Local capital markets cannot be built in Latin America unless governments are willing to pay very high nominal rates. As long as a national currency is floating, investors will have to factor in the possibility that the value may depreciate. Governments should focus on improving the investment climate rather than worrying about where companies will get capital. The issue is that no one wants to invest in the first place. Currency stability in relation to the dollar is important for the development of local capital markets.
Every currency crisis sparks a capital outflow.
The money comes back slowly and only when asset prices are down. Pension funds can help to improve transparency in Latin American markets as a mechanism to channel funds into public markets. They can make an enormous difference in how the bond market operates. The experiences of Argentina and Panama would seem to indicate that dollarization is not a panacea. Stabilizing currencies will not solve all of Latin America's problems, but it is a critical starting point for raising investment levels and building better institutions.