Latin American Capital Markets

THE IMPACT OF THE MACROECONOMIC ENVIRONMENT ON CAPITAL MARKETS I 15bles.They cannot self-finance because they often need years of costly research anddevelopment before they can generate significant revenues. Nor are they able to bankon their reputation, being young and not yet established. Even when they can accessbank credit, entrepreneurial start-ups pay high interest rates. Hence, financing constraintsconstitute a powerful barrier to entrepreneurship.The lesson is that the legal framework should cater to the individual country.Settlement, clearing, custody, and all the necessary steps should be included in a customfit that does not overwhelm small and emerging markets with too many regulatoryburdens. It would be impossible to enforce too many regulations, and such a situationwould promote the creation of a parallel, nonregulated, informal credit market.Fraud would be more common, and the informal market would be costly because ofthe implied risks.For example, public offering law should follow general principles and containsome basic, transparent, and simple requirements in order not to stifle the market.Minimum capital should not be an important constraint. India's success in developingits stock exchange may be due in part to the common-law tradition it inheritedfrom the British, but also to the fact that India's public offering law does not discriminateagainst medium enterprises. Minimum subscribed capital to initiate a public issueis about $2 million and is reduced to about $ I million for information technologycompanies.Moke Information Transparency an Important Policy GoalTransparency is a necessary condition for market discipline to operate. Firms benefitfrom low-cost access to capital markets, including a low regulatory burden. Requirementsto frequently publish cash flows and company statements should be strictly enforced.Publications should clearly state whether such reports have been audited andby whom.The publication requirements should not impose large costs; in this respect,the Internet is an excellent option.This set of policies will enhance the role of marketdiscipline in the performance of capital markets.Information is not a free good, but enhancing the flow of information maybe the most cost-efficient measure for the development of capital markets.The governmenthas a crucial role in designing the rules and enforcing them, keeping at thesame time a delicate balance between the costs and benefits of self-regulation andover-regulation.It is in the interest of market participants and the government to minimizethe tension between transaction costs derived from regulations and the need to en-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub