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Growth and External Financing in Latin America

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  • Reinhart, Carmen
  • Calvo, Guillermo
  • Fernandez Arias, Eduardo
  • Talvi, Ernesto

Abstract

This paper discusses the economic performance of Latin America in the last decade, paying special attention to growth and the financial sector. In particular, it shows that external factors, such as like U.S. interest rates and the business cycle, play a key role in capital inflows, investment, and growth.2 As a result, economic growth in the region tends to be fragile and exhibits a high degree of co-movement, i.e., high cross-country output correlation. This last feature exacerbates fragility, because there is little room for mutual insurance within Latin America in case a country suffers a bad shock, and finance during downturns has to come primarily from outside the region. The “Lost Decade” of the 1980s and the recovery of the early 1990s are clear illustrations of these tendencies. During the 1980s the slow resolution of the debt crisis kept Latin American countries outside the international private capital market. In contrast, the 1990s brought a dramatic increase in capital inflows that exceeded expectations. In addition, whenever crises struck, their negative effect on growth was dramatic. This paper will provide some clues regarding the big swings in capital inflows. It will argue that although these swings are oftentimes triggered by external factors, domestic financial vulnerabilities could seriously contribute to magnifying them. Thus, crisis depth is positively correlated with phenomena like a weak banking sector and large debt amortizations. However, it will also be argued that the central capital market has represented an additional source of disturbance for all Emerging Market Economies (EMs) and not just Latin America.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9074.

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Date of creation: Mar 2001
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Handle: RePEc:pra:mprapa:9074

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References

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  1. Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany.
  2. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  3. Eduardo Fernández-Arias & Peter Montiel, 2001. "Reform and Growth in Latin America: All Pain, No Gain?," Center for Development Economics 166, Department of Economics, Williams College.
  4. repec:fth:inadeb:429 is not listed on IDEAS
  5. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
  6. Reinhart, Carmen & Calvo, Guillermo & Fernandez Arias, Eduardo & Talvi, Ernesto, 2001. "The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets," MPRA Paper 9075, University Library of Munich, Germany.
  7. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306.
  8. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  9. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  10. repec:fth:inadeb:418 is not listed on IDEAS
  11. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sebastian Sosa, 2008. "External Shocks and Business Cycle Fluctuations in Mexico: How Important are U.S. Factors?," IMF Working Papers 08/100, International Monetary Fund.
  2. Alicia Garcia Herrero & Alvaro Ortiz, 2005. "The Role Of Global Risk Aversion In Explaining Latin American Sovereign Spreads," International Finance 0503005, EconWPA.

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