A paradox of emerging government securities market development

Many governmental and international attempts to develop government securities markets (GSMs) in low-income economies have been unsuccessful. Common causes of the failures are a lack of understanding of the development dynamics of emerging GSMs and developmentally and locally suitable policies. Emerging GSMs tend to get trapped in a paradoxical market failure in which the market system cannot develop a GSM or core financial infrastructure. In contrast to advanced GSMs in which the government plays a minor role, emerging GSMs require the government to play a significant role in establishing and supporting a market structure that provides traders with “utilities” to facilitate trading. Using a multiplicative factor model and diagrams and referring to empirically observed development patterns of the Indian GSM, this study examined the effects of “utilities” and found that diminishing returns to utility explained the development dynamics of emerging GSMs. The analyses in this study also used the theories of club, consumer purchasing behavior, and diffusion of innovation. For better policy analyses and formulation for emerging GSM development, the study proposes a financial market utility hypothesis and a two-dimensional policy framework.