Edited by Matías Vernengo
Chapter 9: Integrating Uneven Partners: The Destabilizing Effects of Financial Liberalization and Internationalization of Latin American Economics
Rogério Studart INTRODUCTION In the second half of 1980s and throughout the first half of the 1990s, there was a spectacular growth of financial markets in the developed economies. This growth was soon followed by a significant surge of capital flows from mature economies to developing countries. In particular, in Latin America the opening of capital account (in the context of liberalizing policies of the end of 1980s and beginning of the 1990s) led to a very significant surge of voluntary foreign capital inflows. These flows had strong destabilizing effects on key economic variables, such as exchange rates, domestic supply of credit and domestic asset prices – soon followed by significant macro and financial imbalance. This chapter claims that to some this instability was originated by the abrupt and careless integration of two financial markets of quite distinct structure, size, depth and pace of growth. Even though the international financial environment and the policy regimes did have an important role in creating the macro and financial imbalances of the 1990s in Latin America, here we want to focus on the ‘domestic financial channels’ – that is, the links between surges of financial capital in the context of a bank-based financial system with shallow credit and securities markets and of highly unstable growth performance. The paper is structured in four parts in addition to this introduction. Section 2 contrasts the distinct structural features and pace of development of financial systems of developed and Latin American economies in the 1980s. Section 3 presents...
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