Schweickert, Rainer

English

Research Papers in Economics

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Schweickert, Rainer
Book Review
[Book Review of] Coping with capital surges : the
return of finance to Latin America, Ricardo Ffrench-
Davis ... (eds.) : Boulder, Rienner, 1995
Weltwirtschaftliches Archiv
Provided in cooperation with:
Institut für Weltwirtschaft (IfW)
Suggested citation: Schweickert, Rainer (1996) : [Book Review of] Coping with capital surges :
the return of finance to Latin America, Ricardo Ffrench-Davis ... (eds.) : Boulder, Rienner,
1995, Weltwirtschaftliches Archiv, ISSN 0043-2636, Vol. 132, Iss. 3, pp. 594-596, http://
hdl.handle.net/10419/2215594 Weltwirtschaftliches Archiv 1996, Vol. 132 (3)
theoreticaldisputes ineconomics aregenerally a mere facade for thepermanentstruggle
between believers in unfettered markets and supporters ofpublic sector intervention-
ism. Both political camps use theoretical as well as empirical arguments largely for
disguising their true political message. According to Corry, neither does economic
theory in reality adhere to political neutrality norhas the growing use ofempirical tests
helped the profession much in becoming less ideologically biased. This reasoning is
backed up by describing the evolution ofmainstream macroeconomic thought and its
interplay with political beliefs from classical economics to Keynes and back to the
natural rate. Nowadays, the tide seems to turn back in favor of more government
interventions due to a concentration of research activities on market failures. As
economists vacillate so much between very different proposals for economic policy,
their reputation has deteriorated dramatically in the last 30 years. Real world financial
and business experts are usually preferred for giving advice on economic policy.
Overall, the book contains a rich overview ofthe issues involved in the NRH from
very different angles. However, after having carefully read the book, the reader is a bit
puzzled whether the NRH still is a powerful concept for macroeconomic analysis.
Unfortunately, the book is also by no means specific in explaining why unemployment
in Europe is so high and in making suggestions for its struggle against unemployment.
Yet, after aH the public at large mainly demands useful policy advice together with
accurate economic forecasting from economists. But as Olivier Blanchard notes in his
preface, itis notyet time for a synthesis andthe research onhow to fight unemployment
effectively is still very much in progress.
Rainer Fehn
Ffrench-Davis, Ricardo, StepbanyGriffitb-Jones (Eds.), Coping with Capital Surges. The
Return 01Finance to Latin America. Boulder, Ottawa 1995. Lynne Rienner Publ.
and International Development Research Centre. X, 277 pp.
This coHection of papers clearly differs from others: it has a surprisingly clear
concept which is given in the preface. The first group ofpapers deals with sources of
flows, distinguishing between North American lending and investing (the main source
ofprivateflows to LatinAmericainthe 1990s), Europeanlending andinvesting (second
to the United States in importance), and Japanese funding (characterized until now by
their rather low level). Each of the chapters on sources of financial flows analyzes
separately foreign direct investment, securities (both bonds and shares), and bank
lending, as weH as examining the motivations of lenders and investors and existing
regulations thataffect suchflows. Thesecond groupofpapersdeals indepthwith Chile,
Argentina, and Mexico. All three countries are among those that have experienced
particularlylarge increases in theircapitalinflows intheearly 1990s. Emphasisis placed
onpolicy responses fundamentally related toattempts tomoderate theimpactofcapital
inflows on appreciating the exchange rate, to reduce the monetary impact of foreign
exchange operations, and to moderate capital inflows, particularly of a short-term
nature. The third section of the book draws out the policy implications for recipient
countries and lessons from the capital marketcase studies. Even more surprisingly than
the clear concept, the authors adopted this structure when writing their papers. As a
consequence, the book allows for both selective and comprehensive reading without
wasting too muchtime for understandingtheconceptoftheindividual papers and their
contribution to the issue. Well done!
Somewhatunsystematic, however, both Roy Culpeper (Chapter 1on 'Resurgence of
Private Flows to Latin America: The Role ofNorth American Investors') and StephanyRezensionen - Book Reviews 595
Griffith-Jones (Chapter 2 on 'European Private Flows to Latin America: The Facts and
the Issues') start with putting the regional view into aglobai perspective. This is
confusing to the extent that different data sources and different perspectives are used
to tell the same story twice. A chapter on 'facts' introducing the first group ofpapers
in source countries would have been a good idea.
Unsystematic as well, Griffith-Jones examines at the end ofher chapter 'what the
potential for volatility ofsuch flows is and what the negative effects ofsuch volatility
could be, as well as how policymakers should attempt to minimize both' (p. 66). These
questions are addressed in the second groupofpapers on recipient countries. Even more
surprisingly, she concludes "Finally, it should be stressed that, globally, regulations of
internationalcapital flows have evolved weIl behind the flows themselves. This is partly
due to technical difficulties, the great complexity ofthe task, and lack ofpolitical will
in the major industrial countries. Although the tide is turning, the regulatory response
seems always 'too little, too late' " (p. 71). My reading ofthe recent literature is that the
tide is turning for less rather than more regulation of financial markets in industrial
countries.
Apart from these confusions, bothchapters as well as the chapter by Punam Cluhan
and Kwang W Jun (Chapter 3 on 'Latin American Financing in Japan's Capital Mar-
kets') give a rather comprehensive view about market potential and market regulations
ofthe three main capital markets combined with concrete advice for Latin American
policymakers.
Culpeper shows the trend from bank lending to portfolio flows (either ofthe fixed
income or the equity type) and forcing direct investment (fdi). He points to the impor-
tance ofcomplete, consistent, and promptreporting ofsecondarymarketandderivative
transactions and the implementation of standardized generaIly accepted accounting
principles in order to smooth capital flows and the secure an 'investment grade'.
Griffith-Jones shows the heterogeneity of European investors. 'There is a particu-
lady sharp contrast between the United Kingdom, where pension funds distribute their
foreign assets by putting only 6 percent into foreign bonds and as much as 94 percent
into foreign equities, and Germany, where pension funds distribute their foreign assets
by putting as much as 93 percent into foreign bonds and as little as 7 percent into
foreign equities' (p. 50). But she also identifies a lot of common features: they 'are
willing to have a wide range ofexposure in terms ofcountries within Latin America,
that the more 'conservative' U.S.-based investors, who concentrate far more on invest-
ment in Mexican equities (pp. 56/57). - Once they decide to go into a particular region
or country, they tend to invest in the whole range of instruments in that particular
country, including equity, bonds and short-term instruments' (p. 58); and 'Among the
criteria attracting investors a major change in economic philosophy toward more
free-market economics, which is broadly seen as permanent, increased growth and
growth prospects prudent macro-economic management and improved political stabil-
ity' (p. 60). The chapter also includes a detailed discussion of relevant regulations in
Europe and ofthedecision-making process oflargeinstitutional investors which should
help Latin American borrowers to establish stronger links to European investors.
Cluhan and Jun point out that regulations ofthe Japanese capital market restriet an
increase in Japanese portfolio flows to developing countries. Even recent efforts to relax
such regulations are rather likely to increase outflows to East Asia rather than to Latin
America. According to the authors 'this can be explained by the different policies in
these two regions in the 1980s. East Asian countries generally had more export-oriented
policies and those in Latin America were more inward-oriented' (p. 95).
The second group of papers dealing with capital inflows to Latin America is as
strong in its descriptive parts as the first group of papers. Readers interested in the
extent and the structure ofcapital inflows and domestic policies targeted towards either596 Weltwirtschaftliches Archiv 1996, Vol. 132 (3)
attracting or dampening inflows (or their consequences respectively) will find the rele-
vant information. Itcould be questioned, however, whether it is necessary to repeat the
experience made during the depth crisis once again.
Ricardo Fjrench-Davis, Manuel Agosin and Andras Uthojj (Chapter 4 on 'Capital
Movements, Export Strategy, and Macroeconomic Stability in Chile') explain how
Chile used a consistent package of exchange rate, monetary, and fiscal policies to
discourage short-term capital inflows. The riskiness and the costs ofshort-term invest-
ment was systematically increased by trading inflows, by increasing the exchange rate
band, by discretionarychanges ofthecentral parity(a passive crawl), and by discretion-
ary interventions within the band. Stabilization policies have been made possible by
fiscal savings and a relatively well-developed financial market.
Given this information, the conclusions in tbis chapter are rather ad hoc and
surprising: 'The recovery of international economic activity and interest rates may
cause significant reversals of capital flows, regardless of Cbile's domestic policies'
(p. 136)- in themeanwhile we know thatChileanpolicies did notonly moderateinflows
but also prevent outflows in the aftermath ofthe Mexican Peso crisis; 'The exchange
rate has fluctuated andappreciated, despite the effortsofthe monetaryauthorities, with
greater intensity than what appeared to be their preference' (p. 138) - the foregoing
analysis rather emphasized that (after a decade of prudent macroeconomic policy)
gained what developing countries in Latin America are keen on: a relatively smooth
development ofcapital inflows.
In this respect, Argentina and Mexico are clearly different although both countries
made considerable efforts since the mid-1980s as shown by Jose Maria Fanelli and Jose
Luis Machinea (Chapter 5on 'Capital Movementsin Argentina') and Jose AngelGurria
(Chapter 6on 'Capital Flows: The Mexican Case'). While Argentina adopted a market-
based approach (fixed exchange rate, full convertibility), Mexico established a social
consensus model (active crawl, Pactoagreements). By now we know thatthe former was
more successful than the latter. The chapter on Argentina also contains a convincing
analytical partonthe relationship between capitalflows, stability and growth (pp. 176-
183).
The summary chapter by Robert Devlin, Ricardo Fjrench-Davis, and Stephany
Griffith-Jones (Chapter 7: Surges in Capital Flows and Development: An Overview of
Policy Issues) is excellent. The authors explain the importance ofexternal savings as a
complement to domestic savings, they summarize supply-side anddemand-side aspects,
and they formulate the policy alternatives in a bigly efficient way. I would suggest to
read tbis chapter first and to pick up the details from the other chapters. This does not
imply that one has to accept the message - to allow for managed inflows. The exoge-
nous character ofchanges in capital flows and their negative impact on the economy
are, at least, slightly overemphasized. Comparing Asian with Latin American experi-
ences teIls a different story. Also, global regulation is not likely to smooth the supply
of financial funds significantly, exchange stabilization funds have negative incentive
effects, and social contracts do not provide a third way between the Argentine and the
Chilean approach.
But at the time when the book was completed, i.e. before the Mexican Peso crisis,
the authors have been in good company with their assessment and - most importantly
- they do not hesitate to deliver a clear hypothesis wbich the reader could check by
reading the book. In my view, this would be a worthwbile exercise for both academics
and policymakers interested or involved in the development ofLatin American coun-
tries.
Rainer Schweickert

[Book Review of] Coping with capital surges : the return of finance to Latin America, Ricardo Ffrench-Davis ... (eds.) : Boulder, Rienner, 1995.

http://www.econstor.eu/bitstream/10419/2215/3/262275430.pdf

[Book Review of] Coping with capital surges : the return of finance to Latin America, Ricardo Ffrench-Davis ... (eds.) : Boulder, Rienner, 1995.

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