Despite the intense reform effort, access to finance does not seem to have increased significantly in most developing countries since the early 1990s.<sup>42</sup> While many countries experienced a strong growth in deposits, this growth did not translate into an increase of similar magnitude in credit to the private sector, as most of the additional loanable funds were absorbed by higher holdings of public sector debt (Hanson, 2003).<sup>43</sup> Similarly, the performance of domestic securities markets in many emerging economies has been disappointing (World Bank, 2004a). Although some countries experienced growth of their domestic securities markets, this growth in most cases was not as significant as that witnessed by industrialized nations. Other countries experienced an actual deterioration of their securities markets.<sup>44</sup> The general perception of lack of results from the reform process contrasts with empirical evidence suggesting that reforms did in fact have a positive impact on financial development. For instance, Djankov, McLiesh, and Shleifer (2006) find that improvements in creditor rights and the introduction of credit bureaus are associated with increases in credit to the private sector. Similarly, de la Torre, Gozzi, and Schmukler (2005) find that capital market-related reforms tend to be followed by significant increases in stock market capitalization, trading, and capital raising. The contrast between this evidence and the general perception may be explained by excessively high expectations at the beginning of the reform process.<sup>45</sup> The gap between expectations and outcomes may also be ascribed to a combination of insufficient reform implementation with impatience.<sup>46</sup> In effect, despite what many claim, key reforms were in some cases not even initiated, while other reforms were often implemented in an incomplete or inconsistent fashion. In many cases, only laws were approved, but they were not duly implemented, nor were they adequately enforced. Moreover, policymakers have been too impatient, often expecting results to materialize sooner than warranted. While the 42 From a more general perspective, Easterly (2001) points out that despite significant policy reforms, developing countries have on average stagnated over the last two decades. He argues that worldwide factors may have contributed to this stagnation and says that this evidence deals a significant blow to the optimism surrounding the “Washington Consensus.” 43 The increase in public sector debt holdings was driven by several factors, including central banks’ growing use of bonds as monetary policy instruments, post-crisis bank restructurings in several countries, and increasing fiscal deficits. In countries where banking crises where not massive and government deficits were limited, credit to the private sector grew reasonably well (Hanson, 2003).

44 Stock markets in many developing countries have seen listings and liquidity decrease, as a growing number of firms have cross-listed and raised capital in international financial centers, such as New York and London. Karolyi (2004) and Moel (2001) offer evidence on how the use of American Depositary Receipts (ADRs) can affect stock markets in emerging economies. Levine and Schmukler (2006a,b) analyze the impact of migration to international markets on domestic market trading and liquidity.

45 Loayza, Fajnzylber, and Calderon (2005) analyze whether the growth outcome of the reforms of the 1990s in Latin America can be interpreted as a disappointment. They estimate the expected impact of the reforms on economic growth using cross-country regressions and then compare the predicted growth rate of Latin American countries on the basis of the reforms with their observed growth during the 1990s. They find that most Latin American countries experienced growth rates consistent with the extent of the reforms and thus conclude that reforms had the predicted impact. However, the estimated pay-offs of the reforms in many cases are quite small, suggesting that initial expectations may have been overly optimistic. 46 Renditions of this view, in the more general context of assessing the impact of reforms on economic development, can be found in Fernandez Arias and Montiel (2001), Krueger (2004), Singh et al. (2005), and World Bank (1997).

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