Transcript José Antonio Ocampo and Bilge Erten – Latin

LATIN AMERICA’S LESSONS FROM
CAPITAL ACCOUNT LIBERALIZATION
José Antonio Ocampo and Bilge Erten
Committee on Global Thought
Columbia University
"Capital Account Liberalization in China: Learning Lessons" Workshop
Boston University – February 13, 2014
Medium-term cycles of capital flows to emerging markets:
1. 1975-81 -- Recycling of petrodollars, via bank loans, to oil-importing EMs
1982, Aug.-- Mexico unable to service its debt on schedule, defaults
=> Start of the Latin American debt crisis, 1982-89
2. 1990-97 -- New capital flows to EMEs following 1989 Brady Plan
1994, Dec. -- Mexican peso crisis
1997, July -- Thailand forced to devalue and seek IMF assistance
=> Start of East Asia crisis
1998, Aug. -- Russia defaults on much of its debt => Contagion to Brazil.
2001-02 -- Turkey and Argentina currency & debt crises
3. 2003-07 -- New capital flows into developing countries
2008, Sep. – Lehman Brothers collapse
=> Beginning of North Atlantic FinancialCrisis
4. 2009-13 -- Post-crisis surge in capital flows to emerging markets,
2013, May
-- May 2013 U.S. Fed tapering began the contraction phase
3
Net resource transfers to Latin America
4.0%
Figure 1: Net resource transfer, 1950-2012
(% of GDP at current prices)
0.0%
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2.0%
-2.0%
-4.0%
-6.0%
-8.0%
via financial flows
Source: Authors’ estimates based on ECLAC data
via FDI
Total
4
Major phases of liberalization and regulation
1950-75 -- Extensive FX and capital account regulations in all LA
▫ Exceptions: Mexico and Venezuela
1. 1975-81 -- Capital account liberalization in Argentina, Chile and Peru, but Brazil and
Colombia remain relatively closed; Domestic liberalization in Argentina and Chile
▫ 1982-89 -- Closing of the capital account during LA debt crisis
2. 1990-98 -- Broad-based capital account liberalization in LA, including Brazil and
Colombia, but with new instruments to regulate capital flows:
▫ Taxes on capital flows in Brazil, and URRs in Chile and Colombia.
▫ Regulations on FX transactions, e.g. restrictions on domestic financial deposits
in FX.
-- Semi-dollarized systems in Argentina and Peru, hyperinflations of 1989
and 1990; but not in Brazil despite its hyperinflation in early 1990s
3.2000-06 -- Further liberalization in Brazil, Colombia, Chile (FTA with U.S.), but
reversal of liberalization in Venezuela and Argentina
▫ 2004-13 -- Peru used differential RRs on deposits in dollars and short-term
external borrowing by domestic banks vs. deposits in the domestic currency
▫ 2007-08 -- Colombia used URRs before FTA with U.S.
▫ 2009-11 -- Brazil used taxes on capital inflows after the North-Atlantic crisis
5
Comparison of capital account restrictiveness of Latin America
vs Emerging Market Economies
Figure 2: Capital Account Restrictiveness in Latin America and EMEs
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
1970
1975
1980
1985
1990
LA7
1995
2000
EMEs
Source: Negative of Chinn-Ito index of capital account openness.
2005
2010
6
Capital flow regulations in Latin America
Figure 3: Capital Flow Regulations in Latin America and EMEs
.9
.9
A. Capital Inflow Regulations
.8
.8
.7
.7
.6
.6
.5
.5
.4
.4
.3
.3
.2
.2
.1
.1
1996
1998
2000
2002
2004
LA7
.9
B. Capital Outflow Regulations
2006
2008
2010
1996
1998
2000
EMEs
2002
LA7
.9
C. FX-related Regulations
.8
.8
.7
.7
.6
.6
.5
.5
.4
.4
.3
.3
.2
.2
.1
2004
2006
2008
2010
EMEs
D. Financial Sector Specific Restrictions
.1
1996
1998
2000
2002
LA7
2004
2006
EMEs
2008
2010
1996
1998
2000
2002
LA7
2004
2006
2008
2010
EMEs
Source: Updated by Erten and Ocampo (2013) with data from Schindler (2009) and Ostry et al. (2012).
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Lessons from capital account liberalization and regulation
• Surges in international capital flows generate pressure to adopt procyclical macroeconomic management and to liberalize capital
account and financial regulations, with large destabilizing effects:
▫ Both the liberalization of the 1970s/early-1980s and that of the
1992-97 ended up in major crises.
• However, not all booms end up in crises: The critical issues are
current account deficits and associated currency
appreciation.
▫ Reduction of external debts and accumulation of reserves serve as
additional buffers against capital flow volatility.
▫ The domestic counterpart of the current account deficit is
important: the experience of the Southern Cone during the first boom and of
a broader group of countries during the second was problematic, since
external financing was essentially consumed.
• Maintaining some capital account regulations to directly
manage capital flow volatility is important.
▫ Brazil, Chile, Colombia and Peru used some of these tools effectively.
▫ But these regulations should be used as a complement, not as a substitute
for domestic financial regulations – in some cases, their use as a
substitute has made crises unavoidable and more severe.
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Investment as a share of GDP
Figure 4: Latin America Investment ratio, 1965-2013
(2000 prices)
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
16%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
15%
Source: Authors’ estimates based on ECLAC data
9
External debt as a share of GDP
Source: Authors’ estimates based on ECLAC data
10
Current account balance has deteriorated since 2002
when adjusted by terms of trade
Source: Authors’ estimates based on ECLAC data
LATIN AMERICA’S LESSONS FROM
CAPITAL ACCOUNT LIBERALIZATION
José Antonio Ocampo and Bilge Erten
Committee on Global Thought
Columbia University
"Capital Account Liberalization in China: Learning Lessons" Workshop
Boston University – February 13, 2014