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Capital Market Development in Latin America and the Caribbean

By Antonio Vives (07/95, GN-1870-2, En, Es)

This strategy (GN-1870-2) was formally considered by the Board of Executive Directors and the management of the IDB on October 10, 1995.

Abstract

Perhaps in no other activity is the pace of innovation as great or the cost of failure so high as in capital markets. When the countries of Latin America and the Caribbean enter the 21st Century, the structure of the region's capital markets will be as different as today's markets differ from those of the 1970s. The worldwide forces of change are rapid advances in information technology, an accelerated pace of financial innovation, greater private sector participation, and the globalization and integration of domestic markets. At the same time, the lessons from recent currency crises, that threatened to spread throughout the region's stock and bond markets, point to the consequences of an excessive dependence on foreign portfolio investment, and especially, investments in highly mobile, short-term instruments. It is axiomatic that savings are key to sustainable, long-term growth. In the region, however, low domestic savings have been the handmaiden of weak capital market development leading to a greater reliance on external debt.

One necessary condition for financial savings is a capital market that can provide accessible and economical instruments to encourage savings and lower the costs of financial transactions. Furthermore, as intermediaries of those savings, efficient capital market institutions will improve the allocation funds to alternative productive investments in the corporate and public sectors.

While acknowledging that domestic financial systems differ greatly within the region, the Bank's capital market strategy recognizes that there are common themes and challenges. To meet these challenges it is proposed that the Bank adopt a dedicated capital market strategy aimed at (a) raising the level of savings and improving its composition; (b) enhancing the economic efficiency of capital markets, and (c) promoting the harmonization and integration of the region's capital markets.

The elements of the capital market strategy identified here should serve as a guide to the Bank's operating departments in the preparation of country and regional strategies. When deemed necessary, a Country Capital Market Development Program should be designed that identifies specific barriers and interventions for a given country. Each country program will have to be coordinated with other multilateral institutions (IMF and World Bank) to ensure consistency and the appropriate macroeconomic framework. Given the rapid pace of change in capital markets, the Bank should establish a Capital Market Studies Program to provide analytical work, support technical assistance, and disseminate information on best practices. The Program can serve as an independent source of support for regional regulatory and supervisory bodies, governmental authorities and the Committee on Hemispheric Financial Issues.

Last updated: 12/02/04

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