Latin American Capital Markets

THE IMPACT OF THE MACROECONOMIC ENVIRONMENT ON CAPITAL MARKETS 105No matter how unsettled the issue may be, small economies can overcomeany drawback that they may have in relation to capital markets. Of course, many smalleconomies cannot overcome the fact that they are subject to terms of trade shocksdue to the specialized nature of their economies, but they could use readily available,sophisticated financial instruments to smooth income flows. For example, few smalleconomies have implemented fiscal stabilization funds.The techniques related to settingup these funds are now standard, and there is rich experience with the oil stabilizationfunds implemented in larger countries. Small economies should weigh theadvantages of integrating with the rest of the world in addition to or instead of integrating,as they normally do, with small neighbors that face the same problems andbasically qualify for the same risks.Weak Impact of Structural ReformsDuring the 1990s, most emerging economies implemented structural reforms, in particularregarding the privatization of public enterprises and social security schemes.Most countries in the region sold their public sector firms to foreign investors thatused the financial resources available in developed capital markets. The need for futureprivate sector financing arising from these privatization processes was supposedto be satisfied mainly by the reduction of government deficits and increase in internalsavings. The latter were derived from the transformation of pay-as-you-go pensionfund systems with individual capitalization accounts administered by private companiesand external resources.To have a significant impact on capital markets, these structural reforms mustbe part of a comprehensive strategy to transform the performance of the economyby increasing productivity, improving competitiveness, and allowing sustainable realizationof operational cash flows of private firms.The wealth effect derived from the reformprocess should also have positive effects on savings, closing the gap between theadditional demand for funds and the corresponding supply of financial resources.In Latin American and Caribbean economies, policymakers have not designedand implemented such an integrated strategy in a systematic and consistent form. Political"engineering" of the reforms would need strong leadership and long-term governmentcommitment in order to confront strong opposition from group interests,such as labor unions. In general, neither the leadership nor the commitment has beenavailable at the same time in the region.Fundamental objectives of the privatization of state-owned assets are to increaseefficiency, reduce the government's financial burden, and spur the growth of theCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub