Whither the Reform Agenda?
THIS STUDY WAS MOTIVATED BY the observation that the state of development of domestic securities markets in many emerging economies, and especially in Latin America, is perceived as disheartening and puzzling. Disheartening because of the low level of development of local capital markets relative to the expectations of the early 1990s. Disheartening also because of what seems to be too meager a payoff for the intense reform efforts of the past two decades. Puzzling because of the lack of clarity and consensus as to how to modify the capital market reform agenda going forward.
In previous chapters, we described the sense in which the state of domestic capital markets in many emerging economies is in fact disheartening. Although some developing countries experienced growth of their domestic markets since the early 1990s, this growth in most cases has not been as significant as the one witnessed by industrialized nations. Other countries experienced an actual deterioration of their capital markets. Stock markets in many developing countries have seen listings and liquidity decrease, as a growing number of firms have cross-listed and raised capital in international financial centers, such as New York and London. In many emerging economies, stock markets remain highly illiquid and segmented, with trading and capitalization concentrated on few stocks. Also, bonds tend to be concentrated at the short end of the maturity spectrum and denominated in foreign currency, exposing governments and firms to maturity and currency risks.
In the case of Latin America, the results appear even more discouraging given the intensity of reform efforts in the region over the past decades plus the better evolution of capital markets in East Asia and their rapid growth in developed economies. Furthermore, the evidence shows that capital markets in Latin America are below what can be expected (in terms of commonly used measures of size and liquidity), even after controlling for per capita income, economic size, macroeconomic policies, and legal and institutional development. The evidence thus suggests that certain characteristics of these countries, beyond those usually highlighted in the