Creditor Rights, Enforcement and the Access to Credit

A large and growing literature has demonstrated in recent years how deep and efficient financial markets help to foster economic growth, by promoting investment and productivity growth (e.g., Rajan and Zingales, 1998). Through their role in selecting and monitoring projects, diversifying risks, and allowing investment and production to be carried out in the most productive scale and time frame, financial markets reduce the cost of asymmetries of information, improve resource allocation, and encourage the use of best practice technology. It is rather positive, thus, that among the structural reforms implemented in Latin America in the nineties, financial reform, together with trade opening, was one of the areas in which most progress was achieved (Lora, 2001). Notwithstanding this progress, however, most countries in the region continue to show low levels of financial intermediation, including levels of credit to the private sector that, as a proportion of GDP, remain well below that of upper middle income and OECD countries (Beck 2000). It is not surprising, therefore, that Latin American firms find the difficulty to access financial markets to be the major obstacle to the expansion of their business activities, ahead of factors such as macro instability, taxes, and street crime (Galindo, 2001).