Latin American Capital Markets

106 VALERIANO F. GARCIA AND LUIS ALBERTO GIORGIOsecurities market.The securities market objective depends on the existence of otherrequisites for capital market development, for example, transparency and the protectionof investors.As a matter of fact, privatization of companies worldwide has contributed tothe growth of stock markets both in terms of capitalization and trading volume. However,many of these positive outcomes have not significantly touched Latin America,where capitalization of companies listed in the stock exchange and trading volumehave languished, particularly in the past 10 years.Chile initiated and pioneered social security reforms during the early 1980sin order to develop capital markets, among other goals.The Chilean model substituteda pay-as-you-go system with individual capitalization accounts administered by privatecompanies. Other countries in Latin America replicated the Chilean experience withsome changes.The most popular variant was based on a three-pillar system consistingof a pay-as-you-go minimum funded from the general budget, individual accountsfunded by employers and employee contributions, and voluntary contributions. Thereform was intended to provide sustainable retirement benefits, creating a link betweencontributions and benefits. It was also expected to prop up capital markets byincreasing the savings rate, which would provide long-term resources to the country'sbusiness sector However; the regulation of these forced savings favored fixed-incomeinstruments, that is, government debt. Inasmuch as government debt was involved, thepay-as-you-go system returned through the back doorSocial security reform has had a positive but modest impact on capital markets.Even in Chile, where market capitalization is high, a large amount of funds is investedin government bonds. Local businesses have not been able to issue sufficientinstruments, and the pension fund administrators have been authorized to invest asmall share on foreign stock exchanges.It is not clear whether mandatory contributions to contractual savings planshave increased national savings. Research shows mixed results.There are several theoreticalreasons to expect savings to increase. Impavido, Musalem, and Vittas (2001)argue that mandatory contributions to contractual savings plans could increase the nationalsavings rate if some members of the population do not have sufficient access tocredit. Under these conditions, they would be forced to save more because they wouldnot be able to smooth out their consumption over their life cycle. In addition, the nationalsavings rate could increase if governments do not take these funds as a captivesource of finance. If this forced saving relaxes the government budget constraint andfunds additional government expenditure, there might be no increment in net nationalCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub