Whither Capital Market
BACK IN THE EARLY 1990s, economists and policy makers had high expectations about the prospects for domestic capital market development in emerging economies and, particularly, in Latin America. Unfortunately, they are now faced with disheartening results. Though many still hope that securities markets will develop, the reality is that equity and corporate bond markets in most emerging economies remain highly illiquid and segmented, with trading and capitalization concentrated on few firms. Stock markets in many developing countries, particularly in Latin America and Eastern Europe, 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. Debt tends to be concentrated at the short end of the maturity spectrum and denominated in foreign currency, exposing countries to maturity and currency risks. Moreover, government debt is crowding out corporate bond markets in many countries.
The state of capital markets in many emerging economies looks particularly poor when considering the many efforts already undertaken to improve the macroeconomic environment and reform the institutions believed to foster financial development. In the case of Latin America, the results appear even more discouraging in light of the better evolution of capital markets in East Asia and their rapid growth in developed economies (especially in international financial centers). This disappointing performance has made the conventional policy recommendations for capital market development questionable, at best. Policy makers are left without clear guidance on how to revise the reform agenda, and many of them do not envision a bright future for domestic capital markets, particularly for the local stock markets or the smaller emerging economies.
The failure to develop deep and efficient capital markets may have important consequences: growing empirical evidence suggests that financial