Forms of external capital and economic development in Latin America: 1820-1997

This paper examines the risks and constraints of different forms of capital inflows and costs of not honoring these obligations in Latin America from independence in the 1820s through 1997. The constraints and risks of inflows during each period are shown to depend on the maturity structure, nature of risk sharing and whether the inflow is from private or official sources. The penalties imposed depend on the linkages among creditors and among different financial contracts such as debt and equity. We show the importance of distinguishing between new forms of short-term portfolio debt and equity and different forms of portfolio equity inflows such as ADRs, closed and open-end country funds and domestic equity purchases by examining their behavior in the aftermath of the Mexican crisis. The policy recommendation is that portfolio equity and long-term portfolio debt inflows should be encouraged over short-term debt inflows, especially those with explicit or implicit government guarantees on the banking system and exchange rate policy.