Latin American Capital Markets

162 RUBEN LEEmore easily and cheaply to investment, and barriers to investment will be dismantled.Lower transaction costs will imply higher returns on investments. Investors who previouslyfaced restricted opportunities will be able to diversify their investments to agreater extent and take advantage of enhanced risk-return frontiers. The improvedmacroeconomic performance of the region's economy will produce higher economicgrowth, with positive effects on employment and productivity, possibly resulting inmore inward investment. Higher returns should also lower pension costs, with an attendantreduction in labor costs and enhancement of competitiveness.These benefitsshould obtain broad political support because they should be widely shared by theregion's citizens, small and medium-size businesses, and large companies.However, regional capital market integration may also lead to a number ofcosts. For example, protected industries will lose out and will lobby hard to resist theeffects of regional capital market integration. Some individual companies will lose outif they prove not to be competitive in the integrated market Furthermore, transitioncosts may have to be borne by some market participants; for example, there may belarge unanticipated regulatory costs. Finally, regional integration may lead to unanticipatedprotectionism if the process is captured by vested interests.A Positive Example: Competition between European Stock ExchangesIntegration of the capital markets has had dramatic and positive effects on competitionbetween national stock exchanges in Europe since 1986. This integration hassharply reduced the costs of trading, enhanced the quality and quantity of services offeredby exchanges, and increased the number and diversity of trading mechanismsavailable to market participants. Pagano (1997) provides a good summary of this integrationprocess. 2Until 1985, European equity markets still worked according to a blueprint laitout in the 19th century. Continental Europe featured call auction markets with openoutcry dealing, where publicly licensed, single-capacity intermediaries conveyed theorders of their customers and were compensated via statutory fixed commissions.In London, dealers, called "jobbers," who received the customers' orders via singlecapacitybrokers, managed stock trading, and the members of the exchange fixedcommissions. In all countries, stock exchanges were closed-membership organization2 The next four paragraphs are copied with permission, and also some small amendments, from Pagano (1997). Seealso Pagano and Roell (1990).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub