2004.<sup>12</sup> This reduction stands in contrast to the increase in the number of listings experienced by both G-7 and East Asian countries during this period.<sup>13</sup> Domestic bond markets in both developed and developing countries have experienced considerable growth over the last decades. This growth was especially pronounced in East Asia following the 1997 crisis, as governments and firms increasingly switched to bond financing.<sup>14</sup> In Latin America, most progress has been made in the development of public bond markets, with the stock of domestic government bonds outstanding increasing from 12.3 percent of GDP in 1993 to 20.7 percent in 2004 (Figure 4).<sup>15</sup> Public sector bond markets in the region present a development level close to that of East Asian markets. On the other hand, in spite of their growth over the last decades, private bond markets in Latin America remain underdeveloped. The amount outstanding of domestic private sector bonds in the region stood at 10.7 percent of GDP in 2004, compared to an average of 36.3 percent in East Asia and 47.7 percent in G-7 countries.

# **3. Empirical Analysis of Stock Market Development in Latin America**

The data on stock and bond markets in Latin America presented in the previous section show that, although securities markets in the region have grown substantially since 1990, Latin American capital markets remain underdeveloped when compared to markets in industrial and East Asian countries. This evidence suggests that the high expectations of the early 1990s about capital market development in the region have not been met. An open question is whether this lack of development is a consequence of the failure to build an environment conductive to capital market development, despite the intense reform effort, or if even when Latin American countries have built such an environment, markets have failed to develop as predicted. In this section we focus on answering this question. Doing so requires a formal analysis of the determinants of capital market development and then testing whether, once we control for those determinants, Latin American countries have less developed capital markets. We focus our analysis on stock markets, as data on different measures of stock market development are available for a large cross-section of countries and a relative long time series. In contrast, comprehensive data on domestic bond market development are available for a shorter period and a smaller sample of economies, making it more difficult to capture differences between Latin America and other regions. We first describe the dependent

> 12 The reduction in the number of listed firms has been associated with the increasing migration of Latin American firms to international markets. Merger and acquisition activity, as well as majority shareholders trying to increase their controlling stakes, have also been brought forward as possible explanations for the growing stock market delistings in Latin America (see de la Torre and Schmukler, 2006).

> 13 Different explanations have been proposed for the diverging trend in stock market listings between Latin America and East Asia. For one, unlike the European and U.S. stock markets, which performed well during the 1990s, stock markets in Hong Kong and Tokyo, the natural candidates for migration in Asia, have not done well in recent years (World Bank, 2004).

> 14 Following the financial crisis, it was argued that capital markets in East Asia had not been diversified enough and that well-developed bond markets would have made several Asian economies less vulnerable to the crisis (see, for example, Batten and Kim, 2001 and Herring and Chatusripitak, 2001).

> 15 The sample of East Asian and Latin American countries and the period presented in this figure differ from those used in Figures 2 and 3 due to data availability.

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