Latin American Capital Markets

PRAGMATIC ISSUES IN CAPITAL MARKET DEVELOPMENT IN EMERGING ECONOMIES 501reward companies with good disclosure. In practical terms, this requires the use of InternationalAccounting Standards, good monitoring of company reporting, access tospecific programs and financing based on good corporate disclosure, updated corporategovernance systems, and the prevention of private pension funds from investingin entities that do not subscribe to corporate disclosure. Several Latin Americancountries, including Colombia, Brazil, Mexico, and Peru, have launched programs in linewith these proposals. 8The Role of Market InstitutionsGoldstein (chapter 5, this volume) demonstrates that institutional investors can be keycontributors to the development of capital markets. Institutional investors are relevantbecause they add liquidity to securities traded in the marketplace, foster innovationand financial development as issuers try to match the investment needs of institutionalinvestors, help uninformed investors to become part of the overall capitalmarkets, and impose market discipline on market participants.The development of institutionalinvestors in the United States has had a range of additional impacts on thesecurities markets: the advent of competitive bidding for corporate securities, the developmentof mortgage securitization and derivatives products, the introduction of indexedfunds, the modernization of trading and related facilities, and the use of collectivebodies and specialized monitors for strengthening corporate governance. It takestime for institutional investors to reach the critical level that would allow them to playa catalytic role in capital market development Some of the beneficial effects of institutionalinvestors are taking place faster in developing countries because of theexperience gained in advanced countries and because of the transfer of financial expertisethat electronic technology and globalization make possible.One of the most clear-cut examples of the impact of institutional investorson the development of capital markets is Chile. As Dowers, Gomez-Acebo, and Masci(chapter I, this volume) illustrate, Chile has the highest market penetration rates forcapital markets in Latin America and the Caribbean and one of the highest among allemerging markets. While there is no one single explanation for this outcome, one ofthe most important lies in the development of private pension systems. In 1980, Chileintroduced a national private pension system that replaced the pay-as-you-go systemof the past.This new pension system has several key characteristics, including defined8 See Lubrano (chapter 6, this volume) for discussion of specific regulatory reforms in Colombia, Brazil, and Mexicopertaining to increased disclosure.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub