Capital Inflows to Latin America: The 1970s and 1990s

For the first time since the onset of the debt crisis in the slimmer or 1982, capital began to return to Latin America during 1990 and 1991.In general, Latin America's re-entry into the international capital markets was perceived as a positive development. However, policy-makers in the region have also voiced concern about the less favourable side-effects of these capital inflows. First, it was feared that the real exchange rate appreciation that of tell accompanies these inflows would adversely affect the international competitiveness of the export sector. Second, there was concern thatthe inflows could be reversed abruptly, possibly doing considerable damage to the domestic financial system in the process. The fear (If reversal was based on the experience of the debt crisis, which followed on the heels of the 'capital bonanza' of 1978-81. This chapter compares the recent capital inflows experience with that of the late 1970s. The analysis examines the differences and similarities between the two episodes over three broad areas:1. Domestic macroeconomic conditions in the recipient countries at the outset of both episodes. 2. The behaviour of the external factors that influence the international allocation of capital.3. The response of key macroeconomic variables, such as the real exchange rate, reserves, and stock prices to the inflow of capital.