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Finance for Development

Finance for Development: Latin America in Comparative Perspective

Copyright Date: 2006
Pages: 316
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  • Book Info
    Finance for Development
    Book Description:

    Access to finance is critical in setting the course for development in emerging market economies. In this innovative study, which provides the first book-length analysis of the Latin American financial sector, Barbara Stallings and Rogerio Studart examine the dramatic changes resulting from financial liberalization in the region. The authors begin by discussing the critical transformations taking place in Latin America since 1990 -a period marked by acceleration toward a new open, market-oriented development model, and away from a semi-closed model relying heavily on the state. Stallings and Studart examine changes in ownership of the financial sector and government regulation of banking, evaluate the role of capital markets as a source of finance, and compare Latin America's financial sector to that of East Asia. The second section of the book features case studies that demonstrate the changes occurring in Chile, Mexico, and Brazil with particular reference to finance for investment and access to credit. The authors conclude with a set of policy recommendations aimed at strengthening Latin American banks and capital markets so that they can play a greater role in supporting economic development.

    eISBN: 978-0-8157-9791-3
    Subjects: Business, Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments
    (pp. vii-viii)
    Barbara Stallings and Rogerio Studart
  4. 1 Finance for Development: Issues and Trends
    (pp. 1-18)

    Access to finance is a crucial determinant of the development process in emerging market economies. Although it may seem obvious now, this view was not always widely accepted. The tendency in development economics during most of the postwar era was to focus on the “real” sector of the economy—namely, industrialization, technology transfer, and the international exchange of goods—with the financial sector relegated to the sidelines. Insofar as finance formed part of the constellation of priority topics, it centered on international finance, in the form of foreign direct investment, bilateral and multilateral aid, and international commercial bank loans.


  5. Part I. Changes in Latin America’s Financial System since 1990:: Comparisons with East Asia

    • 2 Financial Liberalization, Crisis, and the Aftermath
      (pp. 21-51)

      Financial liberalization in the past two decades has profoundly transformed financial systems in developing economies around the world. Broadly speaking, these changes have occurred in three stages, although differences are found across countries and perhaps across regions. First, liberalization changed the rules under which financial sectors operate. Whereas previously governments had a strong influence on the volume, price, and destination of loans, private sector institutions now make such decisions on their own. This shift has had important implications for investment and growth, as well as for who has access to finance. Second, in many cases financial liberalization was followed by...

    • 3 Changes in Ownership: Public, Private, and Foreign Banks
      (pp. 52-81)

      Bank ownership in emerging market economies has been transformed by financial liberalization. Two main policy changes have driven the process: the market share of public sector banks has been reduced, and the share of foreign banks has been allowed to increase. As a secondary consequence, private domestically owned banks have generally lost market share. This outcome—which is still evolving and varies across regions and countries—came about in two stages. As part of the liberalization process itself, state-owned banks were sold to the private sector, both domestic and foreign. If a crisis occurred, however, governments often saw themselves forced...

    • 4 Toward Stability: Regulation, Supervision, and the Macroeconomic Context
      (pp. 82-110)

      The financial crises of 1994–95 and 1997–98 sounded wake-up calls to Latin America and East Asia, respectively, indicating that regulation and supervision needed to be strengthened. But what exactly does strengthening regulation and supervision mean? Until recently, the phrase would have been universally interpreted as tightening government regulations on capital adequacy, classification of problem loans, and provisions for expected losses at individual banks. It would also have been associated with giving supervisors more power and autonomy to enforce the regulations. In the last few years, however, a new view has been put forth that posits the superiority of...

    • 5 From Banks to Capital Markets: New Sources of Finance
      (pp. 111-142)

      Emerging market economies—including Latin America and East Asia—have traditionally had bank-based financial systems, with small, poorly developed capital markets. Bond markets have tended to be shallow, heavily dominated by government debt, and with low turnover. Stock markets have likewise featured few issues, and most have not been traded with any frequency. Thus, the banking system has provided the main source of finance for both public and private borrowers. Recent financial liberalization reforms changed the way that banking systems operate by limiting government controls over interest rates and over the volume and recipients of credit. While they also provided...

  6. Part II. The Impact of the New Financial System on Investment and Access in Latin America

    • 6 Chile: Mixed Ownership Provides a New Model
      (pp. 145-183)

      Chile was the first country in Latin America to embark on a major and sustained program of financial liberalization.¹ It began in the mid-1970s, soon after the military overthrew the elected government of Salvador Allende. The liberalization process, however, resulted in a period of unsustainable and poorly managed lending that ended in a serious crisis in the early 1980s. As part of the recovery process, Chile became a pioneer in terms of restructuring its banks and revamping its regulatory and supervisory system. Since 1990, the Chilean financial sector has been the most successful in the region on a variety of...

    • 7 Mexico: Foreign Banks Assume Control
      (pp. 184-221)

      Mexico initiated its financial reforms more than a decade after Chile.¹ In the late 1980s, the Mexican government began to eliminate the controls that had characterized the financial sector during much of the postwar period; the reforms accelerated in the early 1990s. Liberalization and a resulting lending boom occurred in the absence of new prudential regulations, however, and they were combined with macroeconomic policies that ultimately led to a foreign exchange crisis and devaluation at the end of 1994. The decline in the currency’s value undermined an already weak banking sector, and the government was forced to intervene to prevent...

    • 8 Brazil: Public Banks Continue to Play a Key Role
      (pp. 222-258)

      Brazil’s economic reforms date to the late 1980s and early 1990s, making the country part of the third reform wave in Latin America. Even then, however, the reform process in Brazil was moderate and pragmatic in comparison with the more abrupt and ideologically based changes of some of its neighbors. At the same time, the government had to deal with growing macroeconomic disequilibria that included large fiscal deficits, a growing public sector debt, and price rises that threatened to reach hyperinflationary levels. The combined structural and macroeconomic changes were intended to reorient the economy so as to stimulate a return...

  7. Part III. Policy Recommendations for a Stronger Financial System

    • 9 A Policy Agenda for the Financial Sector
      (pp. 261-284)

      This book has analyzed the domestic financial system in Latin America and how it has changed since the early 1990s. Expanding finance is one of the major challenges facing governments of developing countries, as they try to speed up economic growth and reduce poverty to improve the welfare of their citizens. A large body of literature now provides evidence that access to finance, through domestic banking systems and local capital markets, is an essential element for promoting growth. Our evidence indicates that the relationship runs in the other direction as well, but finance and growth are clearly intertwined. A smaller...

  8. References
    (pp. 285-304)
  9. Index
    (pp. 305-316)
  10. Back Matter
    (pp. 317-317)