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The Importance of Financial Markets in Economic Growth

It is always a pleasure for me to be in Brazil. It is especially a pleasure to be here at a time when Brazil appears successfully to have surmounted the crisis of last year, and to be on a path that will lead to renewed growth with low inflation. And I am honored to have the opportunity to speak at this first International Derivatives and Financial Market Conference of the Brazilian Mercantile and Futures Exchange. I will be talking today about the importance of financial markets in economic growth. During the financial crises of the last decade, we all saw that a weak financial system not only makes a country open to international capital flows more vulnerable to crisis, but also exacerbates the costs of any financial crisis that does occur. The Asian crisis countries, Thailand, Indonesia, and Korea, vividly demonstrated that. Among all the recessions associated with the financial crises of the past decade, Brazil’s were the shallowest. That was in part the result after 1999 of the very skilled management of the economy – fiscal and monetary policy – not least during the pre-election financial crisis last year. It was also the result of Brazil’s willingness to use its reserves and debt management policy actively to influence the exchange rate. Brazil’s superior information system about capital flows has been very useful for policymakers. But we should not overlook the paradoxical fact that although Brazil’s financial markets are in many respects highly sophisticated – as the success of the BM&F Exchanges illustrates – Brazil was helped during the crises by having a financial system that is much smaller, relative to the economy, than those in Asia. 2