Financial Development: Maturing and Emerging Policy Issues

Abstract

In recent decades, financial development policies in emerging market economies have been shaped by a fundamental shift toward market-based financial systems and the lessons from financial crises. Today, there is consensus that financial development depends on financial stability and convergence toward international standards. While the debate on some issues has matured, policy thinking in other areas is changing, fueled by recent experiences. This article analyzes the evolution of policy thinking on financial development and discusses three areas that are important to achieving deeper financial systems: stock market development, small-and medium-size enterprise financing, and defined-contribution pension systems. The main emerging issues in these areas are illustrated using recent experiences in Latin America. The article concludes that there is a need to take a fresh look at the evidence, improve diagnoses, and revisit expectations. JEL codes: F36, G15, G18, G20.Policymakers concerned with financial development in emerging market economies face an increasingly complex and perplexing situation. Despite the many efforts already undertaken to improve the macroeconomic environment and reform the institutions believed to foster financial development, financial markets in most emerging economies remain relatively underdeveloped. The more stable, internationalized, and better regulated financial systems of today do not seem to be contributing to social and economic development as much as expected at the beginning of the reform process. This has left policymakers with no clear guidance on how to move forward on the financial market development process and has brought to the forefront of policymakers' agenda some big emerging issues in critical areas of financial development that have not been adequately addressed in the policy debate. These issues have emerged after other important policy issues have been settled and as experience has started to show

Debt Markets in Emerging Economies: Major Trends

“…Most of these developments were the result of inherent deficiencies in emerging economies (de la Schmukler 2004 and2006;de la Torre, Gozzi, and Schmukler 2007). A number of economists shared this pessimism, focusing on the metaphor of "original sin" in emerging economies-that is, the inability to issue long-term debt in their own currencies-as well as on outright dollarization and "sudden stops" that would subject the economies to frequent shutdowns of foreign financing (Eichengreen and Hausmann 1999;Hausmann et al 1999;Calvo and Reinhart 2000;Hausmann and Panizza 2003).…”

The Long and the Short of Emerging Market Debt

“…An important final piece of evidence regarding the importance of incentives is that the maturity structure of Chilean insurance companies (which face the same supply of domestic assets) is substantially more tilted toward the long term, with an average maturity of 10.32 years. The main difference between insurance companies and mutual and pension funds is that the former have long-term liabilities since investors are promised a defined benefit (de la Torre et al, 2007). Therefore, insurance companies benefit from matching the maturity structure of their assets and liabilities.…”

Mainstream Methodology, Financial Markets and Global Political Economy

“…This has particular relevance for the approach taken by international organisations. De la Torre et al (2007) provide a detailed explanation of the failure of Washington Consensus financial liberalisation policies, and conclude with a call for 'modesty' (an interesting counter, from World Bank staff to the monist Knowledge Bank approach characterised by Cammack, 2004). The source of the struggle between approaches may well be political, but it is dressed in methodological clothing.…”

“…These markets are normally highly active, information flows are good, and the profitability of arbitrage ensures that mispricing is arbitraged away. Reforms to create such markets where they do not exist in emerging market economies is a key plank of IMF and World Bank policy (de la Torre et al, 2007).…”