Latin American Capital Markets

6 KENROY DOWERS, FELIPE GOMEZ-ACEBO, AND PIETRO MASCIeconomic growth. Caprio and Demirguc-Kunt (1997) confirm that long-term credit isscarce in emerging countries and more so for smaller firms that could obtain term financein developed countries. Long-term credit is associated with higher productivity.Boyd and Smith (1996) show that the endogenous evolution of debt andequity markets in the development process provides an economy with more efficientcapital markets. Levine and Zervos (1998) exemplify that equity market liquidity iscorrelated with rates of economic growth. In that vein, AI-Yousif (2002) studies timeseries and panel data for 30 developing countries in 1970-99. The results supportthe view that financial development and economic growth are mutually causal, but therelationship cannot be generalized across countries because economic policies arecountry specific and depend on the efficiency of the implementing institutions. Wurgler(2000) finds that financially developed countries boost investments more in theirgrowing industries and reduce it more in their declining industries. Therefore, the efficiencyof financial markets allows a better allocation of capital and determines economicgrowth.Taking the perspective of global markets, Rodrick (1999) examines the relationbetween openness to trade and economic growth, and introduces the role of thefinancial sector in a standard cross-country analysis. Rodrick finds that the relationshipbetween openness to trade and economic growth is weak In contrast, Bekaert, Harvey,and Lundblad (2001) find that financial liberalization is associated with higher realgrowth. Rajan and Zingales (2001) illustrate the role of openness and interest grouppolitics in financial market development. Bekaert, Harvey, and Lumsdaine (2002) showthat integration is accompanied by a significantly larger equity market, more liquidity,and more volatile stock returns, and is more correlated with world market returns.Integration is associated with a lower cost of capital, improved credit rating, real exchangerate appreciation, and increased economic growth.Regarding the specific policy choices that spur capital market development,the research examines the relevance of legal regulatory reform, property rights, therole of institutional investors, and effective corporate governance. La Porta andothers (1997, 1998) confirm that the legal environment and enforcement matter forthe size and extent of capital markets. They study the quality of laws governing investors'protection and enforcement and confirm that a weak legal system has a negativeimpact on financial development and economic growth. Demirguc-Kunt andMaksimovic (1998) illustrate that in countries with an efficient legal system, a greaterproportion of firms uses long-term external financing. On the relevance of institutionalinvestors for capital market development, Gompers and Metrick (1998) analyzethe holdings of individual investors in the United States and confirm the role ofCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub