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Emerging Capital Markets and Globalization: The Latin American Experience


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Back in the early 1990s, economists and policy makers had high expectations about the prospects for domestic capital market development in emerging economies, particularly in Latin America. Unfortunately, they are now faced with disheartening results. Stock and bond markets remain illiquid and segmented. Debt is concentrated at the short end of the maturity spectrum and denominated in foreign currency, exposing countries to maturity and currency risk. 

Capital markets in Latin America look particularly underdeveloped when considering the many efforts undertaken to improve the macroeconomic environment and to reform the institutions believed to foster capital market development. The disappointing performance has made conventional policy recommendations questionable, at best.

Emerging Capital Markets and Globalization analyzes where we stand and where we are heading on capital market development.  First, it takes stock of the state and evolution of Latin American capital markets and related reforms over time and relative to other countries. Second, it analyzes the factors related to the development of capital markets, with particular interest on measuring the impact of reforms. And third, in light of this analysis, it discusses the prospects for capital market development in Latin America and emerging economies and the implications for the reform agenda.

The book is part of the broader regional study "Whither Latin American Capital Markets?" conducted at the Latin America and Caribbean Region of the World Bank, under the Office of the Chief Economist and the Financial Sector Unit.  Augusto de la Torre (FPDFA and LCRCE) and Sergio Schmukler (DECRG) were the task managers and main authors of this project. Francisco Ceballos, Norbert Fiess, Juan Carlos Gozzi, and Marina Halac actively participated in the production of the book and the overall regional study. Leonor Coutinho and Jurgen Janssens helped in the initial stages of the project. Many authors wrote the background papers listed in this website. The authors are grateful to Guillermo Perry, who encouraged them to undertake the research, disseminate its results, and publish the book, and who provided constructive feedback throughout the entire process. For facilitating the dialogue with financial sector practitioners and for financial support to produce this book, the authors are deeply indebted to Makhtar Diop. For their detailed and useful comments and suggestions, the authors would also like to thank Christian Broda, Jerry Caprio, Juan José Cruces, Barry Eichengreen, Francisco de Paula Gutiérrez, Arturo Galindo, Michael Gavin, Tom Glaessner, Claudio Irigoyen, Miguel Kiguel, Yambeon Kim, Leora Klapper, Anjali Kumar, Jeppe Ladekarl, Danny Leipziger, Ross Levine, Giovanni Majnoni, Santiago Pombo, Michael Pomerleano, Luis Servén, Dimitri Vittas, and Sara Zervos, among many others. Dana Vorisek provided excellent editorial assistance in the production of the book.

Developing capital markets is high on the policy agenda in Latin America. Augusto de la Torre and Sergio Schmukler provide the big picture, together with some exceptionally pointed and provocative analysis. There is no better place to start for readers interested in the state of the markets, obstacles to their further development, and concrete policy options.

- Barry Eichengreen, George C. Pardee and Helen N. Pardee
Professor of Economics and Political Science
University of California, Berkeley

This insightful analysis of what went wrong in Latin America's capital markets since the 1990s is a must read for anyone interested in financial markets, international finance, or economic development. The book articulates cogent arguments on how to get it right in the future. I learned an enormous amount from reading the book and will recommend it highly to students and colleagues.

- Ross Levine
Author of Rethinking Bank Regulation: Till Angels Govern
Harrison S. Kravis University Professor and Professor of Economics, Brown University

This is a book that researchers and practitioners of financial market and economic development should not plan to do without. The message is sobering, and admirably forthright about limited progress in the development of capital markets in much of Latin America and the extent of our knowledge about some of the most critical issues. The authors make a compelling case that attempting to create mini Wall Streets may be a poor way to increase the contribution of local financial markets to economic development. Read it!

- Michael Gavin
Emerging Markets
Citadel Investment Group

Background papers for this project:

Corporate Governance in Latin America, by Capaul

Housekeeping and Plumbing: The Investability of Emerging Markets, by Ladekarl and Zervos

The Transaction Costs of Primary Market Issuance: The Case of Brazil, Chile, and Mexico, by Zervos

Internationalization and the Evolution of Corporate Valuation, J.C. Gozzi, R. Levine, and Sergio Schmukler, Journal of Financial Economics (forthcoming). Older version appeared as NBER Working Paper No. 11023 (2005).

