Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Summary of WP/92/85
“Capital Inflows to Latin America: The 1970s and the 1990s” by Guillermo A, Calvo. Leonardo Leiderman, and Carmen M. Reinhart
For the first time since the onset of the debt crisis in the summer of 1982, capital started to return to Latin America in 1990 and 1991, and policymakers in the region have begun to voice concerns about the less favorable side effects of these capital inflows. Based on the experience of the debt crisis, which followed on the heels of the “capital bonanza” of 1978-81, they feared, specifically, that the inflows could be abruptly reversed.
This paper compares the recent capital inflows experience with that of the late 1970s, examining the differences and similarities between the two episodes in three broad areas: initial domestic macroeconomic conditions in the recipient countries, the behavior of the external factors that influence the international allocation of capital, and the response of key macro-economic variables--such as the real exchange rate, reserves, and stock prices--to the inflow of capital. The paper aims at assessing how vulnerable these economies are to an unexpected swift reversal in capital inflows, and whether there are signs that the vulnerability has changed appreciably over time.
In some areas, Latin American countries are on a firmer footing now than they were in the late 1970s. Governments have reduced their spending and structural deficits, policies are oriented toward privatization and deregulation, and some countries are bringing inflation under control. In addition, during the 1980s, most of these countries learned to cope with adverse terms of trade shocks and have successfully maintained growth of real export earnings by expanding the volume of their exports. Some also succeeded in further diversifying their export base. This scenario contrasts with that of the late 1970s, when the favorable export performance was largely due to favorable terms of trade developments. As the experience of the 1980s shows, the external shock was fully reversed in an abrupt manner.
Although these economies have become more resilient over the past decade in a number of important areas, their vulnerabilities have also increased. As the key debt ratios show, external and internal public sector indebtedness remain sharply higher than those of the late 1970s, and the proportion of variable rate debt is now much greater. Taken together, the facts suggest that these economies are now more vulnerable to an increase in world interest rates than they were during the late 1970s. Stock markets have not deepened to any significant extent since the boom-bust of the late 1970s and early 1980s; rather, some of the evidence suggests the opposite. The banking system also remains vulnerable to a sudden withdrawal of deposits, particularly if its investments are less than fully liquid and if reserve requirements on short-term deposits are low. In sum, although the renewed optimism about the reintegration of Latin America in world capital markets is warranted, some of the economic indicators of these countries suggest that optimism should be tempered with caution.