Emerging Capital Markets and Globalization by A. De la Torre and S. Schmukler ( Stanford University Press and the World Bank, 2008)

✍ Scribed by Laura Tedesco

• Book ID: 102347763
• Publisher: John Wiley and Sons
• Year: 2009
• Tongue: English
• Weight: 28 KB
• Volume: 22
• Category: Article
• ISSN: 0954-1748
• DOI: 10.1002/jid.1528

✦ Synopsis

This book offers an analysis of the development of capital markets in emerging economies looking specifically to Latin American countries. The book presents a historical approach to the development of capital markets. It emphasises the analysis of the prospects for capital market development in Latin America, presenting conclusions on the reform agenda for the markets. The study includes domestic bond, stock market activity, the evolution of global capital markets and the participation of emerging economies in those markets.

The authors explain their focus on Latin America by arguing that the countries of the region underwent significant economic and state reforms which increase the expectations towards the development of capital markets. The chapters of the book concentrate on the influence of the globalisation of the economy on the development of economic and state reforms, and of capital markets in emerging economies. The chapters describe the influence of worldwide trends on domestic reforms and the development of the financial markets and the factors that explain the development (or the lack of development) of capital markets. An analysis of the evolution of domestic securities markets and the participation in international financial markets in Latin America and other regions is also presented.

Analysing the factors behind the development of capital markets and their internationalisation, the authors conclude that the size of the economy matters for the development of capital markets. It is crucial in determining domestic stock and bond market development. They arrive at this conclusion after analysing empirical evidence from Latin America on the role of economic and institutional fundamentals, the impact of the reforms and the impact of internationalisation on local stock markets. They argue that the level of local stock market development in Latin America is below what should be expected. Therefore, they suggest that 'certain intrinsic features of these countries, that are beyond those usually highlighted by the capital market development literature but that are still not well understood, may limit the scope for developing deep stock markets in the region' (p. 133). Thus, in their last chapter, the authors offer an interpretation of the gap between expectations and outcome.

The authors offer three different views to understand and amend the gap between expectations and outcomes. The first view-be patient and redouble the effort-assumes that the reforms were right and that more time is needed so the recommendation is to let market discipline work. The second view-get the sequence right-argues that problems are created when some reforms are implemented ahead of others. The recommendation of this view is that key preconditions should be met before 'fully liberalising domestic financial markets and allowing free international capital mobility' (p. 141). Finally, the authors offer their view-revisit basic issues and reshape expectations-which is less prescriptive. It argues that there are important problems with respect to the expectations and the design of past reforms and that there is a need to step back and reconsider basic issues. The main issues to be reconsidered are financial globalisation, market liquidity and risk diversification.

The book presents new issues that need to be addressed in the reform agenda going forward such as the interactions between financial market internationalisation and domestic capital market development. Likewise, more research is essential to explain why, after controlling for economic fundamentals and reforms Latin America has performed worse in terms of domestic capital markets development.

This book offers some insights to understand the recent development of capital markets and open some new questions and avenues for future research. It is a good, clear and critical account of the