Capital Flows to Emerging Markets under the Flexible Dollar Standart: A Critical View Based on Brazilian Experience

The purpose of this chapter is to contribute to the discussion of a number of issues concerning macroeconomic policies that should be appropriate for developing countries. We shall take into account the broader political picture of changes in the international economy, reflected objectively in terms of the nature of the balance of payments constraints facing the ‘emerging markets’ and specially the Latin American economies since the early 1990s. It is within this wider context that we present our account of the particular case of Brazil.

The Brazilian experience has some peculiarities that make it an interesting testing ground for the presumed benefits of the process of financial globalization and the policies of trade and financial opening.

Many will agree that the slow growth and extremely high inflation experienced in Brazil in the 1980s had much to do with debt crisis and the subsequent interruption of capital flows towards Latin America. Indeed, in what became known as the ‘lost decade’ Brazil experienced a severe balance of payments constraint that slowed growth and triggered the acceleration of inflation. Since the early 1990s, foreign capital started again flowing towards Brazil in large quantities, first mainly as portfolio capital but towards the end of the decade more and more as foreign direct investment. one could well have expected that this large amount of foreign capital would improve ‘quality’ (presumably increasingly ‘cold’ rather than ‘hot’ money), by alleviating the balance of payments constraint, and would have had a big effect on both inflation stabilization and in the resumption of fast economic growth.

However, what the actual record shows is that the impact on inflation stabilization, although starting a bit late, only by mid-1994, was in fact more drastic than anybody could have reasonably expected. Inflation fell spectacularly and has remained extremely low ever since. on the other hand, the growth performance was, to say the very least, extremely disappointing. this chapter will try to make sense of this experience using a combination of some features of the international situation and of particular policies followed by the Brazilian state.

Most Latin American economies followed more or less the same broad pattern of fast disinflation and slow growth with the notable exception of Chile and partial exception of Argentina. therefore the Brazilian story, in spite of its peculiarities, may arguably be seen to reflect a more general pattern.

We shall begin our discussion in the following section with a brief account of the operation of the current international monetary system, a system that we call the ‘floating dollar standard’, and of other salient features of the international trade and financial environment faced by the ‘emerging’ developing economies since the early 1990s. the third section shows how this new international environment affects and changes the nature of the balance of payments constraint facing the developing countries. The fourth section discusses the Brazilian experience within the context of the resumption of large capital flows towards Latin America since the early 1990s. the last section contains a few concluding remarks.

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