Dirty laundry.

The Futuer of Domestic Capital Markets in Developing Countries By Robert E. Litan, Michael Pomerleand and V. Sundararajan The Brookings Institution US$39.95

Following an international conference on development and financial markets at the end of 2003, several financial experts got together and compiled a collection of essays, published now as The Future of Domestic Capital Markets in Developing Countries. The book starts from the startling premise that limitations on access to capital area huge threat to growth and stability for nations.

The authors begin with on assertion that has by now become axiomatic: Economic development in a country is not possible without healthy growth in the infernal financial sector. Previously, they explain, countries would usually--and sometimes exclusively--channel savings and investments through the domestic banking system. With time, however, demands flora individuals and institutions in search of higher yields and companies in search of capital established a foundation for development of national stock markets.

Markets cannot function efficiently if they do not follow certain basic rules. In addition to the mechanisms of foreign currency exchange, settlement and clearing systems, and the money market, it is imperative to have a solid and transparent legal system that guarantees the fulfillment of contracts and protects intellectual property.

There should also be a profusion of accurate and useful information so that investors are aware of the current financial situation and perspectives of the companies in which they plan to invest their money. That is to soy, there should exist an established trust that encourages investors to buy stocks and bonds. Corporate management should be transparent. Without these elements, capital markets are erratic.

Several financial crises in different parts of the planet, such as in Russia, Latin America and Asia--as well as the dot-com, energy and telecom scandals in the United States--have highlighted this need. As a result of these debacles, numerous experts in both developed and developing countries have incessantly spoken and written about the importance of transparency and integrity in corporate activity. These sermons can be summarized by the very direct, and frank, affirmation that corruption stifles development. Of in other, less kind, words: Poor countries are endemically corrupt.

Just following these crises in developing countries and the corporate scandals that have rocked the United States and, to a lesser extent, Europe, it becomes clear that the First World, which had been reprimanding and giving lessons to Third World countries, has its own dirty laundry.

If there is one positive thing that emerged from these scandals and that proved the experts wrong, it's that, in fact, financial systems are based on trust. The fan of the stock market following the case of U.S. energy trading company Enron case proves the point. Dozens of state budgets and pension funds in the United States--not to mention ordinary individual investors--lost billions by buying into Enron.

Polar opposites. The book tackles the dilemma of corruption and confidence, the two polar opposites from which financial systems fluctuate. It provides a thorough review of capital market tendencies in developing countries; offers strategies for risk management; profiles corporate conduct in emerging markets; and points out vulnerable spots for future financial stability.

The one question that is left hanging is found in the title of the book itself. What is the future of domestic capital markets in developing countries? The answer fluctuates between two sides. On one side, the laissez faire attitude preferred by many U.S. financial leaders, among them Alan Greenspan, president of the U.S. Federal Reserve. On the other, having stricter regulations, as proposed by the former vice president of the World Bank Joseph Stiglitz, author of the best seller Globalization and Its Discontents.

Greenspan's choice has generated riches beyond mankind's wildest dreams; Stiglitz's approach would prevent the emergence of stock bubbles that, since the tulip mania in Holland nearly four centuries ago up to the most recent Internet fever, have turned illusions of splendor into a nightmare. Somewhere in between, indeed, lies the future of capital markets.

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Excerpt from The Future of Domestic Capital Markets in Developing Countries:

"It is widely recognized that the pressures of competition, globalization, and technological change are threatening the development, and in some instances the very survival, of many developing capital markets."