Latin American Capital Markets

PRAGMATIC ISSUES IN CAPITAL MARKET DEVELOPMENT IN EMERGING ECONOMIES 507to establish new rules and regulations and training and to enhance the monitoringprocesses. In addition, in the short term, some market players may have to bear the additionalcost of participating in an unfamiliar cross-border market In the case of opportunitycost to market participants, securities market integration in essence assumes anelement of financial market liberalization, which effects greater competition for limitedinvestment resources.Thus, financial institutions that previously had market advantages,particularly in a domestic setting, will have to compete against cross-border financialfirms. Lee (2002) reports that securities market integration may lead to unanticipatedprotectionism, either from the process being captured by specific vested interests ordue to the specific action of institutions or individuals opposed to the process.Optimal Sequencing of Capital Market ReformThere is no consensus about how capital markets grow or about the most importantfactors in effecting such growth. Furthermore, different sequencing programs may beoptimal for different countries with different cultural, economic, legal, and political historiesand different political economies. However, three key factors should go into thedetermination of an optimal sequencing program for the development of capital marketsin a particular country.The first factor is the link between the macroeconomic status of the countryand the types of capital market instruments that could be traded. Many policymakersargue that domestic long-term savings should be increased with the development ofcapital markets to avoid excessive reliance on external borrowing.They also claim thatfinancing needs differ depending on the stage of development of the economy, anddifferent segments of the capital markets need to be developed to accommodatethese evolving financing requirements. An optimal sequencing plan would ideally specifythe required actions along all the key policy targets: the legal/regulatory structure,market infrastructure institutions, private sector market participants, and capital marketinstruments. In addition, the manner in which the proposed capital market developmentstrategy fits into the wider financial sector reform plan needs to be considered.The second factor is the level of sophistication and complexity in the countryand the prerequisites needed for certain instruments and institutions to functionappropriately. Glen and Madhavan (1998) suggest that primary market developmentis related to both macroeconomic factors and market-specific aspects, including thelegal and regulatory framework, the nature of the institutional investor community, thetax regime, and the competitiveness of the investment-banking network While financialmarket development may aid in achieving macroeconomic goals, such as boost-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub