Capital inflows to Latin America with reference to the Asian experience

Abstract

Introduction The revival of substantial international capital inflows to Latin America is perhaps the most visible change in the economic situation of the region during the past two years. Whereas capital inflows to Latin America averaged about $8 billion a year in the second half of the 1980s, they surged to $24 billion in 1990 and to $40 billion by 1991. Of the latter amount, 45 percent went to Mexico, and most of the remainder went to Argentina, Brazil, Chile, Colombia, and Venezuela. Interestingly, capital is returning to most Latin American countries despite the wide differences in macroeconomic policies and economic performance between them. In most countries, the increased capital inflows have been accompanied by an appreciation in the real exchange rate, booming stock and real estate markets, faster economic growth, an accumulation of international reserves, and a strong recovery of secondary market prices for foreign loans. Without doubt, an important part of this phenomenon is explained by the fundamental economic and political reforms that have recently taken place in a number of these countries, including the restructuring of their external debts. Indeed, it would have been difficult to attract foreign capital in the magnitudes mentioned here without these reforms. Nevertheless, while domestic reform is a necessary ingredient for capital inflows, it only partially explains Latin America's forceful reentry in international capital markets.

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