Financial Development: Maturing and Emerging Policy Issues, with A. de la Torre and J.C. Gozzi Valdez, World Bank Research Observer (forthcoming).

International Financial Integration through Equity Markets: Which Firms from Which Countries Go Global? S. Claessens and Sergio Schmukler, Journal of International Money and Finance, 26:5, pp. 788-813 (2007).  Longer version appeared as CEPR Discussion paper 6137 (2007).

Stock Market Development under Globalization: Whither the Gains from Reforms?, A. de la Torre, J.C. Gozzi Valdez, and Sergio Schmukler, Journal of Banking and Finance, 3:16, pp. 1731-1754 (2007).

Government Bonds in Domestic and Foreign Currency: The Role of Macroeconomic and Institutional Factors, S. Claessens, D.Klingebiel, and Sergio Schmukler, Review of International Economics, 15:2, pp. 370-413 (2007)  Previous version appeared as CEPR Discussion Paper 3789 (2003).

Migration, Liquidity Spillovers, and Trade Diversion: The Impact of Internationalization on Stock Market   Activity, R. Levine and Sergio Schmukler, Journal of Banking and Finance, 31:6, pp. 1595-1612 (2007).  Previous version appeared as NBER Working Paper 9614 (2003).

Stock Market Development and Internationalization: Do Economic Fundamentals Spur Both Similarly? S. Claessens, D. Klingebiel, and Sergio Schmukler, Journal of Empirical Finance, 13:3, pp. 316-350 (March 2006).  Previous version appeared as "Explaining the Migration of Stocks from Exchanges in Emerging Economies to International Centers" CEPR Discussion Paper No. 3301 (April 2002).

Internationalization and Stock Market Liquidity, R. Levine and Sergio Schmukler, Review of Finance-Journal of the European Finance Association, 10:1, pp. 153-187 (March 2006).

Financial Globalization and Debt Maturity in Emerging Economies, S. Schmukler and E. Vesperoni, Journal of Development Economics, 79:1, pp.183-207 (February 2006).

Como Desarrollar Los Mercados de Capitales? A. de la Torre and S. Schmukler, Carta Financiera, 136, pp. 14-21, Asociacion Nacional de Instituciones Financieras, Colombia (November 2006/February 2007).

Capital Market Development: Whither Latin America?, A. de la Torre, J. C. Gozzi, and S. Schmukler, in Strengthening Global Financial Markets, M. Garcia and S. Edwards (eds.), IASE/NBER Volume, University of Chicago Press (forthcoming).

Small Fish, Big Pond. What is the Future for Domestic Capital Markets in a Globalized Economy?, A. de la Torre and S. Schmukler, Finance and Development, Vol. 42:2, pp.47-49 (June 2005).

Why Do Emerging Economies Borrow Short Term?,  with F. Broner and G. Lorenzoni, World Bank Working Paper 338 and MIT Department of Economics Working Paper. (2004).

Short-Run Pain, Long-run Gain: The Effects of Financial Liberalization, with G. Kaminsky.  NBER Working Paper 9787 and World Bank Working Paper 2912 (2002); IMF Working Paper 03/34 (2003). Featured in the Wall Street Journal(October 2002); Frontline (India's National Magazine) (April 12, 2003).

Related presentations:

Washington, DC - October 2006 (227K PDF)

New York - October 2006 (182K PDF)

Chile - June 2005 (155K PDF)

Washington, DC - June 2005 (118K PDF)

Washington, DC - April 2005 (130K PDF)

Kellogg Institute - April 2005 (229K PDF)

Chile - April 2005 (142K PDF)

Securities and Exchange Commission, Washington DC - April 2005 (229K PDF)

Washington, DC - March 2005 (144K PDF)

Argentina - December 2004 (102K PDF)

Stanford - November 2004 (143K PDF)

Colombia -October 2004 (188K PDF)

Oxford -September 2004(135K PDF)

The World Bank -June 2004(87K PDF)

Peru -March 2004 (121K PDF)

Colombia -February 2004 (292K PDF)

New Delhi -January 2004 (91K PDF)

Mexico -November 2002 (195K PDF)

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