The main purpose of this paper is to assess the impact of financial market development on Foreign Direct Investment (FDI) in Latin American countries. Financial market development and FDI are two important sources of efficient economic resource allocation in the region. We use banking sector and stock market indicators to capture financial market development. By giving greater consideration to the short-run and long-run effects of financial market development on FDI, this paper presents empirical results from a time series model of 14 Latin American countries. We find financial market development link is both short-run and long-run phenomena in majority of countries. Furthermore, our result of the causality test shows that link between FDI and banking sector development is uni-directional and the link between FDI and stock market development is bi-directional.

The Relationship between Financial Market Development and Foreign Direct Investment in Latin American Countries

We examine the effects of public sector borrowing from the domestic banking system on financial development in middle-income countries. While these countries' external debt has been falling, the share of bank credit absorbed by the public sector has been rising rapidly. We argue that this runs the risk of slowing financial development by affecting structural characteristics of the banking systems. We find empirical evidence that too much public sector borrowing harms financial deepening, and that banks mainly lending to the public sector tend to be more profitable but less efficient. We note that these effects add to the costs of fiscal prolificacy.

https://www.imf.org/-/media/Websites/IMF/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp0626.ashx

Fiscal Policy and Financial Development

Fiji, a developing island economy in the East Asia and Pacific region, has been
experiencing modest growth for some time despite its ability to do better. Various
strategies to boost the growth levels, including major cross–sectoral reforms, have
yielded little success. Motivated by a recent and expanding finance–growth literature,
this study investigates the possibility of enhancing the country’s financial development.
Further financial development appears to depend importantly on designing appropriate
strategies to deal with obstacles and challenges relating to enhancing both the supply of
funds to the private sector and the demand for these funds. This study provides
strategies for dealing with two such likely important challenges in the case of Fiji—
legal institutions and alternative finance.
Prior to investigating and developing strategies in relation to these issues, the study
attempts to understand the financial sector’s past development trends and its current
strengths and weaknesses. This extensive analysis uses a recently available
comprehensive financial structure database to assess Fiji’s situation against 20
developing and developed countries across the Asia–Pacific region over a 33–year
period. Overall, it assesses Fiji’s relative banking and stock market development using
relevant composite indices constructed for the purpose. Specifically, it assesses the
size, activity and depth of Fiji’s sectors relative to the comparator countries. Findings
suggest positive past development of the banking sector but weak development of the
stock market. Further, the banking sector has become larger, deeper and more active
while the stock market remains small and largely inactive.
Legal institutions—encompassing the mandating of legal rights of the suppliers of funds
and the appropriate enforcement of their rights—have become widely accepted in the
literature as a major, possibly even the dominant, supply–leading determinant of
financial development. The legal theory asserts that the supply of funds is likely to be
better in countries with better legal institutions. The suppliers of funds include mainly
banks (providers of private sector credit) and shareholders (providers of stock market
equity).

Financial Development in Fiji

Financial intermediation in Latin America has experienced profound changes due to financial liberalization, which also resulted in further financial deepening. The bulk of the literature on financial deepening focuses on its macroeconomic dimension and its implications for growth. In this paper, we shift our attention to its microeconomic implications by shaping the environment within which banks operate. In particular, we examine the possible effects of financial deepening on bank productivity changes as well as the possibility of a two-way causality. We obtain bank productivity estimates using the non-parametric Malmquist methodology. We find strong evidence of causality from financial deepening to bank productivity and also evidence of reverse causality. Our results suggest that a virtuous circle between financial deepening and financial institutions’ productivity may exist.

Financial deepening and bank productivity in Latin America

In the Latin America and Caribbean (LAC) region, as in the rest of the world, reliable financial information is the cornerstone of a robust market economy and efficient public sector. This book presents both an analysis of the broader trends derived from the individual country-level studies produced under the Report on the Observance of Standards and Codes (ROSC) Accounting and Auditing (A&A) program and a synthesis of lessons learned from the Bank's experiences working with policy makers and other stakeholders to implement the ROSC A&A recommendations. This first chapter introduces the book by showing how sound A&A practices in the private and public sectors contribute to LAC development agenda, and by describing the regional economic context. It then presents three case studies of successful financial reporting and auditing reforms within LAC, showing how these reforms have benefited the countries. It describes drivers of reform that have led some countries to adopt global standards of good A&A practice and others to take a more conservative, wait and see approach. Finally, the chapter describes the objectives and methodology of this study, and the structure of the book.

/pdf/accounting-for-growth-in-latin-america-and-the-caribbean-1xd0qi9jdf.pdf

Accounting for Growth in Latin America and the Caribbean: Improving Corporate Financial Reporting to Support Regional Economic Development

This paper assesses financial sector development in Latin America, both in the banking system and in the capital markets. After a brief review of the explanatory factors and the definitions of financial development found in the literature, Latin American countries are classified in groups of similar characteristics by using cluster analysis - first worldwide and second within the region - in terms of financial depth and per capita income. In the worldwide exercise, virtually all Latin American countries appear in the same cluster, which argues in favor of a regional dimension in financial development. A comparison of the Asian and Eastern European emerging regions shows that Latin America lags behind Asia in terms of financial development and compares slightly unfavorably with Eastern Europe. In the regional cluster exercise, four relatively homogeneous groups of Latin American countries are found. Stylized facts of the four groups’ banking sectors and capital markets show - in line with the results of the more recent economic literature - that those countries which have deeper financial systems are also those with a more efficient financial system. Although no conclusions on causality can be drawn from this review, it argues in favor of a virtuous circle, in terms of financial depth and efficiency, for countries with the most appropriate structure of the financial system.

/pdf/latin-american-financial-development-in-perspective-46r3br0c0o.pdf

Latin american financial development in perspective

We construct a new measure of financial development, through multivariate analysis, which includes several indicators of financial size and efficiency for 134 countries. Based on this broad measure, we assess empirically the determinants of financial development focusing on two factors not yet explored in the literature, namely the central bank role and bank regulation and supervision. The differences between emerging and industrial countries are explored. The results show that a relatively large involvement of the central bank in the financial system contributes to financial development in all countries, other things given. In the industrial country group, both broader central bank objectives and a large lender of last resort mandate are found to be beneficial. For emerging countries, the central bank involvement in the payment system, as well as broader central bank objectives, seem to enhance financial development. Finally, high quality regulation and supervision, particularly supervisory independence, is beneficial in industrial countries. As for emerging ones, supervisory independence only contributes to financial development if a relatively solid institutional framework is in place.

Lucía Cuadro

Papers

Latin american financial development in perspective

Why do countries develop more financially? the role of the central bank and banking supervision *