Policy priorities to promote financial development in the context of the middle-income trap: the cases of Argentina, Colombia, Mexico and Peru

Abstract

This paper analyses the development of financial markets in Argentina, Colombia, Mexico and Peru in the context of the middle-income trap. This is particularly relevant for these economies, since well-developed and properly-functioning financial markets are fundamental to achieve high income status on a sustainable basis. This paper identifies key policy priorities relating to four financial pillars: access, depth, efficiency and institutional factors. The analysis is based on a benchmark analysis from 1985 to 2015 and taking into consideration experiences in the financial status of 14 economies at the time they became "high income" and also focusing on advanced economies that exhibited the most similar characteristics to each of the four countries studied (defined as a “synthetic country”). Results show that despite some improvements in recent years, all countries display gaps in different areas to promote further access, depth and efficiency in both the banking system and capital markets. Finally, this paper identifies policy priorities across these four countries, highlighting the heterogeneity with respect to the financial dimensions of these countries.