The benefits of deeper, broader and more diversified capital markets are, in theory, well-established. The primary purpose of capital markets, or the buying and selling of equity and debt instruments, is to serve as a conduit for the transformation of savings into investment for the real sector, thus constituting an alternative to bank financing.
Markets also serve as a mechanism through which risk is transferred, and risk exposure diversified, enabling financial intermediaries to manage risk more efficiently. Deeper and more liquid capital markets, along with a large investor base, can lead to effective price signalling mechanisms and reduced transaction costs via frictionless trading in the secondary market.
Within the context of Latin America, could efficient capital markets play an essential role in achieving the wider socio-economic goals of the region?
Broadening and deepening capital markets via regional integration initiatives may, in theory, create a number of positive outcomes: greater investment and growth by disconnecting investment from domestic savings rates and unlocking cross-border capital flows; financing to address the region’s infrastructure needs; financial stability in a region where volatility has historically been prevalent; development and diversification of a private sector that remains commodity-dependent and often crowded out by government investment.
Academically, these gains are relatively well-established, if not unilaterally accepted. But do they translate into reality? This paper explores the possibility for and applicability of capital markets integration in Latin America, precisely the economies of Mexico, Chile, Colombia and Peru.
It explores three main channels:
- Assess whether there is scope for regional integration in Latin America. Identify the key drivers for regional integration by reference to other integrating regions (Europe, Asia, East Africa), and assess the applicability of these trends to Mexico, Chile, Colombia and Peru.
- Identify the principal risks and rewards of capital markets integration, and analyse how they apply to these four economies
- Assess whether a gap exists between the theoretical model of integration and the reality within the region.
- If challenges and barriers to integration exist, what policy initiatives can and should be undertaken to address them?
Institutional Authors: Inter-American Development Bank and Columbia University
Authors: Mario Campa, Sebastian Essl, Muhammed Gundogdu, Caitlin Page, Hongrui Zhang, Liting Zhao
Spanish Title: Regional Capital Markets Integration in Latin America: Mila & Beyond
Full document: Campa, Regional Capital Markets Integration in Latin America- MILA and Beyond