Research seems to indicate that though it is difficult to conclude firmly what approaches and programmes can lead to economic advancement, there is a fair degree of consensus about certain approaches / programmes contributing to economic advancement. One major debate – whether market or state can propel economic advancement – is almost settled. A number of empirical studies reveal that, economies with market friendly policies like disciplined fiscal and monetary system, well developed financial markets experience display long term growth performance. Evidence is also available to substantiate that reforms which usher in market friendly policies register improved growth performance. This essentially means that the state and market have to co-exist and complement each other’s effort. Neither market nor state alone can ensure a high rate of economic advancement. They need to focus on the areas of their respective core competence for an economy to perform well. The state should provide basic support services such law and order, a conductive legal environment, a decent supervisory and regulatory infrastructure, a reliable accounting system, a vibrant securities market, etc. while the private economic agents carry on economic activities. And if market fails for some reason, the state must step in. In fact, state should make efforts to provide an environment which can prevent market failure. The state must lay down the manner of conduct of economic agents so that the activities of the agents create synergy and markets do not fail. If the agents do not on their own volition adhere to such prescribed manners and try to distort market forces to their advantage, the state must have mechanism to prevent such recalcitrant agents from doing so and penalize them adequately so that no agent dares to do so in future. What it means is that the economic agents, for fear of punishment from market or authorities or lure of strengthening their position in market, follow a certain code of conduct, which ensures not only their advancement, but also the advancement of the economy as a whole. Each economic agent individual or corporate – adheres to certain standards, ethical or regulatory, while pursuing its objectives. If it follows the standards, while it attains its own objectives, others are benefited simultaneously. Since the corporates are the major economic agents and their activities determine the level of output and growth in the economy, it is necessary that while they have freedom to act in the manner dictated by the market, they must conduct themselves in a manner that it produces synergy for all others agents in the economy.

Corporate governance is nothing but such conduct on the part corporates and if corporates follow such conduct, it inevitably leads to better economic performance. If they do not do on their own, state intervention is warranted. Hence economic performance depends crucially on the conduct of economic agents, particularly the corporate sector, and it is supplemented by government intervention when the corporate deviate from standards of corporate governance. And the need for corporate governance standards and mechanism to enforce them is more acute in a liberalized economy when the economic agents have a tendency to be guided by market forces only.

The growing discomfort with closed, inward looking, market unfriendly and relationship based institutions and practices has impelled some governments to bring about the succedaneum to state interference in markets with private incentives, public ownership with private ownership, and protection of domestic industries from competition of foreign producers and investors. Government engagement in economic activity has been scaled down. Domestic markets have been opened to international participation and cross border flows. Tax codes have been rewritten. The price determination and the allocation of resources are propelled more by the market forces rather than state policies. Wherever such reforms have been ardently perused and the economic agents have conducted in a befitting manner, growth has assumed multiplier effect. When the economic activities are increasingly being carried out by corporates, the economic performance is jeopardized if the corporates do not adhere to corporate governance standards. To me, it is the level of corporate governance which can make an economy developed, developing, emerging or transitional.

At this stage it is relevant to bring in securities market to discussion. It is the securities market which reflects the level of corporate governance of different companies and accordingly allocates resources to best governed companies. If the securities market is efficient, it can penalize the badly governed companies and reward the better governed companies. Hence not only the corporate governance standards need to improve, but also efficiency and efficacy of securities market need to improve so that the resources are directed to the deserving companies which can really boost economic performance. The securities market can not make best allocation of resources if the standards of corporate governance are not followed in letter and spirit.

A well functioning securities market is conducive to sustained economic growth. A number of studies, starting from World Bank and IMF to various scholars, have pronounced robust relationship not only one way, but also the both ways, between the development in the securities market and the economic growth. This happens, as market gets disciplined / developed/ efficient, it avoids the allocation of scarce savings to low yielding enterprises and forces the enterprises to focus on their performance which is being continuously evaluated through share prices in the market and which faces the threat of takeover. Thus securities market converts a given stock of investible resources to a larger flow of goods and services.

It is reasonable to expect savings and capital accumulation and formation to respond favorably to developments in securities market. The provision of even simple securities decouples individual acts of saving from those of investment over both time and space and thus allows savings to occur without the need for a concomitant act of investment. If economic units rely entirely on self-finance, investment is constrained in two ways: by the ability and willingness of any unit to save, and by its ability and willingness to invest. The unequal distribution of entrepreneurial talents and risk taking proclivities in any economy means that at one extreme there are some whose investment plans may be frustrated for want of enough savings, while at the other end, there are those who do not need to consume all their incomes but who are too inert to save or too cautious to invest the surplus productively. For the economy as a whole, productive investment may thus fall short of its potential level. In these circumstances, the securities market provides a bridge between ultimate savers and ultimate investors and creates the opportunity to put the savings of the cautious at the disposal of the enterprising, thus promising to raise the total level of investment and hence of growth. The indivisibility or lumpiness of many potentially profitable but large investments reinforces this argument. These are commonly beyond the financing capacity of any single economic unit but may be supported if the investor can gather and combine the savings of many. Moreover, the availability of yield bearing securities makes present consumption more expensive relative to future consumption and, therefore, people might be induced to consume less today. The composition of savings may also change with fewer saving being held in the form of idle money or unproductive durable assets, simply because more divisible and liquid assets are available.

The securities market facilitates the internationalization of an economy by linking it with the rest of the world. This linkage assists through the inflow of capital in the form of portfolio investment. Moreover, a strong domestic stock market performance forms the basis for well performing domestic corporate to raise capital in the international market. This implies that the domestic economy is opened up to international competitive pressures, which help to raise efficiency. It is also very likely that existence of a domestic securities market will deter capital outflow by providing attractive investment opportunities within domestic economy.

Any financial development that causes investment alternatives to be compared with one another produces allocational improvement over a system of segregated investment opportunities. The benefits of improved investment allocation is such that Mc Kinnon defines economic development as reduction of the great dispersion in social rate of return to existing and new investments under domestic entrepreneurial control. Instead of emphasizing scarcity of capital, he focuses on the extra-ordinary distortions commonly found in the domestic securities markets of the developing countries. The distortions in the real sectors such as monopoly power, tariff protection, import quotas, credit rationing and so forth add salt to injury. In the face of great discrepancies in rate of return, the accumulation of capital does not contribute much to development. A developed securities market successfully monitors the efficiency with which the existing capital stock is deployed and thereby significantly increases the average return.

The development of information technology and financial innovations transformed the international financial architecture in the nineties. Capital moved freely and we saw the emergence of transnational corporations which have presence in all parts of the globe. The world economy was globalized and nations were trying to seek a pie of new economy by entering into alliances, agreements etc.

Globalisation represents the movement of the four elements of the economy across the national borders and thanks to the information technology this can happen very fast. The first element is physical capital in terms of plant and machinery. The second one is financial capital in terms of money invested in the emerging capital markets and in the form of foreign direct investment. The third is the technology and the fourth is labour. Since, the emerging economies had abundant natural and human resources and had requisite technical infrastructure, the MNCS targeted emerging economies as potential markets. The opening of economies and advent of MNCs helped the emerging and transition economies in two ways. The investment made by these companies provided the much needed resource for development and these companies imparted global standards in the emerging economies. Thus, these countries are getting slowly and gradually integrated into the global economic system and adopting the global practices of an efficient and efficacious governance system.

However, such countries were opaque, closed or inward oriented with market unfriendly systems. When financial capital moves across national borders, it become necessary for the investors to ensure that the enterprises or the markets in which they are investing are not only managed competently that means they have good corporate management but also they are governed properly. The collapse of the South East Asian tiger economies like Thailand, South Korea, Malaysia, Indonesia in 1998 brought home the fact that if there is no proper corporate governance in the financial sector, it leads to crony capitalism and corruption. It was observed that Corporate governance was not even getting lip service in these economies.

The success of the transnational corporations made it imperative that sound national systems of corporate governance are essential for all countries, including the poorest, to reap the benefits of globalisation. Virtually all developing, transition and emerging market economies now face one of the greatest challenges, that is, how to move successfully from institutions of economic and political governance that tend to be heavily relationship-based to institutions that are more effectively rules-based. They take the challenge head on as they realize that the standards of corporate governance brought in by globalization bring enormous benefits to them in the form of:

• enhancing the wealth creation

• ensuring the efficacious management of wealth, and

• equitable sharing of wealth amongst all stakeholders

These objectives facilitate and stimulate the performance of corporations — the principal generators of economic wealth and growth in society — by creating and maintaining a business environment that motivates managers and entrepreneurs to maximize firms’ operational efficiency, returns on investment and long–term productivity growth, which inevitably contributes to economic growth.