Latin American Capital Markets

CHAPTER 4The Impact of the MacroeconomicEnvironment on Capital Marketsin Emerging Latin American EconomiesValeriano F. GarciaLuis Alberto GiorgioFrom the era when rich Florentine merchants risked their purse and life to financetheir princes until the current period of Internet banking, financial intermediation hasbeen cursed as responsible for the downfall of the rich or hailed as the solution forthe poor Both claims are indeed false, but recent history has shown that, when goneawry, financial intermediation may be the Achilles' heel of the modern economic system.Modern history has shown that there is no development without vibrant capitalmarkets.Macroeconomic variables and the design and implementation of macroeconomicpolicy influence the main functions of financial markets, which are the intermediationof risks and terms. Capital markets and banks have attracted the attentionof intellectuals and policymakers. In Latin America and the Caribbean, policymakershave placed great expectations in the power of banks.Thus, they have created largepublic sector development banks and myriad small specialty banks.The underlying assumptionhas been that public banks play not only a catalytic role but also a developmentfunction in correcting what some analysts assume are market failures.In the past decade, many public banks have been dismantled after they failedto stand up to challenges, created a large fiscal burden, and distributed subsidies in anontransparent way. More importantly, they did not provide medium- and long-termfinancing and did not allocate funds to competitive, export-oriented firms. By contrast,in some other regions, for example Europe, public sector financial intermediaries operatein the context of more open and integrated economies and allocate funds givingpriority to borrowing firms based on their competitiveness in external markets.Developed countries have used the same public sector approach in promoting theCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub