Legal frameworks shape the context in which economic transactions take place, both within a given economy and between economies. Laws and regulations allow private economic agents to establish and (re)organize themselves, to seek finance, to enter markets by selling products and services, to enforce payment claims when customers are entering into default on obligations, and to exit a market in an orderly way when so desired or required. It is widely accepted that well-designed legal frameworks for market entry, operation, and exit can promote economic growth and, from a cross-border perspective, integration of economies and financial systems.
Market capitalizations in the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay) are moderate in size by emerging market standards; however, continued growth and development will depend on improving liquidity conditions across the region. At the end of 2015, capitalization of LA-7 equity markets was 32 percent of regional GDP, while the value of domestically traded bonds outstanding was about 62 percent of GDP (Figure 6.1). In dollar terms, the largest bond and equity markets are in Brazil and Mexico. Despite solid market capitalizations, low trading volumes are a growing concern. Shrinking liquidity is attributed to deteriorating macroeconomic conditions, high transaction costs, and the outsized role of institutional investors and their buy-and-hold strategies.
Luc Eyraud, Ms. Diva Singh, and Mr. Bennett W Sutton
After a period of endemic economic and financial crises during the 1980s to 1990s, many Latin American countries opened up their previously closed economies to international financial institutions at the turn of the millennium, aiming to attract capital, gain technical expertise, and cushion themselves against regional instability. In some extreme cases, such as Mexico and Uruguay, the financial system came to be completely dominated by global banks, with few or no domestic banks remaining. In addition, their experience with financial crises prompted most Latin American countries to implement stricter financial regulations. The strategy of importing global institutions and know-how, together with tighter regulations, appeared to have served the region well: with the exception of the Argentine and Uruguayan crises of 2001–02, none of the largest Latin American banking systems have suffered a financial crisis in the new century. Even the global financial crisis of 2008–09 caused relatively little harm, with high commodity prices fortuitously buffering exports and growth in this resource-rich region.