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Volume 3, Number 1, 1997
Ricardo French-Davis and Stephany Griffith-Jones, eds. 1995. Reviewed by Luis Llambi I acknowledge having mixed feelings reading this book. Nevertheless, I strongly recommend it. My concern, however, is not so much about what the book says but what it is not able, or willing, to say. Most of the book was written in a time of massive capital inflows to selected Latin American countries from 1989 to 1994. The book reflects the general euphoria among government officials, multilateral agencies, and private investors in relation to the resurgence of capital inflows to the so-called emerging markets of Latin America. The 1982 debt crisis, they thought, was over. Structural adjustment programs backed up by the IMF and the World Bank were sending the proper signals to prospective capital investors. The signing of NAFTA and its possible extension to the rest of Latin America promised a new scenario of economic integration between the rich "North" and the underdeveloped "South." The book's main objectives are to explain the sources of these financial flows; to identify their effects on short-term macrostability and long-term economic growth for recipient countries; and to discern the policy implications in both source and recipient countries. Its main concern is how to avoid the risks of real exchange appreciation (undermining export-oriented development strategies) and short-term speculative investments (jeopardizing long-term sustained growth) created in the recipient countries by this capital inflow boom. But the book also reveals a concern for the danger of so-called recurrent systemic crises in this recently globalized financial scenario. [Page 208]
Yet, as the preface and concluding chapters recognize, at the end of 1994 the economic conjuncture started to shift dramatically. Short-term capital inflows began to dry up, capital flight to the North restarted, and there were fears of a backlash in the multilateral agencies-backed structural adjustment programs. What went wrong? The Zapatista uprising of January 1, 1994, the same day NAFTA was signed, sent a powerful message to the world that economic integration between an impoverished South and a rich North could not be successfully accomplished without paying enough attention to the destiny of a growing population of "losers" as a result of the new economic model. Furthermore, on December 20, 1994, the peso devaluation - "the first large crisis of our new world of global financial markets" as IMF general manager Michael Camdessus aptly put it - and the waves of instability it spurred in other Latin American financial markets (the so-called Tequila effect) threatened again to undermine confidence in short-term economic stability and long-term sustained economic growth. The book is the fourth in a series of policy-oriented research studies funded by IDRC (the International Development Research Centre of Canada). The book's structure reflects the above-stated objectives. The first part analyzes the magnitude, composition and outlook for future capital flows from three different sources: the US, Europe, and Japan. I found Roy Culpeper's chapter on the role of North American investors particularly insightful in explaining the connections between the recent capital inflows to Latin America and the historical development of world capital markets. By contrast, the chapters on the links between the European (Griffith-Jones) and Japanese (Chuhan and Jun) capital markets and recent capital upsurges in Latin America are less convincing. [Page 209]
The second part of the book deals with the macroeconomic impacts and policy responses of the economic authorities of three Latin American countries: Chile, Mexico, and Argentina. The authors provide valuable insiders' looks at the variegated and sometimes diverging policies which the economic authorities of these three countries have pursued in moderating the impacts of capital inflows on domestic macroeconomic stability. I found particularly revealing the chapter on Chile (by Ffrench-Davis, Agosin, and Uthoff), usually perceived as a stronghold of financial deregulation and market-led economic policies, in its analysis of the flexible and pragmatic regulatory approach followed by its economic authorities after 1987 when portfolio investments threatened to destabilize its basic macroeconomic equilibria. I especially liked the last chapter about policy recommendations (by Devlin, Ffrench-Davis, and Griffith-Jones). This chapter provides a compelling rationale for the need of regulation of capital markets at various levels. The return of private capital flows to Latin America is to be welcomed, due to their potential positive contribution to the recovery of economic activity in the region. Yet to make the mutual benefits from these flows sustainable, governments in both source and recipient countries should take appropriate measures. Among the measures discussed are better monitoring of the flows and appropriate, as well as coordinated, macroeconomic measures. The book does a good job of unveiling some of the problems facing recipient countries with capital inflows. However, at the book's end one is left with the idea that it does not tell the whole story. After all, has the debt crisis for the heavily indebted countries of Latin America passed? What is the final balance between these short-term capital inflows and capital outflows resulting from new indebtedness? What are the ultimate effects of capital liberalizations on variables such as wages, employment, poverty, and nutrition? Probably the first question with which one should start is, how truly sustainable are the structural adjustment programs on which the whole inflow of short-term capital flows is based? [Page 210] |
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