Latin American Capital Markets

PRAGMATIC ISSUES IN CAPITAL MARKET DEVELOPMENT IN EMERGING ECONOMIES 503market infrastructure and trading mechanism. As discussed above, perhaps one of thekey issues in developing a local securities market as a good and consistent source offunds is to ensure that there is a good local and international investor base.The realityfor many countries is that local investors are more dedicated to domestic securitiesand, if mobilized, provide major demand-side strength for market developmentOn the supply side, to increase the amount of securities offered, effort shouldbe directed at increasing the amount of issues through privatization programs with aview to ensuring increased trading and enhanced local market participation. Increasinglocal issues can also be realized by programs that target SMEs, different tiers formarket trading, and the creation of specific incentives for listing securities, including taxholidays, access to specific government financing, and score cards that rate enterpriseson the basis of specific desirable capital market qualities.Recent evidence suggests the need to consider the establishment of alternativetrading architectures that can facilitate the path for more medium-size companies tocome to the market. 9 This underscores the nascent efforts of the Sao Paulo Stock Exchangeand the Bolsa de Colombia to support greater participation of indigenousmedium-size firms. Hannes and Korcsmaros (chapter 12, this volume) present some ofthe evidence regarding the ability of these SHE stock exchanges to increase SME accessto capital markets. Hannes and Korcsmaros conclude that the findings are somewhatmixed. While there is some evidence that these SME stock exchanges do play a role,they are more relevant for medium-size companies and those that are advanced in theirlife cycle. For SMEs at the early stage, bank financing, angel funds, and personal funds tendto be much more relevant sources of financing than access to capital markets.Fixed-income markets. Bond markets provide a means to fulfill mid- and long-termfunding needs. When developed, they contribute to reducing the financial risks of theoverall economy, providing the government with a noninflationary source of financeand establishing a basis for pricing assets in the market, creating a well-balanced financialenvironment, and promoting economic growth. There is also clear evidencethat domestic government bond markets are the foundation on which the domesticbond markets are built. These are only a few of the potential benefits of domesticbond markets.The importance of these markets to the entire economy makes it imperativethat governments lead the process of developing bond markets by creating9 However; recent evidence suggests the need for prudence in the establishment of these markets because the earlysuccesses of small and medium-size markets that initially showed promise in Germany, France, and Spain, for example,have all suffered declines and outright failure recently.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub