Financial liberalization has also its regional dimension and consequences. The free movement of capital paves the way for more intensive intra- and interregional financial flows. These flows are as important for the process of integration as the free movement of goods and services. Establishing financial integration entails that national, intra-regional and, eventually, interregional capital would benefit from a similar treatment. Thus, the coordination of some aspects of economic policies, particularly in such areas as the monetary and exchange rate policies and financial and credit regulations is required.
The harmonization of monetary and financial policies is thus an important issue in the broader process of integration. Evidently, at national level, the harmonization should be in line with the adjustment programmes that countries undertake. At regional level, it should entail creating a forum where governments would agree on its main aspects. The relationship between fiscal policies and this harmonization is complex. While in principle fiscal policies can remain independent, in reality, tax harmonization is necessary in financial integration. Furthermore, the ability of governments to finance budgets by borrowing from the Central Bank has to be either suspended in monetary unions or subject to strict union-wide rules.
Fostering regional capital markets entails both a process of nurturing of domestic markets and regionally harmonized actions aiming at attaining capital market integration. Both processes involve actions at private and public level. Most of these actions fall under the competence of regulators/supervisors or market players. In addition, the business attitudes of enterprises/financial institutions that engage in debt and equity transactions may further influence the development of capital markets.
The proposed regional capital markets are arrangements based on cooperation among the existing and operational domestic securities markets. Therefore, it is advisable to establish domestic markets under the most appropriate form (stock exchange, parallel market or OTC market) where it is economically rational and feasible. In countries where securities markets already exist, they need to be strengthened in order to be able to cooperate regionally in the most efficient way then, later on, compete successfully in global markets.
Experience of capital market integration is still at a nascent stage. Its implementation requires institutional cooperation and the harmonization of regulations regarding capital market development.
Some countries may follow the Mexican example regarding preparation for internationalization of stock markets. In Mexico, a second-tier domestic market was created for small- and medium-sized domestic companies while the big companies of the first tier are increasingly owned by foreign investors. A similar strategy may become necessary also in the BEIA project where regional trading can start in relatively big companies, leaving the small enterprises to local trading.
The process of integration of capital markets entails the opening of markets to foreign investments and adapting them to the requirements of the integration process and of the competitive climate resulting from regional capital markets. Domestic institutions need to introduce some changes such as improved technology, communication links and services. In addition, regional institutions should embrace a broad concept of integration including the administrative, institutional, legal, fiscal and regulatory aspects of capital markets.
Two alternatives may be envisaged to formulate proposals for fostering regional capital markets. One consists of analysing the lessons learned from the selected cases of emerging capital markets in Asian, African and Latin American countries, and the experience of domestic integration of capital markets in developing countries that have several domestic stock exchanges (e.g. India, Brazil and Nigeria). An other approach is to try to extract useful elements from the already existing schemes (the Caribbean Stock Exchange, the BEIA Project, BOLCEN).
As deduced from both approaches, certain steps may foster successful regional capital market cooperation. Harmonization should be carried out in a way which respects the autonomy of domestic markets and their regulators. Under this framework, harmonization should be viewed as a necessary minimum which eliminates incompatibilities among markets.
Commercial lending to developing countries has in the past been done primarily by banks. This tended to increase risks by concentrating assets in the hands of a single group of creditors. Expanding secondary financial markets for some kinds of liabilities of developing countries widens the range of lenders and thus increases the stability of lending. Such secondary markets also have the potential of providing an extra indicator of a country's creditworthiness, making it easier for lenders to diversify their risks.