Latin American Capital Markets

CHAPTER 16Pragmatic Issues in Capital MarketDevelopment in Emerging EconomiesKenroy DowersRuben LeeAntonio VivesThis book is based on the assumption that a fundamental relationship exists betweencapital market development and economic growth. A growing body of research supportsthis finding and has encouraged policymakers in both emerging economies andinternational financial institutions to consider the development of capital markets withthe expressed intention of making markets more attractive to local and foreign investorsand is suers -1 H owever, many capital markets in emerging economies have notdeveloped at the pace anticipated, and financial crises continue to undermine the perceptionof stability in many markets. 2 A key point of departure for the book is the factthat past strategies have had limited success and new trends have caused analysts to rethinkthe appropriate set of strategies that would lead to viable capital markets inemerging countries.The tasks of the book are twofold. First, it sets out to demonstrate how thefollowing factors contribute to capital market development: the impact of globalization,technology, and regulation; market scale; and institutional investors. Second, it exploresvarious aspects of developing capital market strategies for different types ofmarkets in emerging economies, including bond markets, equity markets, derivativesmarkets, and commodity markets.This concluding chapter focuses on the pragmatic issues that are relevant forimplementing feasible capital market development strategies. It discusses key aspects ofimplementing a holistic approach to stimulate capital market development. In a sense,1Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pubSee Bekaert, Harvey, and Lundbald (2001); Demirguc-Kunt and Levine (1996); Levine (1997); and Levine and Zervos(1996, 1998). For an opposing opinion, see Clayton, Jorgensen, and Kavajecz (1999).2 Levich (2000) concludes that while emerging financial markets have grown since 1982, they are small relative to maturemarkets and typically small relative to gross domestic product. He adds that these facts make emerging marketsvulnerable to large inward and outward capital flows from global investors.