Volume 43, Number 168,
January-March 2012
Stock Markets and their Relationship
with the Real Economy in Latin America
Samuel Brugger and Edgar Ortiz

Although stock market yields in the major Latin American economies remain balanced in relation to gdp, this relationship is, to a large extent, weak. The gdp and stock market activity time series, in their first differences, do not strictly meet the criteria for normality for Argentina, Brazil, Chile and Mexico. However, the different econometric analyses show that stock market yields for these countries and growth of aggregate production remain balanced in the long run. During the period under analysis, from 1993 to 2005, the monthly deviation from this balance was relatively small in all cases, negative for Argentina, -2.1%, 4.7% in the case of Brazil, less than 1% in the case of Chile and around 3% in the case of Mexico. Granger Causality Analysis confirms the two-way directional relationship between the Stock Exchange and gdp in all cases. It is not surprising that such a two-way relationship exists as it is common in many economies studied. Self-regressive vector analysis confirms the cointegration and error correction findings short term, in that the functions of impulse response indicate a slightly positive impetus on the stock exchange for gdp for all cases except Mexico. In the case of Mexico, the impetus is slightly negative. In all cases the response zig zags and stabilizes at about fifteen months. Finally, the breakdown of the variance shows that the standard stock market errors are greater than the standard gdp error and that deviations from equilibrium can be seen from the first month until the last in the period under study.

It is worrying that the causality between stock market activity and the real economy in Latin America (at least in the countries under study) is only unidirectional, because there is total autonomy of stock market activity in relation to the real economy. Although initially there is a positive impact owing to high levels of foreign investment, this implies that when taking into account stock market trends, investment decisions, savings, consumption and production on the part of family groups, the government and manufacturing firms, there is an element of misguidance, given that stock market activity is aligned to the real economy. The fact that stock market activity follows its own cycles, without taking unemployment and the needs of the real economy into account shows that stock market financing has a negligible effect on company growth. Stock market activity is restricted to the secondary market and prone to speculation. In summary, the Washington Consensus and economic-financial globalization have led to the liberalization of capital accounts including high growth of financial markets, in particular stock markets but without accompanying measures that link this growth to the real economy. This has an apparently positive impact on the real economy (through international reserves). Although this has a small positive effect on gdp, this is soon diluted by the lack of stock market activity in the business economy. Three important lessons that merit future research remain and new stock market development policies should be developed based on these: Latin American emerging market ties with stock markets in developing countries, their dependency on them and the effects of contagion; regulatory policy making that avoids speculation and "footloose capital" in emerging capital markets; and the link between stock market activity and real company investment.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Feb 23th, 2018.
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The online journal Problemas del Desarrollo. Revista Latinoamericana de Economía corresponds to the printed edition of the same title with ISSN 0301-7036