Latin American Capital Markets

104 VALERIANO F. GARCIA AND LUIS ALBERTO GIORGIOital markets? Even in large economies, like Brazil and Mexico, the viability of equitymarkets is questionable. 4 In the advanced industrial countries, financial integrationthrough the removal of regulatory barriers has led to massive cross-border mergers.This process has revealed that even large developed economies have domestic inefficienciesand a lot to be gained from economies of scope and scale.Among other constraints, regulatory institutions in small economies must enforcerules over enterprises that have state-of-the-art technology and highly trainedhuman capital.The regulatory agencies face severe budget constraints and cannot paysalaries at market levels, causing frequent rotation in human resources and significantlyincreasing the costs of the learning process.It may well be that the only common characteristic of small economies is thatthey are small. Some of them are open, while others are closed. Some, like Honduras,have underdeveloped capital markets, but others, like Panama, are financial centers. Allof them may be subject to large exogenous shocks, but for some this may be due tocrises in neighboring countries, and for others it may be due to changes in the pricesof their main exports or imports.These sources of instability require different strategiesand pose different challenges.Small economies tend to have higher income variability than larger countries.Nonetheless, even if variability is not good per se, variable income associated with arelatively high rate of growth is better than stability associated with stagnation. Highvariability and high rate of growth are not antinomies. Some small economies havehigh productivity and a high rate of growth; others have low productivity and a lowrate of growth.Research on small economies has come to the fore because of the renewedinterest of international financial institutions. Bossone, Honohan, and Long (2001) identifya few common characteristics of small economies. For example, they are proneto lumpiness (that is, investment may not come in small doses), and they haveincomplete financial systems (minimum scale preludes the organization of some financialservices industries).These small systems are more costly to regulate becauseregulation has fixed costs.There is no unanimity regarding the issue of small economies. In fact, there isa growing view in the economic literature that small and even micro economies maynot face such big problems and challenges. Easterly and Kraay (2001) find that, aftercontrolling for a range of factors, microstates have on average higher income and productivitylevels than small states and do not grow more slowly than large states.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub4 Brazil has one of the largest derivatives markets in the world, but its equity market is relatively small.