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

For the first time since the onset of the debt crisis in the summer of 1982, capital began to return to Latin America during 1990 and 1991; a phenomenon analyzed by Calvo, Leiderman, and Reinhart (1993). In general, Latin America’s re-entry into the international capital markets, as noted by El-Erian (1992), was perceived as a positive development. However, policy-makers in the region have also voiced some concern about the less favourable side-effects of these capital inflows. First, it was feared that the real exchange rate appreciation that often accompanies these inflows would adversely affect the international competitiveness of the export sector. Second, there was concern that the inflows could be reversed abruptly, possibly doing considerable damage to the domestic financial system in the process. The fear of reversal was based on the experience of the debt crisis, which followed on the heels of the ‘capital bonanza’ of 1978–81.