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Growth and External Financing in Latin America

Author

Listed:
  • 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.

Suggested Citation

  • Reinhart, Carmen & Calvo, Guillermo & Fernandez Arias, Eduardo & Talvi, Ernesto, 2001. "Growth and External Financing in Latin America," MPRA Paper 9074, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:9074
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    References listed on IDEAS

    as
    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. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    3. Guillermo A. Calvo & Eduardo Fernández-Arias & Ernesto Talvi & Carmen M. Reinhart, 2001. "The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets," IDB Publications (Working Papers) 1425, Inter-American Development Bank.
    4. 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.
    5. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    6. Eduardo Fern·ndez-Arias & Peter Montiel, 2001. "Reform and Growth in Latin America: All Pain, No Gain?," IMF Staff Papers, Palgrave Macmillan, vol. 48(3), pages 1-5.
    7. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," IDB Publications (Working Papers) 1319, Inter-American Development Bank.
    8. repec:idb:wpaper:418 is not listed on IDEAS
    9. Carmen Reinhart & Guillermo A. Calvo & Eduardo Fernández-Arias & Ernesto Talvi, 2001. "The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets," Research Department Publications 4279, Inter-American Development Bank, Research Department.
    10. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    11. Fernandez-Arias, Eduardo, 1996. "The new wave of private capital inflows: Push or pull?," Journal of Development Economics, Elsevier, vol. 48(2), pages 389-418, March.
    12. repec:idb:wpaper:429 is not listed on IDEAS
    13. 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.
    14. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    15. Yingqi A. Wei & V. N. Balasubramanyam (ed.), 2004. "Foreign Direct Investment," Books, Edward Elgar Publishing, number 3169, April.
    16. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," Research Department Publications 4203, Inter-American Development Bank, Research Department.
    17. repec:idb:brikps:61018 is not listed on IDEAS
    18. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, January.
    19. Geert Bekaert & Campbell R. Harvey (ed.), 2004. "Emerging Markets," Books, Edward Elgar Publishing, number 2836, April.
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    Citations

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    Cited by:

    1. Alicia Garcia Herrero & Alvaro Ortiz, 2004. "The Role Of Global Risk Aversion In Explaining Latin American Sovereign Spreads," International Finance 0408001, EconWPA.
    2. Remberto Rhenals Monterroso & Alejandro Torres García, 2007. "Volatilidad de los flujos de capital hacia los países en desarrollo: evidencia para América Latina, 1970-2002," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 67, pages 9-42, Julio-Dic.
    3. 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.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F30 - International Economics - - International Finance - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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