cannot carry alone. They become a source of vulnerability when foreign-currency debt, short-term capital and dependence on a narrow group of investors expose the economy to monetary decisions and portfolio movements originating abroad. They become an instrument of resilience when a diversified investor base, local-currency markets and effective hedging infrastructure allow shocks to be absorbed without interrupting the financing of economic activity.

The decisive question is therefore not whether to choose between markets and sovereignty. It is which markets to build, in which currency, with which investors and in the service of what economic transformation. An emerging economy does not become sovereign by closing itself off from capital, any more than it develops by surrendering to it. Its real strength lies in its ability to mobilise finance without allowing finance alone to determine its future.

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