Latin American Capital Markets

426 OSVALDO R. AGATIELLOLatin America and the Caribbean is a part of the world where personal trustis the currency of business. More abstract and far-reaching forms of confidence andcommitment are shunned because of a history of instability and unpredictability of,and unreliability in, the legal framework, the system of justice, the rule of law, governmentdecisions, macroeconomic policy, and everyday business practices. Naturally, thisvaries enormously from country to country, within countries, and across activities. Althoughthe legal environment, as prescribed by laws and regulations and enforced (ornot) by specialized government agents, especially the judiciary, affects the size andscope of capital markets, evidence shows that cultural patterns must be factored inwhen attempting to understand why investor protection differs so much from onecountry to the other and across regions (Stultz and Williamson 2002; Lopez de Silanes2002; Calvo 2002). And there is no question that cultures, and the ethical frameworksthey inform, constantly change for better or worse.It is increasingly clear that the procedural approach applied in developedcountries for the supervision of capital markets takes for granted institutional andmoral underpinnings that may not exist in much of Latin America and the Caribbean.The natural reaction is to try to institute better rules, regulations, and procedures toimprove supervision.The problem is that, while it is true that legal enforcement mechanismscan provide a partial substitute for trust, the cost of promoting and ascertainingcompliance, even in cases of (partially) privatized enforcement, may make transactionsprohibitively expensive (Stiglitz 2001).The cost of foreign exchange, interestrate or transfer risk hedging, or the issuance of performance bonds in the region, forinstance, are cases in pointThe adoption of a three-pronged methodological approach could help in thisarea. At the macro level, governments are responsible for the regulatory frameworkSelf-regulation and customs govern the meso level of industries, professional associations,and corporate governance, encompassing more specific norms.The micro levelis made up of individual practitioners, investors, and other stakeholders. 10 All three10 Although easy to comprehend, the introduction of the meso level runs contrary to the intuitions of mainstreameconomists and political scientists, who are disinclined to communitarian devices that may restrain individual freedomin the economic and political domains.This methodological approach is essential, however, because seldom can theproblems at one level be thoroughly solved exclusively with measures at another level (Enderle 2003). Resorting tolegislation to improve supervision, a common policy in Latin America and the Caribbean, may not necessarily resultin better compliance, where active engagement of institutions and individuals is required.This does not mean that ethicaldisplacement may not be necessary to resolve some dilemmas.This is a technique in applied ethics that seeks asolution at a different level than the one where the problem appears (De George 1993). A vivid example was therecent introduction of legislation in the United States (the macro level) mandating higher standards of transparencyand accountability in the "corporate reporting supply chain" (executives, boards, auditors, analysts, and information disseminators),thus giving a strong signal that corporate cultures (the meso level) and individual behaviors (the microlevel) had to change fastThis is the basis for advocating an integrated approach in which a rational, conscientious compromisebetween freedom and responsibility can be achieved at all levels.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub