Financial Dependency and Growth cycles in Latin American Countries (Carlos Aguiar Medeiros)

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Journal o Post Keynesian Economics / F 2008, Vo. 31, No. 1 79

© 2008 M.E. Shpe, Inc.

0160–3477 / 2008 $9.50 + 0.00.

DOI 10.2753/PKE0160-3477310104

CarlOS aguIar DE MEDEIrOS

Fiacial dpdcy ad growth cycl

i Lati Amrica coutri

Abstract: Tis paper argues tat tere was a remarkable similarity in te exter-

nal cycles in Latin America’s economic istory. Te desarrollo acia uera, te

Economic Commission or Latin America and te Caribbean earlier designation or te World Bank’s “outward-oriented” model, tat prevailed in te last part

o te nineteent century until 1930, was rom te beginning a nancial-export

model were nancial integration to te world economy played a central role.

An ortodox economic policy based on scal contraction, a ig rate o interest,

and incentives to external debt in order to sustain convertibility and ree capital

fows was a permanent strategy o tis model. Ater a long period distant rom

te world nancial markets, many Latin American countries received trougout

te 1970s and especially during te 1990s, uge volumes o nancial capital

tat brougt about once again a similar pattern and strategy o internationalintegration.

Key words: economic growt, excange rate policy, external debt, trade

specialization.

The stenth o the ibeizin eoms nd othodox economic stteynched in ltin ameicn conties in the 1990s ve momentm to

mcoeconomic dynmics nd n otwd economic mode simi tothe od ptten tht boht these conties into the ob economy inthe nineteenth centy. This occed not soey becse einviotedpimy expot mode ws med in mny conties s dominnteconomic edeship, bt so becse the evotion o the pyments

Cos ai de Medeios is poesso t Institto de Economi/univesiddeFede do rio de Jneio. This ppe is bsed on esech done t the Fcty o

Economics, Cmbide univesity, with nnci sppot o CaPES (Coodençãode apeeiçomento de Pesso de Níve Speio). The tho thnks CaPES o thennci sppot nd n nonymos eeee o insiht emks.



80 JOURNAL OF POST KEYNESIAN ECONOMICS

bnce ws shped by nnci fows. The od pe-Keynesin doctineo sond nnce nd ee cpit fows ws estoed s bsiness ndovenment qsi-consenss.

The spectc cisis o aentin in 2001 oowed by det inexten debt nd the ntionistic poicy dopted in Veneze in the pstew yes wee bcksh o the dic nnci openin tht hppenedin the 1990s. These exceptions cme in contst to the peviin poiciesin Bzi, Chie, Coombi, Mexico, nd sm conties in the eionbsed on ston eince in hih commodities pices nd in poiciesimed t ttctin oein nds.

Fiacial dpdcy ad coomic growth

The histoicy dieent pttens o nnci nd exchne systemsbetween conties nd eions boht the exchne te eime tothe coe o deveopment economics. Fo instnce, Dooey et . (2003)eeed to asin conties s “conties o tde ccont” in contst toltin ameicn conties descibed s “conties o cpit ccont.”The ome exchne eime is typic, s ed by Mhon (1996) nd

so by the Trade and Development Report, 2003 (TDr), o deveop-ment sttey tht vos tde nd indsty, whees the tte vosessentiy nnci cpit. These ppes discss the cci dieencebetween these two stteies nd thei pedominnce in asi nd in ltinameicn conties, espectivey. Howeve, the instittion nd stctconditions tht commnd ech doption e not evident.

amon stct ctos, the composition o expots pys centoe. In ltin ameicn conties, commodities hve histoicy hd sinicnt weiht in tot expots. The dieent income esticitybetween expots nd impots nd the et votiity o commoditiespices in the intention mket hve eneted cycic vitions inthe impot cpcity nd hih instbiity in exchne te nd demndo cpit fows.1

1 athko (2003), in n empiic ppe covein the pevios 20 yes, ondhihe ppecition in the e exchne te (rEr) ssocited with cpit infowsin ltin ameic thn in asin conties. He sests tht the composition o cpitinfows whee oein diect investment (FDI) nd expots e e pt o cpitfows nd the evotion o nomin wes expin the etive stbiity o rEr inasin conties. The dominnt oe o cpit fows diected to expoit the domesticmket nd the evotion o nomin wes in ltin ameicn conties ws ssoci-ted with mjo pice inceses nd hihe ppecition in rEr.



FINANCIAL DEPENDENCY AND GROWTh CYCLES 81

Chonic decits in cent ccont histoicy pesent in ltin amei-cn conties wee ssocited with tde speciiztion tht ve bith to “oein exchne p”2 s cent ete o deveopin economies.

Bt in ddition to the speciiztion o commodities, thee is nothecto tht hs n tonomos dimension nd, de to its pesistence,pys stct oe: the histoicy hih eve o exten indebtednesso ltin ameicn conties. In ct, the hih eves o indebtedness—mesed, o exmpe, by the exten debt (nd ssets) stock ponexpots—possess n tonomos expntion the thn meey bein conseqence o the kind o tde speciiztion.3

The pobem o the “oein exchne p” mode is to ssme tht

indebtedness is wys economicy needed, bt s the economic histoyo ltin ameicn conties bndnty shows, exten indebtedness cnbe excessive nd not expined by cent ccont pobems.

To expoit this ment, conside deveopin economy tht hs decit in its tde cent ccont. So it is possibe to eqte [I] FCA =CAD, whee FCA stnds o net cpit ccont nd CAD stnds o cent ccont decit. as s CaD ows, thee is necessity o hihecpit infows tht espond o diseqiibim between the potenti

te o owth nd the vibiity o cency. Becse thee is imitto nncin CaD, the economy hs to djst its te o owth o itsexpot nd impot esticities thoh depecition in e exchne te(heete rEr) nd ti poicies.4

This mode ssmes tht cpit fows e e necessity. Doppin [I],it becomes [II] FCA = CAD + R + NRCO, whee R stnds o vitions

2 The “oein exchne p” emees s n extension o the Hod–Dom modeo open economies o the thid wod. In ddition to the svins p— common ve-sion ssocited with this mode—this vesion consides oein exchne p ththods wheneve ow impot cpcity hindes the incese o investment te nti theeve owed by svins vibiity is eched. This second kind o p is impossibein the neocssic ppoch, which sys tht pope mcoeconomic poicies wysenbe inten esoces to become oein exchne, eimintin the p. The cssi-c omtion o the two ps mode ws deveoped by Cheney nd Bno (1962).Fo bod discssion, see Seno nd Soz (2000).

3 The Wod Bnk nd minstem economics conside ltin ameicn conties

cosed to intention tde nd inwd oiented, in opposition to asin conties,which e descibed s moe open nd otside oiented. One o the ies o sch nment is tht it does not econize tht ltin ameicn conties hve wys beenmoe open to oein cpit thn asin conties. This dieence on the oe o exte-n nnce hs deep impictions tht e the object o efection o this ppe.

4 See Cvo (1998) o nysis o this bindin constint.




in eseves nd NRCO stnds o the noneisteed cpit otfow thtcn be consideed poxy o the stndd cssiction o the bnce-o-pyment eos nd omissions. as on s the owth o cpit i-biity ove cpit sset (net o eseves) exceeds the cent ccontdecit, thee is n excess o nnci fows ove e necessity. and son s they enete e otfows o noneisteed cpit, these fowse nncin demnd o esidents to pt thei sset bod. The pointhee is the econition tht thee is nnci demnd o cency—“iqidity peeence o hodin cency”—tht does not ise by enecessity bt by “nnci iity.” Besides, i this demnd is sppiedby e fow o nds, the ppecition o exchne te cn enete n

expnsion o cent ccont decit tht bsobs the cency sps.In “Cpit Expots nd gowth” (1957), Knpp exmined the pob-

em o excessive boowin. The cci point obseved by Knpp istht the esons to contct oein on e not necessiy entnedby necessity to nnce sppy o sevices nd oods eqied oeconomic owth. acty, it deives om dieenti te o inteests,ndedeveopment in nnci system in boowin conties, nd theiqidity peeences (o ston cencies) o the weth ownes o

these conties.In deveopin conties, the esons o n excessive ccmtion

o cims o oein cency ey on the combintion o two dieentmechnisms. The st des with on-pshin pocess; whoe set o pesses om bnks nd the ovenments o ich conties tht exetin detemined moments (when thee is ow te o inteest nd excesso iqidity in the dominnt cency) ston psh in bnk on onnce bonds to peiphe conties (Dity nd Hon, 1988; Devin,

1989). The second mechnism is the excess o boowin tht depends oninten decisions. govenments nd ms decide to contct excessiveons o isse ssets denominted on oein cency. This spect hsbeen eeed to s “oiin sin” (Hsmnn nd Pnizz, 2003) nd isssocited with mny histoic nd poitic spects.5

an oveendin o oein ons (o oein-denominted ibiities)6

becomes n excess o boowin when it compomises the exten so-

5 The ide behind the “oiin sin” is tht the e tio o oein money–denominted debt on ntion debt is imposed by intention cpit mkets. How-eve, this imposition is ony pt o the stoy. The othe is the sc nd inten ceditse-estiction ssmed by peiphe conties in ode to the me es o nintention monety system in nnciy open nd inteted economy.

6 Fo the pesent discssion, thee is no dieence i the oein ibiity is oeinbnk on o bond pced in intention mket.




vency nd iqidity incesin the iity o the peiphe nncisystem. Dom (1950) ws iht when he consideed the sovency tios the tio between the te o expots nd the te o inteest pevi-in o the soveein debt.7 By its tn, the vome o eseves t shotnotice vis-à-vis the vome o shot-tem debt povides meninindex o iity.8

The intection o these two movements—on psh nd oveboow-in—cn bin bot nnci iity tjectoy. This tjectoy wsexmined by Minsky (1982) in cosed economy—n evotion om hede to Ponzi nnce—nd ws expoed by Foey (2003) nd lopezet . (2006) o n open economy. accodin to this itete, the exis-

tence o net nnci infow ows te o investment nd te o economic owth hihe thn the pot te. This enetes owinCaD nd spective eime. It occs thoh the te o inteest setby the cent bnk, which tends to incese s s the income owthexceeds the te tht eqiibtes the bnce o pyment. The incesinmcoeconomic nnci iity (mesed by the sovency tio ndiqidity tio) oses owin sspicion tht the peviin exchneeime (xed, pe, o moe fexibe bt stbe exchne te) cod not

be sstined.In n eie intepettion on the aentinen cyce, Pebisch (1939) de-

veoped comptibe nysis considein tht, iven the cency bodsystem tht chcteized the aentinen exchne system din the1920s (nd din the 1990s s we), the inceses on expot pices ndon oein investment—both ovened by oces otside the conty—setin pce n incese o inten cedit nd o impots tht djsted to thenew oe o cency. This expnsion eneted tde decit. The excess

o impot nd the decine o oein investment depessed the intencedit nd economic owth nti new exten cyce ben.athoh these expntions depict coecty tjectoy o inces-

in nnci iity, it keeps the ide tht nnci fows is ovenedminy by the demnd side nd tht oveboowin (considein theconty sovency) hs nnced hihe te o economic owth. Bt,s mentioned bove, in constined economy, the vibiity o c-ency ows hihe owth, nd thee is no necessy ink between noveendin nd hihe te o investment nd income owth. an

7 athoh some modes sch s Moeno-Bid (1998–99) depicted the imits o owth with exten debt in conveent intepettion, most o them se the tiobetween the decit in cent ccont nd podct. Tht cn be misedin.

8 See Medeios nd Seno (2006).




tonomos pocess om the ceditos’ bnks nd om demndes o cency de to weth motives cn enete spective tjectoywithot ny coespondence in the e wod.

The intections o nnci fows nd exchne te in peipheconties depend on some instittion nd stct dimensions. In cency bod eime with nonsteiized intevention, sch s consideedby Pebisch, se in FCa bins bot (thoh cedit expnsion) ston expnsion on CaD nd, dependin on the eects on the we te,it cses n incese in nontdbe oods, enetin n ppecitionin rEr. In othe exchne eimes, the monety poicy cn steiizept o this monety expnsion thoh hihe te o inteest nd

expnsion o eseves. It is impotnt to conside tht in both eimes,the ppecition o rEr hs positive eect on economic owththoh the incese o e wes nd the edction o the domesticcost o exten debt, stimtin ovenment nd ms. Ths, excepto expotes, the economic dominnt pesses in n indebted contye o n oveved cency. This is so vid o oein investosin nontdbe oods. Bt the se in CaD is ssocited with this teo exchne demnds nd hihe te o inteest nd spective nd

Ponzi nnce. Once in, this cn cse sspicion tht the cency isnot sstinbe, enetin hihe CaD thoh n incese in potsnd inteest tnseences. This ests in hihe demnd o FCa tonnce se in NrCO.

The exchne copse is the ikey otcome o this tjectoy nesssccess exchne depecition o intense decine in inten bsop-tion eqiibtes CaD. Nevetheess, this is impobbe de to disptivecpit fiht (NrCO).

Ths, s Ptnik (2002) med, the intinsic iity o thid-wodcencies s se mens o hodin weth is wys conmed by then diection o cpit ccont movements. accodin to Ptnik, in nnciy deeted wod, thee is chonic tendency o cpit tomove wy om these cencies, nd theeoe, thee is tendency othe domestic cency to depecite. This tendency cnnot consistentybe eiminted by monety poicy. In simi nysis, McKinnonmed tht peiphe monies e ony povision becse ny “eco-nomic o poitic distbnce t home povokes the sspicion tht . . .

oein debts my not be epybe, nd tht the domestic cency widepecited inst the do” (2002, p. 2).

given the hiechy o cencies in nnciy open wod, the ink between these qestions nd the nte o the tdbe secto in ltinameic is bsed on thee cts: (1) tht the nnci cyce mkes the




commodities pices cyce deepe, (2) the oveved exchne te ss-tins ctivity eves, nd (3) the impot popensity is not comptibe tothe expote bse.9 Theeoe, the nnci dependence is simtneosy cse nd conseqence o this tde insetion in the wod economy.

It is impotnt to obseve tht neithe the se in infows no the ot-fows e pimiy detemined by domestic oces bt e mde by themonety poicy o the “denitive money.”

Hee it is impotnt to conside some chcteistic o nnci cyces depicted by Peez (2002). She es tht in evey technooic evo-tion, thee e two moments when the “mie” o nnci cpit ndpodctive cpit is boken: soon te the se o n indsti evo-

tion when nnci enzy ties to ene the hihe pot chieved innew ctivities thoh spective bbbes, nd din the mtity phseo n indsti evotion when the decine in economies o sce in theod economy ties spective cpit otfow nd intense competi-tion in ode to keep the potbiity. These movements e stimted bynnci innovtions nd ow te o inteest. athoh Peez centeshe ments on indsti conties, she consides tht in these twophses—which in some cses cn ovep becse the indsti cyce

does not occ simtneosy in indsti conties, et one in theob economy—the cpit fows to peiphe conties e ookin oextodiny nnci oppotnities, ood expot pices, nd ow wes.When the bbbe is ove (oowin n incese in the te o inteest),inteptin the nnci enzy in the beinnin o indsti evotiono in the st phse o the mtity o n od pdim, nnci cpittends to concentte in indsti conties.

The est o this ppe es tht the dominnce o exten events

shpin the ltin ameic nnci cyces is on-n ete. asTbe 1 shows, intention cyces in ltin ameicn economichistoy wee ccompnied by nnci infows tht shped the intencyce nd iqidity cisis.

Fiacial cycl i Lati Amrica

Thee e et nmbe o histoic nd empiic ppes expointhe simiities nd dieences between the pesent nnci obiz-

tion nd the nineteenth-centy nnci obiztion.10 In 1870, 1890,

9 like Kminsky et . (2004) eted bot nnci fows—when it ins, it pos.10 Ny (2006), De lon et . (1999), Devin (1989), Eicheneen et . (1998;

1999), Koz-Wiht (2006), nd TDr (2003) e ood exmpes.




T a b l e 1

F i n a n c i a l c y c l e

s i n L a t i n A m e r i c a n e c o n o m i e s

U p s w i n g c y c l e

M a i n t r i g g e r a c t o r

R e v e r s

i o n

S u m m a r y

1 8 6 0 – 7 6 m a t u r i t y

L o w B r i t i s h r a t e o i n t e r e s t

E c o n o m

i c c o n t r a c t i o n i n

F i n a n c i a l c y c l e l e d b y r a i l w

a y

p h a s e o r a i l w a y s e r a

a n d a c u t e c o m p e

t i t i o n a m o n g

E n g l a n

d a n d i n d u s t r i a l

i n v e s t m e n t a n d r e n a n c i n g o

E u r o p e a n b a n k s

o r n a n c i n g

c o u n t r i e s . D e a u l t s i n O t t o m a n

o l d d e b t .

r a i l r o a d s i n L a t i n

A m e r i c a n

e m p i r e

a n d i n L a t i n A m e r i c a n

c o u n t r i e s .

c o u n t r i e s . R e v e r s a l i n t e r m s

o t r a d e

.

1 8 8 5 – 9 0 r e n z y


C o l l a p s

e o B a r i n g s B a n k .

C a p i t a l i n f o w s p r o p i t i a t e d

p h a s e o s t e e l a n

d

a n d s p e c u l a t i v e f o w s t o

c o n v e r t i b i l i t y i n c u r r e n c y b o a r d ’ s

e l e c t r i c i t y e r a

m o r t g a g e s m a i n l y i n A r g e n t i n a

r e g i m e s . T h e B a r i n g s c r i s i s

a n d U r u g u a y .

g e n e r a t e d a s t r o n g c o n t a g

i o u s

e e c t t o m a n y L a t i n A m e r i c a n

c o u n t r i e s , i n c l u d i n g B r a z i l .

1 9 0 4 – 1 4 m a t u r i t y


W o r l d W

a r I

F i n a n c e l o a n s t o r a i l w a y s a n d

p h a s e o s t e e l a n

d

a n d s t r o n g c o m p

e t i t i o n o

p o r t s . D u r i n g t h e w a r r e v e r s a l i n

e l e c t r i c i t y e r a

E u r o p e a n b a n k s

o r L a t i n

n a n c i a l t r a n s e r e n c e a n d

i m p o r t

A m e r i c a n l o a n s o r s p e c u l a t i v e

s u b s t i t u t i o n .

a n d F D I p u r p o s e

s .

1 9 2 1 – 2 9 r e n z y

D o l l a r d i p l o m a c y . R e d u c t i o n i n

1 9 2 9 i n

t e r n a t i o n a l c r i s i s .

H i g h l e v e l s o e x t e r n a l b o r r o w i n g s

p h a s e o o i l a n d

U . S . r a t e o i n t e r e s t a n d

C o l l a p s

e o t e r m s o t r a d e a n d

o r r e n a n c i n g l o a n s a n d p

u b l i c

a u t o m o b i l e e r a

s t r o n g c o m p e t i t i o

n o U . S .

d e a u l t s o n d e b t t h r o u g h o u t

w o r k s . A t e r 1 9 3 0 , n a n c i a

l

b a n k s i n L a t i n A m

e r i c a n m a r k e t .

t h e 1 9 3

0 s .

t r a n s e r e n c e o r t h e c o n t i n

e n t

S t r o n g v a l o r i z a t i o n o t e r m s o

r e m a i n e d n e g a t i v e o r v e r y

l o w

t r a d e a t e r t h e w a r .

u n t i l 1 9 7 0 .




1 9 7 3 – 8 1 m a t u r i t y

R e d u c t i o n i n U . S

. r a t e o i n t e r e s t

S t r o n g

e l e v a t i o n o U . S . r a t e o

O v e r b o r r o w i n g i n 1 9 7 8 – 8 1

a n d

p h a s e o o i l a n d

a n d e x t r a o r d i n a r y e x p a n s i o n

i n t e r e s t i n 1 9 7 9 , c o l l a p s e i n

d i e r e n t g r o w t h s t r a t e g i e s

a u t o m o b i l e e r a

o i n t e r n a t i o n a l “ o i l - d o l l a r s ” l o a n s .

t e r m s o

t r a d e a n d M e x i c a n

o c c u r r e d w i t h i n c o u n t r i e s w i t h

( B e t w e e n 1 9 7 4 a

n d 1 9 8 1 , t h e

d e a u l t

i n 1 9 8 2 .

d i e r e n t t r a d e a n d e x c h a n

g e

c u m u l a t i v e n e t i n

f o w s i n [ 2 0 0 0 ]

r a t e s r e g i m e s . A t e r 1 9 8 2 ,

s t r o n g

d o l l a r s a m o u n t e d

$ 1 . 1 5 5 b i l l i o n . )

d e v a l u a t i o n s i n R E R c a u s e d

h y p e r i n f a t i o n e p i s o d e s .

1 9 9 1 – 2 0 0 1 r e n z

y


. r a t e o i n t e r e s t ,

E l e v a t i o n o U . S . r a t e o i n t e r e s t

A p u r e n a n c i a l c y c l e w i t h

p h a s e o i n o r m a

t i o n

B r a d y ’ s S e c u r i t i z

a t i o n o F o r e i g n

i n 1 9 9 9

– 2 0 0 0 , e x h a u s t i o n o

d e t e r i o r a t e d t e r m s o t r a d e

.

a n d t e l e c o m m u n

i c a t i o n

D e b t a n d e x t r a o r

d i n a r y

m a s s p

r i v a t i z a t i o n a n d h i g h

R a d i c a l p r o n a n c e s t r a t e g

i e s .

e r a

e x p a n s i o n o l i q u

i d i t y ( b e t w e e n

e x t e r n a

l n a n c i a l r a g i l i t y .

O v e r b o r r o w i n g a n d s t r o n g

1 9 9 2 a n d 2 0 0 1 , n e t i n f o w s o

v a l o r i z a t i o n o R E R . C o l l a p s e i n

$ 1 . 2 4 3 b i l l i o n ) .

R E R a t t h e e n d o d e c a d e .

2 0 0 2 –


. r a t e o i n t e r e s t

?

A t e r d e v a l u a t i o n s i n R E R ,

i n 2 0 0 1 a n d 2 0 0 2 a n d h i g h

b o o m i n g i n e x p o r t v a l u e w

a s

v a l o r i z a t i o n o t e r m s o t r a d e .

a c h i e v e d b y h i g h c o m m o d i t y p r i c e s

a n d h i g h v o l u m e d e m a n d e

d b y

i n t e r n a t i o n a l t r a d e g r o w t h

l e d b y

t h e U n i t e d S t a t e s .

S o u r c e s : T e c h n o o

g i c n d f n n c i p h s e s b s e d

o n P e e z ( 2 0 0 2 ) ; s o m e p t i c u

e t u e s i n l t i n a m e i c b s

e d o n M i c h ( 1 9 8 9 ) ; d t o n

T D r

( 2 0 0 3 ) .




1920, 1970, nd 1990, the sppy o nnci fows (ons nd bonds)ed by nnci cyces in deveoped conties, nnce innovtions, ndchnes in the te o inteest in the wod nnci centes boht botmssive ons nd cpit infows to ltin ameicn conties. Thesennci infows ceted sittion o on enzy to pbic nd pivtesectos in ltin ameicn conties, nd in mny episodes, centccont decit not checked by exchne te devtion. a ponncend pocommodity sttey ssocited with these fows hs stimtedn intentioniztion o pivte domestic ssets. This cyce hs beennomy eveted by chnes in the oe o nnci cpit in indsticonties oowed by exten shocks tnsmitted thoh n incese in

the te o inteest o mjo nnci cente nd by o commoditypices. The copse o the exchne te ws oowed by the impossibi-ity to meet o the debt compomises in oein exchne, enetincontction nd dets. Popety tnseences, dentioniztion, ndempowement o mobie intention sset hodes hve been somecommon poitic nd economic otcomes o this ptten. These cycesested in ston vibiity in the rEr with tendency to depeciteinst the stonest cencies.

Te nance-export age

Pebisch (1949) showed tht the inne dynmic o cpit fows dinthe peiod towd acia uera (o expot ed) in ltin ameicn contiesws connected to the bidin o the commodity instcte nd expotcpcity o those conties. Bt, s ws eced by Mich (1989), thecose intetion o Eopen mechnt/bnks nd the podction o wmtei/ood in the continent set in motion new mode o economic

owth ed by expots nd nnci expnsion.In the expot e, ltin ameicn conties tied to oow the odptten’s e cetin om o inom convetibiity schemes ndestictive Tesy poicies. The incomptibiity o this endevo withthe votiity o its expots eneted sccession o exchne ciseswhen on peiods o exchne ppecition sstined by cpit infowsboht exten cisis nd copse in the rEr. ate the independence, on spee took pce in the 1870s eed by hih pot oppotnitieso commodity expots. The mjoity o ons wee tken by the pbic

secto thoh bond issin in london miny to ennce od debts ndto nnce iwys.11 Bt not ony wee these necessities nnced by

11 Fo detis nd empiic evidence, see De lon et . (1999).




exten cpit, mny pbic woks wee so nnced bod de tothe chonic cedit constint imposed by the poicymkes; this ws inode to oow the “me es” ssocited with the monety systemed by Ennd. So, the contction o bi on in stein o the seino bonds with od cses wee the bsis o cedit nd sc expnsionnd to sstin the convetibiity o domestic cencies.

Din the second h o the 1880s, oowin nnci enzy s-socited with new technooic wve ed by the united Sttes ndgemny (Peez, 2002), second boom o cpit fows to ltin ameicnconties, miny in the om o oein diect investment (FDI) took pce. at this time, aentin nd uy ttcted the mjoity o fows

to nnce iwys nd bn instcte. This hih vome o fowsbcked e isse o oden pesos nd od bonds. a spective isseo mote bonds ceted he expnsion o weth ssets in pondsnd od o the ich eite o Benos aies nd Montevideo. When, in1889, the Bnk o Ennd ised its discont te, the nnci cisis wssetted. The ne-copse o Bins Bnk—by the most speciizedin aentinen nnce—in 1890 nd the aentinen det echedthe entie continent. In conseqence, the ons fows wee stopped, nd

the next ten yes wee dedicted to eneotition o debt with intenpoicies o deftion sset pivtiztions nd ntioniztion o debts. Inaentin, this nnci enzy chned the popety o instcte. InBzi, hihy indebted conty, the shp edction o cpit infowste the Bins cisis csed bnce-o-pyment cisis. This boht he devtion in the exchne te bekin with the od stnddcs intodced in 1889. The cpit fiht tht scceeded this edevtion pessed the te o exchne dditiony with et eects

in the inftion te. The encilamento cisis tht took pce in 1890–91ws diect conseqence o aentinen contion.12

It is inteestin to note tht beoe 1929, thee wee no cent bnksin the eion. Schemes o cency bods wee intodced in mnyconties in the beinnin o the centy, bt thei incomptibiity withthe shp fcttions o commodities pices csed systemtic cisis.With the copse o the intention system din the Wod W I,ltin ameicn conties pcticed moe pmtic monety poicy.ate Wod W I, nd nde the infence o intention missions

12 The most common nysis o this cisis ttibtes the inftion pesses ndspective enzy to the sc imbnces ceted by excessive money issin. Fo eview o this debte nd dt, see Tine (2001).




stimted by owin concens with cpcity o ltin ameicn con-ties to py thei intention debts, mny cent bnks wee ceted.They wee spposed to conto the discetiony powe o the Tesy(Ftdo, 1970). The bsic ine ws to oow moe ecient othodoxpoicy bsed on “es o the me” o the od system nd to ttctnew ons ttendin the he nnci tnses bod. The Bziineconomic poicy bsed on the cency bod o 1926–30 ws oodexmpe o this endevo.

The expeience o aentin deseves the considetion. It wsthe most deveoped conty o ltin ameic din this peiod nti1935. When the aentinen Cent Bnk ws ceted nd ed by

r Pebisch, cency bod system imed to ive convetibiity tothe ntion cency. Pebisch, in his ey nysis o the aentinenexten cyce (Minos, 1991), ed tht this system ony wokeddin cpit infows nd neve nctioned din od otfow. Btthe pesistence on keepin this system csed, in mny episodes, seveedmes in the economy nti the bst o new cyce. This ws themin eson o cetin cent bnk—s hppened in aentin in1935—with discetiony powe on the exchne mket nd to isse

nonconvetibe Tesy notes.as ed by Mich (1989), in spective cpit infows, the

wethy nd owne, bn popety ownes, mechnts, bnkes, ndpoiticins who omed the nces o the dominnt csses o the pimyexpot mode wee the min domestic op beneted.

ate the 1930s, ltin ameic stted to ce new eity—sccity o dos. an “tonomos poicy” ws nched in mny conties s s they decided to bek with convetibiity nd to deve the exchne

te. Bt this new poitic economy ws conned to the bi economiesbecse these stct nd instittion chnes did not hppen insm nd pssive economies. Veneze, Cb, gtem, Dominicnrepbic, Ecdo, Cost ric, E Svdo, Nic, Pnm, Hiti,nd Honds emined ttched to do exchne stndd with itteexchne o nnci conto.13 The sccity o dos ended ony in the1970s, when the nnci tnseences becme positive nd excessive,s discssed in the next section.

13 It is impotnt to conside tht thoh din these yes, the sccity o do-s ws pominent cto, ltin ameicn conties neve intepted dsticy thepcement o ssets bod (Mhon, 1996).




Debt-led growt in te 1970s

The se in cpit fows in the 1970s is emkby dieent comped

to the fows o the 1920s. Shitin om bond nnce nd om diect in-vestment towd bnk nnce ws the min nnci chne. This chnews bit by the enomos do iqidity eneted by the exposiono oi pices, the mtity o the peviin technooic pdim, ndthe deetion o the nnci system. Wht seems howeve simito the 1920s ws the oveendin nd oveboowin pocess. Bt inthe 1970s, dieenty thn in this nnci cyce, thee ws not epevios debt to nnce.

a ndment nnci innovtion tht pshed the he vome o sps nds om the eodo mket to peiphe conties ws thepossibiity o bnk endes to om e-sce syndiction nd the in-tion o coss-det cses in on contcts. In ddition, the SoveeinImmnities act o 1976, on its tn, emoved the doctine o bsotesoveein immnity om u.S. cots (Dity nd Hon, 1988).

Besides tht, the most impotnt innovtion ws the fotin te onstht pssed the isk to the boowe (Devin, 1989). With these nnciinnovtions, the et dieentis in the te o inteest boht bot

by the edction o the u.S. pime te in 1971 opened oppotnities ointention bnks—ed by u.S. bnks in eomkets—to pce theexcess o nds in deveopin conties.

Din the 1970s, exchne eimes in ltin ameicn conties weevey dieent, efectin stct nd poitic spects. In Bzi ndCoombi, cwin pe system voided e ppecition in exchnete. In Mexico nd Veneze, the he inceses in oi pices weeoowed by e ppecition o domestic cencies. In aentin nd

Chie, the excess o iqidity ve bith (t the end o the decde) to stbiiztion sttey bsed on xed exchne te. Dieent om thepevios peiods (nd the 1990s), the cpit ccont ws mch moecontoed in conties sch s Bzi nd Coombi. Nevetheess, inaentin, uy, nd Chie in the st yes o the decde, shpnnci ibeiztion occed. Cpit contos wee neve dopted inMexico nd in sm conties s in the ome conties.

Independent o the esons—in Bzi, cpit infows wee sed to

nch hevy indsty pn—the exten indebtedness hd its owndynmic. as in the nineteenth centy, et pt o the new ons ws tocove od ons iven the shot mtity tht sti pevied in the mjoityo this on spee. So beoe the expot o impot sbstittion poceedswee vibe—whee the oein esoces wee sed to pomote




expots o impot sbstittion—the boowe conty hd to cove debtsevices with new ons, enin its exten ibiity (Devin, 1989).Hihe domestic inteest tes, owe exchne tes, nd hih incentivesto contct exten ons ceted n oveboowin pocess tht ssmedin mny pces, s in Veneze, the sme “miions eve” s obsevedby Ftdo (1982). On vee, debt sevices bove expots eched40 pecent nd the oein cency eseves expnded in the continentthoh shot-tem nnci esoces. as peviosy consideed, theFCa ws in e excess o the necessities pt by the vition o CaD,nncin positive vitions in r nd NrCO.

athoh the nmbes wee not compbe with those tht pevied

in the 1980s, in the st yes o the 1970s, sinicnt cpit fiht took pce in Mexico, Veneze, aentin, nd even Bzi, the most e-ted conty (Cmby nd levich, 1987).

The he incese in the inteest te in 1979 nd the bnks’ decisionsto ct endin to ltin ameicn conties te Mexico’s det in 1982intepted this cyce nd imposed ston cency devtions to nncethe tnses o the ceditos’ bnks. This shit in cpit fows—netcpit tonomos infows becme stony netive—occed in

conties except Chie, despite the dieences in the se o oeincency. Cpit fiht eched e vomes nti the end o decde(Schneide, 2003).

The exten cisis ws the bse o dic eoms in ltin ameicnconties. The objective, in wht hs been known s the “st Wshin-ton consenss,” ws to nch new ptten o economic owth ed bypivte entepise thoh compehensive intetion to wod mkets.This mked dic move om wht ws chistened the “ncient e-

ime” o impots sbstittion. Bt the e expecttion ws to ttct thecpit fows om oeines nd eptite the stock o dos hed byesidents. The min sotion o the nbebe ltin ameicn debt wspoitic, ed by u.S. Tesy Secety Nichos Bdy. It ws stted s poitic nd economic pobem te the Mvins (Fknds) W, btony te the Mexicn debt eschedin in 1989 ws it impemented inthe indebted ltin ameicn conties. as shown by the estimted dto cpit fiht, in aentin in 1988 nd in Bzi in 1989, sinicntcpit fows wee eptited (ibid.).

Te 1990 external cycle and te return o te “treasury view”

The 1980s wee chcteized by he cpit otfow, hih inftion,nd stntion. Except in Chie (which ttcted moe poitic sppot)nd Coombi (with owe debt), stbiiztion eots ied. The




1990s boht to ltin ameicn conties enomos infows o cpitttcted by hih inteest tes nd he pivtiztion oppotnities.These fows wee peceded by the ise o “Bdy’s bonds,” secondymket in commeci bnk ons o ltin ameicn conties’ debtsestbished to “eieve u.S. bnks o non-peomin ons” (TDr, 2003,p. 36). In simi oe pyed by the bnks din the 1920s, the newnction o ndewitin bond isses tht sped thohot the decdedissipted the bnk isks by sein o pticiption in ltin ameicnons (Dity nd Hon, 1988; Eicheneen nd Bodo, 2002). The etnnci innovtion ws the dominnt oe o the he ameicn pen-sion nd mt nds on cpit mkets. This movement ve nd

mnes nd investment bnks et evee on nnci mketsnd n sy on “investo condence.” Bt t the sme time—nd di-eent om the nineteenth centy—it ve moe poitic menin tothe iqidity cisis in tht it invoved miions o ameicn pensiones,s becme ce in the Mexicn cisis o 1994. By the sme eson, theIntention Monety Fnd (IMF) hd stone invovement in ltinameicn conties, povidin nds o nnci esces in ons withhih poicy conditionity.

as in pevios cyces, the decine in the u.S. inteest te in thebeinnin o the 1990s nd the nnci innovtion (secitiztion) thtoowed the nnci enzy ssocited with new technooic wve(teecommnictions nd inomtion technooies) stted new extencyce. Dismntin cpit contos ws the dominnt spect to nch ponnce sttey in ltin ameicn conties (TDr, 2003). This wsconsideed he oppotnity not ony to stbiize the economy nddeet it om hih inftion (hypeinftion in aentin nd Bzi), bt

to estbish new mode o economic deveopment centeed on tde ndnnci intetion. Tde nd cpit ccont ibeiztion, dee-tion, nd mss pivtiztion sped to the continent.

In this sttey, the “technopos,” the Cent Bnk nd the Tesy,ssmed hih evee ove the economy, efectin the enewed poweo the inteests o bnks, expot-oiented bsiness, nd the ownes o doized ssets.

Bt the new oe o the Cent Bnk ws ceted by ston connec-tion with the IMF. It is impotnt to note tht since the 1980s, the IMF

cted moe s epesenttive o cedito bnks thn s pbic mti-te nnce instittion o conties seekin ssistnce. Its eveein the eion ws popotion to the exten debt to be estcted ndnnced. Bt the novety thohot the 1990s ws the owin sbmis-sion o the ltin ameicn cent bnks to the IMF stbiiztion pcke




centeed on deftion poicies. In pt, this sbmission ws the est o owin exten instbiity demndin owin IMF intevention, bt,in pt, this sbmission ws the est o two othe pocesses. Fist, thecosmopoitn ntion ops chned the composition o thei ssetsenin nnci deposits in oein bnks; in tht sense, thei inteestswee moe in common with the intention ceditos nd investos.Second, thee ws pctic consenss between the “technopos” ndcdemic economists tht the best poicy to be oowed by the CentBnk ws the poicy pescibed by the IMF. In mny conties, s inaentin nd Bzi, mny deftiony poicies deepened the poiciesnd os bove the tet estbished with the IMF.

as in the od ptten tht pevied beoe the 1930s o in the 1970s,thee ws n oveboowin pocess nd, de to its eects on the rErenhnced by n dvese tems o tde, the new infows ceted thei owndemnd in the om o impots o oods nd sevices. a he decit incent cconts ws set in motion in the mjoity o ltin ameicnconties by the combintion o tde ibeiztion nd ppecition inthe rEr, both estin in iqidity bndnce. The nnci tnse-ences towd the eion becme ey positive covein et decit

in cent ccont nd ttended to the ntion esidents’ hih domesticdemnd o do-denominted ssets. This hih eve o infows nnced,by its tn, hih vomes o cpit fiht. Thohot the 1990s, thevibe dt (Schneide, 2003) show tht cpit fiht ws pem-nent ete nd te 1994 eched hih eves in the eion. In odeto conto the otfow pesses nd ttct new cpit, hih te o inteest ws the min poicy nd the isse o pbic bonds indexed to thedo ws the min instment. In conseqence, domestic debt boomed,

ed excsivey by the monety poicy, nd sqeezed pbic spendin,miny investment.Dieent om the 1970s nd moe simi to the 1920s, the FDI pyed

mjo oe nd ws ttcted essentiy to pivtiztion des in pbictiities, bnks, nd indsty in conties sch s aentin, Bzi, ndMexico. ate its inception in the ey 1990s, this ponnce stteyested in vey shot boom–bst cyce, tentin phses o heinfows o cpit nd ppecition in rEr scceeded by the copse inexchne eime nd cpit fiht.

In ltin ameicn mjo conties, the combintion o extenindebtedness with dentioniztion o weth (do-denominted -nnci ssets nd secities hed by esidents nd domestic nnci ndsecities ssets hed by nonesidents) eched no pecedent eves since




1930.14 Two pocesses wee deveoped. In conties sch s aentin,Boivi, Pe, uy, Ecdo, Nic, nd Cost ric, the depositsin dos nd the she o ons denominted in dos dispced com-petey the domestic monies om these nctions. In othe conties, schs Mexico, Chie, Veneze, o Bzi, thoh the domestic monieswee not epced, the she o oshoe deposits s she o tot de-posits incesed stony. Fom the mid-1990s, cpit fiht otnmbeedby the mont eisteed in the 1980s. The povision nte o ltinameicn cencies ws neve s evident s in this decde.

as in othe exten cyces, the exten nd domestic inteest teswee o tmost impotnce. The decine o the u.S. inteest te in the

beinnin o the decde stted this nnci cyce; shot incesein the u.S. ede nds te in 1994 pecipitted cpit eves inMexico, the “st nnci cisis o the nineteenth centy,” s pt byEicheneen et . (1999), bt the decine o this te te 1994 owedthe nnci cyce nti the end o the decde. The te o inteest wsvey hih in nondoized ltin ameicn conties (miny in Bzi)in ode to stimte the cpit infows. Despite tht, s ws obsevedin othe histoic episodes, the 1990s cisis showed tht inceses in the

te o inteest wee neve enoh to stop the cpit otfow when thete o exchne ws peceived s stony oveved. like in othennci cyces, the eves in cpit fows eneted copse in theexchne te oowed by nnci nd sset cisis (Bzi in 1998,aentin in 2001–2, nd uy in 2001–2).

a depecited rEr chieved in the beinnin o the twenty-st centyby the mjoity o the economies cod not stt one new extencyce no eveted pidy the tde ccont tht becme in ew yes

ey positive. In ct, it ws stted by exten oces. The teoistttck in the united Sttes nched ston miity expnsionist poicywith decese in the te o inteest. at the sme time, Chin nchedn nticyce poicy with bi eects on asin conties nd on the com-modities mket. Both events ected tde vome nd commoditiespices o the min expots o the eion. This stony ened the incometems o tde o ltin ameicn conties nd shited its netive c-ent ccont, impovin thei sovency nd iqidity tios o hihe

14 Hee the stndd notion o doiztion is consideed s the deposits in dosby ntion esidents. Fo detied nysis o the doiztion pocess incdinothe concepts nd the hih index eched in ltin ameic, see reinht et . (2003).




owth despite the netive tnseence. This new commodities-oientedcyce boht new oppotnities o dieent ntion stteies—seizedte he cisis o aentin nd Veneze. Howeve, the mjoity o ltin ameicn conties took the sme sttey bsed on sc discipinend openness to nnci mkets. The ppecition o exchne te isonce moe common ete in mny conties nd pecdes them omseizin this extodiny oppotnity to divesiy expots to sectos essdependent on nt esoces.

Cocluio

This ppe ed tht thee ws emkbe simiity in the extencyces in ltin ameicn conties’ economic histoy. The desarrollo

acia uera, EClaC’s ey desintion o the Wod Bnk’s “otwd-oiented” mode, tht pevied in the st pt o the nineteenth centynti 1930, ws om the beinnin nnci-expot mode whee thennci intetion to the wod economy pyed cent oe. an o-thodox economic poicy bsed on sc contction, hih te o inte-est, nd incentives to exten debt in ode to sstin convetibiity nd

ee cpit fows ws pemnent sttey o this mode. ate onpeiod distnt om the wod nnci mkets tht sted nti 1970,mny ltin ameicn conties in this decde nd—te the copseo the 1980s—the mjoity o the conties din the 1990s, oowed simi ptten nd sttey o intention intetion.

The chonic tde nbnces histoicy ssocited with ltin amei-cn conties in contst with asin conties cnnot expin the hiheince on exten nnce. In mny episodes pesented in this ppe, theexcess o exten nnce ceted its own demnd thoh cent ccontdecits. The impct o this nnci intetion on tde is tnsmittedthoh hih vibiity in rEr tht, by its tn, jeopdizes the dive-siction o expots. The hih popensity o the domestic cosmopoitncsses to keep ssets in dos nd thei poitic evee on economicpoicy comes om this kind o nnci intetion.

The exten cyce in the continent showed some common etes. Deto exten innovtions in the money mket (bond o on nnce) ndthe pevence o ow inteest tes in deveoped conties, ston infows

o oein cpit wee ttcted by potbe oppotnities in nnciyopen ltin ameicn conties. Hihe inteest tes in ovenment bondso hihe pot tes in boomin sectos tieed by hih commoditiespices nd ses o potbe domestic ssets pt in motion n extencyce. Despite the he demnd o ston cency o weth pposes,




the excess o them in nnciy open economy eneted, din cetin peiod o time, e ppecition in exchne te. This inte-pted the chonic instbiity nd inftion pesses oiinted om wek expot secto nd hih demnd o cency. Economic owth withoveved cency enetes hih demnd o impots nd o ssetsdenominted in oein cency. The eves in tde nd the stonexpnsion o the sevices’ decits tht oowed the ovevtion ws pevese conseqence o cpit infows; enetin thei own demndin the om o cent ccont decit.

The ston commitment to bnce the bdet nd ttct cpit infowto nnce the owin decit in cent ccont hs pessed o hih

e inteest te. The combintion o on psh with domestic ceditcnch oiinted om this economic poicy–enhnced pivte extenoveboowin. When the boom ended, tieed by ston eves inthe tems o tde nd exten fows ed by cpit fiht, shp dev-tions estoed owe eve o rEr. a hih vibiity nd chonictendency o the rEr o domestic cency to deteiote ws the otcomeo these cyces, jeopdizin the divesiction o the expots. Ths, theet nnci dependency is n tonomos cto to compehend the

nstbe peomnce o the expots in the on tem nd, conseqenty,o the deveopment o ltin ameic economies.

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Documents

Financial Dependency and Growth cycles in Latin American Countries (Carlos Aguiar Medeiros)