Latin American Capital Markets

508 KENROY DOWERS, RUBEN LEE, AND ANTONIO VIVESing the growth rate, it is apparent that policymakers must first achieve a minimum ofstability in the macroeconomy if financial markets are to grow.The third factor is government policy. In their study of Peru, Glen and Madhavan(1998) suggest that government policy can play an important role in developingdomestic primary markets through a pro-market stance, the creation of a legalframework that establishes rules and favors transparent markets, and the provision ofincentives for financial institutions to demand private securities, such as through a privatepension fund system. However, subtle institutional details may have a major effecton market development. For example, the constraints on pension fund portfolioscreate a bias toward debt over equity, which may influence the relative prices of debtand equity and also overall issuance activity.The Relevance of Institutional Support to Implement Reform PolicyTo implement a successful capital market development strategy, different entities mustplay specific roles in accordance with the principles of creating checks and balancesamong the various players, which would ultimately constitute the real force to implementthe strategy and monitor the fundraising of the systems. Here we discuss thevarious roles that government, the private sector; and multilateral agencies can play.GovernmentGovernment can take either a passive or an active role in promoting capital marketdevelopment. In the experience of many countries, the passive government stance isgenerally associated with two areas: creating the relevant legal/regulatory structure,disclosure requirements, and trading systems and creating incentives for increasing thetrading activity of market participants. A case for passive government intervention andrelevance in capital market development has been receiving increasing attention inthe literature on public goods. Researchers have demonstrated the importance of financialand capital markets for social development and thus have established an importantmandate for the public sector and the leadership of policymakers as advocatesof establishing a functioning capital marketGovernment can also take a more active role in capital market development,both as a market participant involved in issuing tradable instruments and directly asan investor in capital market instruments.The government can provide specific valueadded if its role as an active market participant does not crowd out private sector initiativeand thus reduce the capacity for innovation. As an active participant in stimu-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub