Latin American Capital Markets

488 KENROY DOWERS, RUBEN LEE, AND ANTONIO VIVESthe chapter represents a culmination of the various ideas of the book and the realworldconsiderations that must be incorporated into a working strategy. For example,the notion of financial sector reform has become relevant for policymakers, and thechapter discusses the optimal sequence for reform in tandem with development in thereal sectorThe book aims to provide guidance for capital market development beyondthe approaches that have been offered in the past. Dowers, Gomez-Acebo, and Masci(chapter I) interpret this changing focus, which has shifted to market participantsand instruments, as part of an evolution from a first to a second wave of reformsto promote capital markets.The first wave, which took place in emerging markets inthe 1990s, focused on creating a good foundation for market activity. Carmichaeland Pomerleano (2002) and Levich (2000) also draw a distinction between first- andsecond-generation reforms.In the first-generation reforms, a key preoccupation was the introduction ofan appropriate legal and regulatory framework for the operation of stock and debtmarkets.This included the enactment of appropriate capital market regulation and thecreation of a securities regulatory body to introduce new attitudes and behaviorsamong market players. Attention was directed at the delicate balance between creatinga legal/regulatory environment to stimulate capital market activity and establishingsafety, discipline, and soundness. Another component of the first generation of capitalmarket reform was the emphasis on market infrastructure. Some of the visible elementsof this first phase included the introduction of trading mechanisms, clearanceand settlement systems, and investor education. Although the first wave of reformspertained to the developments espoused and implemented in the 1990s, many countriesare still struggling with some of these issues and should ensure that these changesare expedited, keeping in mind that the development of capital markets is part of aprocess that involves financial, economic, and other environmental challenges.Second-generation strategies for capital market development presume thatthe foundation for capital markets in an economy has been laid, or is well under way,and that the focus is on increasing market activity and liquidity, broadening investorparticipation, and expanding the types of instruments that are traded. Advancesin technology and increasing investor sophistication also drive second-generation reforms.Carmichael and Pomerleano (2002) identify the following issues as being corefor second-generation reforms: improving corporate governance, strengthening disclosure,protecting minority shareholder rights, developing bond markets, fosteringdevelopment of domestic institutional investors, and strengthening self-regulatoryCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub