Latin American Capital Markets

502 KENROY DOWERS, RUBEN LEE, AND ANTONIO VIVEScontributions by pension contributors, mandatory participation by all workers, pensionassociations that compete on the basis of net returns for the funds of each investorand individual accounts to control the contributions made by each employee.This structure has resulted in a flood of funds directed to the financial system and hasstimulated high interest in active market participation.In spite of the benefits for Chile's capital markets as a result of pension fundreform, Vittas (1998) argues that the promotion of private pension funds and insurancecompanies should be pursued for their own sake and their potential economic,fiscal, and financial benefits and should not be dependent on the prior development ofsecurities markets. The situation of mutual funds is different because they are unlikelyto thrive unless the markets for the instruments in which they specialize are themselveswell developed.Vittas (1998) notes that a limited supply of suitable financial instrumentsshould not be a major obstacle for the creation of pension funds and insurance companies.Theseinstitutions will accumulate their long-term financial resources on a gradualbut steady basis, providing ample time to allow reforming governments to developtheir securities markets. A more important factor than the state of development ofsecurities markets is normally the existence of strong political commitment to a holisticreform program that would need to cover not only pension and insurance reformbut also broader macroeconomic, fiscal, banking, and capital market reforms.Institutional investors can help the development of securities markets.Theycan act as a countervailing force to the dominant position of commercial banks, stimulatefinancial innovation, modernize capital markets, enhance transparency and informationdisclosure, and strengthen corporate governance.InstrumentsThis section examines the key types of instruments that exist in the capital marketsand attempts to provide pragmatic suggestions to help increase the overall liquidityof these instruments. As equities and fixed-income instruments dominate capital markets,the focus is on these two types of securities. However this does not negate thepotential benefits of instruments such as commercial paper, which in fact is the dominantinstrument in many underdeveloped markets, and derivatives instruments, whichare more appropriate for advanced capital markets.Equities. Improving liquidity in equity markets in emerging economies is a difficult endeavorbecause it requires work on the supply and demand sides and also on theCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub