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The Political Economy of Capital Markets in Latin America

Empirical studies of Latin American finance suggest that domestic capital markets are less developed than expected in light of the region’s economic fundamentals. One of several potential causes for this underdevelopment may be tied to the dominance of the 'grupos', family-controlled business groups that extract significant rents from existing institutional arrangements. Although the 'grupos' have driven economic development in Latin America, they also have powerful incentives to block the reforms that would enhance access to capital markets. Without these reforms, the 'grupos' will continue to have privileged access to the region’s stock markets, crowding out standalone firms in the process.This paper describes some of the political economy challenges to capital market development in Latin America and explores how regional integration under the Pacific Alliance and the Latin American Integrated Market (MILA) may create the space for institutional reform.