International Capital Flows With Latin America's Economic Stability

After a hiatus of a nearly a decade, the flow of international capital to Latin America resumed at the beginning of the 1990s. Having adjusted to scarcity, Latin America soon found itself faced with the relatively unfamiliar challenge of managing an abundance of international capital. The significant increase in the volume of flows to Latin America in the 1990s was accompanied by very high volatility of those flows. The most serious concerns about the capital flows stemmed not from the inflows themselves, but from the possibility that they might, for reasons internal or external to the recipient countries, abruptly slow or even reverse themselves, thus forcing a potentially abrupt and painful macroeconomic and financial adjustment.This paper reviews recent experiences with international capitals in Lathi America, and discusses the policy issues that surround them. The main contents are as follows:Chapter one analyzes the new patterns of capital flows to the region in the 1990s, particularly the new market risks revealed in recent financial turmoil. There is a strong empirical correlation between economic growth in Latin America and flows of capital to the region. Capital inflows can provide a strongly expansionary impulse to the domestic economy, and sharp reductions in the rate of inflow can be strongly contractionary.Starting with the macroeconomic effects of capital inflows on Latin America, Chapter Two discusses the measures taken by Latin American countries against the booms of capital inflows. The conclusion via demonstrative analysis is that in order to strengthen the effects of intervention, governments could resort to proper policy combination and pay attention to the balance of current account and the stabilization of financial system.Chapter three focuses on the effects of capital inflows on internal financial system, including banking and capital market. The contrast of Chile and Mexico illustrates that different capital control policies and different financial supervision systems may lead to different effects of capital inflows on financial stability. There are great differences on financial bases, capital market opening strategy, foreign capital policy and validity of macroeconomic management between these two countries, leading to their marked difference in stock market stability.Chapter four analyzes the effects of foreign direct investment on Latin American industries. Although FDI supported investment, increased exports and to some extent prompted industry upgrading, Latin America hasn't got rid of dependence on foreign capital. The explanation lies in the foreign capital management policies, which aremainly stimulating and lacking in restriction. Moreover, governments didn't bring the FDI management policy into macroeconomic development strategy. Latin America should integrate FDI management policy with industry development strategy and combine opening with protection.Chapter five discusses the reasons why financial crises occur to Latin America so frequently in 1990s. Economic fundamentals and speculative capital are both causes of financial crises, but internal defects are decisive factors. Enormous fiscal deficits and current account deficits, heavy foreign debts and inflexible exchange rate regime are common characters of countries attacked by financial crises. In the face of foreign capital, Latin America is still very passive. The fundamental causes of financial crises in 1990s are continuation of 1980s.Chapter six summarizes the factors that decide the results of foreign capital utilization and demonstrates that policies to encourage far greater stability in capital flows are of particularly importance. Some suggestions on dealing with international capital flows are put forward. Governments should follow correct order on the way of financial liberalization, improve financial institutions, ensure sound macroeconomic gross and structure, draw on more domestic savings, keep exchange rate flexible, effectively regulate short-time capital and set up financial risk p...