Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 331plement a coordinated approach between financial and tax policymakers in order todesign the tax system for financial and capital markets.In developing countries, tax authorities usually attempt to take advantage ofthe financial system structure to collect revenues by imposing taxes on that sector, althoughthese tax policies are at odds with the objective of developing the capital marketIf bond market development is a national objective, tax policies and regulationsmust be suitable to achieve that goal without damaging efficient tax practices. In additionto the lack of capacity of some governments to collect taxes, particularly in developingcountries, poor and improvised tax policies hamper the development of certainfinancial instruments and markets.Tax incentives have been used in developed and developing countries eitherto promote the use of some financial instruments or to encourage the developmentof a sector or market. Some governments have provided tax exemptions to bonds inorder to extend maturities. In any case, regulators have to keep in mind that tax policiesaffect not only financial instruments and their development but also consumptionbehavior, as well as savings and investment decisions. As a first step, authorities mustpursue tax neutrality by avoiding tax fragmentation, tax loopholes, and tax avoidanceopportunities (World Bank and IMF 2001).Therefore, an efficient taxation systemshould be based on tax neutrality, simplicity, and fairness.ConclusionDomestic capital markets are one of the most important means for development, andthe bond market, especially the government bond market, is the backbone of capitalmarkets. In fact, the government securities market is a key foundation of domesticcapital markets, and its expansion has to be addressed in a comprehensive way. Moreover,policymakers have to keep in mind that it is a long-term process that requiresvision and a strategic plan. Government agencies and bodies have to be independentbut coordinated.The ministry of finance is usually the one that leads, implements, andcoordinates the process of developing domestic government bond markets.Countries in Latin America and the Caribbean face substantial developmentchallenges. Some countries have made significant advances in developing their markets,but the process is far from complete. Other countries that have not initiatedthe process due to their economic size must evaluate the convenience of such effort.The challenges are common and range from designing a comprehensive plan to de-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub