ABSTRACT
Introduction The institutional foundations for capital markets are clearly alien to most developing economies. The roots of capital markets or capitalism are traced to the West.1 Capitalism as a system requires certain conditions to exist in order for it to take hold. It has been said that the notion of “capitalism is identified with a system of unfettered individual enterprise: a system where economic and social relations are ruled by contract, where men are free agents in seeking their livelihood, and legal compulsions and restrictions are absent.”2 According to Pejovich, the two cornerstones of capitalism are classical liberalism and methodological individualism.3 We proceed on the assumption that these qualities or characteristics are usually in short supply in most developing economies. Consequently, introduction of capital markets in these economies would bring about a certain level of uncertainty on the part of economic agents, whose mental models are not yet prepared to operate within such a system. Further, such actors will lack the requisite skills and knowledge for such a system to work efficiently. There is therefore a case for capital market institutional reform in developing economies in order to realise sustained capital market development. However, as discussed above, designing and implementing such reforms will require a clear understanding of the intricacy of the process of institutional change. First and foremost, it is necessary to understand the interaction between institutions (rules of the game) and organisation (players of the game) in the process of institutional change. According to North, organisations and their entrepreneurs engage in purposive activities aimed at maximising wealth and income or pursue other objectives defined by the opportunities afforded by the institutional structure of the society.4 The wealth-maximising activities of the organisation result from learning by doing and investing in the kinds of skills and knowledge that will pay off.5 It is this maximising behaviour of economic organisations that will shape institutional change by the resultant demand for investment in knowledge of all kinds; the ongoing interaction between organised economic activity, the stock of knowledge, and the institutional framework; and incremental alteration of the informal constraints as a by-product of maximising activities of organisations.6
