Latin American Capital Markets

150 KAREN GOLDSTEIN ROSSOTTOmand for institutional investment products.To fulfill this demand, institutional investorsrequired a sufficient capital base to support their growth and create capital marketliquidity. Because the United States is a large, fully integrated economy, institutions dnot face costly interstate barriers in distributing their shares and investing their assets.Similarly, market integration efforts in the European Union have resulted in benefitsto its members' institutional sectors.Technological developments, deregulation, effectivecorporate governance, competition, and the ability to diversify and innovate havehelped to increase the supply of available capital. Because pension funds are thelargest institutional investors in OECD economies, an overriding element in institutionalinvestor growth is pension-related reforms, particularly the movement frompay-as-you-go to defined-contribution systems.In Latin American and Caribbean economies, many of the factors thatspurred domestic sector growth in the United States and other OECD countries arenot present or are not yet effective. One reason is that macroeconomic instability hasadversely affected investor confidence in the markets as savings vehicles. AlthoughLatin American and Caribbean countries have stimulated demand for a domestic institutionalsector through government efforts, such as pension reforms, the sector remainsunderdeveloped primarily because of a lack of investible capital and correspondinglyilliquid securities markets. However, since the majority of pension reformwas relatively recent, benefits may not yet have been realized. Regulatory frameworksthroughout the region are too rigid or fragmented to allow for the innovation andcompetition required to spur institutional investor growth. Corporate governance frameworksalso remain weak.Institutional investors can have a tremendous impact on the growth andstructure of capital markets. Latin America and the Caribbean should focus on thiskey area to further local market development. As alternatives to commercial banks,institutions can channel savings into the markets to provide an additional source ofcapital financing. Institutions also provide necessary liquidity to allow for transparency,valuation, and, as a result, further market growth. Institutions promote market stabilityby providing liquidity, long-term investment, and corporate monitoring and byencouraging market modernization and innovation. In addition, institutions in LatinAmerica and the Caribbean may promote the competitiveness of local markets andissuers.Through long-term government commitment to macroeconomic reformsand the creation of a regional integrated market, the countries of Latin America andthe Caribbean may further develop their domestic institutional sectors.To ensure theavailability of local capital for SMEs, governments should maintain a local institutionalCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub