Latin American Capital Markets

120 KAREN GOLDSTEIN ROSSOTTOmore, the increased presence of both domestic and international institutional investorsbenefited local capital markets, with domestic institutions having additional desirablefeatures for overall economic development.Capital markets in Latin America and the Caribbean have recently experiencedsteady growth in their institutional investor sectors due to pension reforms andother deliberate government efforts. However, a number of the conditions necessaryfor further sector development either do not exist or are relatively new and have notyet demonstrated positive effects. Moreover; in spite of institutional growth, capitalmarkets in Latin America and the Caribbean remain underdeveloped.This chapter explores how the experience of the United States and otherOECD countries provides policy guidance on how governments and policymakersmay encourage further growth of domestic institutional investors in Latin Americaand the Caribbean and also capitalize on the sector's potential benefits to the region'smarkets. The chapter provides an overview of the current status of institutional investorsin the United States, other OECD countries, and Latin America and theCaribbean. It discusses why capital markets are important and how domestic institutionalinvestors may contribute to their development It describes the factors thatcontributed to the growth of domestic institutional investors in the United States andother OECD markets, identifies the impediments to further sector growth in LatinAmerica and the Caribbean, and suggests policies to reduce these impediments.Overview of the Institutional Investor SectorUnited StatesThe United States maintains both a highly developed institutional investor sectorand highly developed capital markets. U.S. institutional assets totaled more than$ 18 trillion in 1999, or more than 207 percent of gross domestic product (GDP). Pensionfunds, with more than $8 trillion under management, account for the largestshare of U.S. institutional assets (37 percent). Mutual fund assets experienced thesharpest growth over the past 10 years, rising from $915 billion in 1990 to $4 trillionin 1999 and increasing their share of U.S. institutional assets from 14 to 26 percent(OECD 2000). 2 Insurance companies, with assets of $2.8 trillion, account for 23 per-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub2 A significant factor accounting for the rise in mutual fund assets in the United States is their increasing use as investmentvehicles for other institutional investors, particularly for retirement plans. In 2000, U.S. institutional assets represented45 percent of all mutual fund assets (ICI 2001).