Felipe Larraín

Can a liberalization of capital outflows increase net capital inflows

Abstract Facing massive capital inflows that put downward pressure on the real exchange rate, some policymakers and analysts have recommended a liberalization of capital outflows. Empirically, however, the removal of capital outflow controls has apparently stimulated a net inflow of capital in several experiences, such as Britain since 1979, Italy, New Zealand and Spain in the mid to late 1980s, and Colombia, Egypt and Mexico in the 1990s. Numerous measures to liberalize capital outflows in Chile during the 1990s have not had a noticeable effect in offseting a surge of net capital inflows. How can we explain the apparent paradox that reducing controls on capital outflows can actually increase net capital inflows? Our theoretical model provides one such explanation. A liberalization of capital outflows, understood here as a reduction in the minimum capital repatriation period for foreign investment, reduces the degree of ‘irreversibility’ of the decision to invest in a given country. This, in turn, lowers the option value of waiting until uncertainty about a possible change in the rules of the game that affect investment in domestic assets is resolved, because in this event foreigners investing at home will be stuck with the low-return asset for a shorter period of time. Thus, a reduction in the minimum repatriation period is likely to increase—not decrease—net capital inflows. This result has an important policy implication. Liberalizing capital outflows may have significant benefits on its own. But it may not be the appropriate policy to defend the real exchange rate in the presence of massive capital inflows, because it is likely to strengthen those very capital inflows.

Export Processing Zones in Central America

This paper analyzes Export Processing Zones (EPZs) from a worldwide perspective and draws lessons from the accumulated experience in several countries. It argues that developing countries can take advantage of the opportunities provided by EPZs for the acquisition of superior technology, upgrading of labor and managerial skills, and greater access to foreign markets. The paper then examines the development and economic significance of EPZs and similar export-oriented regimes in Central America. This analysis shows that during the 1990s the economic significance of EPZs and other export-oriented regimes increased rapidly, although not uniformly, throughout Central America. The paper ends with a series of considerations and policy proposals for EPZs development in the region. Among other policies, this paper focuses on the promotion of industry diversification of export-oriented activities, on the development of stronger backward linkages, and on the upgrading of the export-oriented legislation in Central America.

Regional Currencies versus Dollarization: Options for Asia and the Americas

This paper undertakes an empirical assessment of Dollarization versus regional currency union as options for the economies of East Asia, South America and Central America. We use summary indicators of bilateral integration to examine the determinants of real exchange rate volatility within each region and between each region and the United States. While Europe is characterized by a high degree of regional integration, there is evidence of increasing integration in East Asia and persistently low integration in the Americas, especially as compared to the levels of bilateral integration vis-a-vis the United States. Our estimates confirm the patterns of regional integration above and reveal substantial regional differences as to the determinants of real exchange rate volatility.

Latin America Confronting the Asian Crisis

This paper evaluates the repercussions of the Asian crisis for Latin America and discusses policy options available to some of the major countries in the region. The paper starts by reviewing the contributions of several theoretical models to our understanding of crises. Next, it discusses the lessons that can be drawn from previous regional crises. Then, it evaluates the current situation of four of the largest Latin American countries and discusses policy options and prospects. It is shown that the Latin American crisis of the early 1980s was very different in nature from both the Mexican crisis of 1994-95 and the recent Asian crisis. In the early 1980s, the crisis had a clear fiscal root in all the countries analyzed (except Chile) while Mexico?s and Asia?s troubles were unrelated to fiscal problems. In contrast, a private credit boom was present in the earlier episode only in Chile, while it clearly shows up in Mexico and most of the Asian countries that fell in crisis. Large current account deficits and substantial real exchange rate appreciation, however, have been a common feature in all the episodes analyzed. Looking at the effects of the current crisis among the larger countries of Latin America, Brazil appears as the most vulnerable economy. Brazil needs to take further steps to reduce its twin deficits in the current account and the public budget, to flexibilize its exchange rate policy, and to implement additional structural reforms. Chile, though hit hard by a terms of trade shock, is structurally healthy. It faces, however, a major challenge from its heavy exposure to copper and to the Asian region. Weaker regional demand and the loss of competitiveness associated with the Asian crisis will deteriorate Argentinas external accounts and provoke a significant slowdown. Because of its heavy dependence on the Brazilian market, Argentina will face severe problems if Brazil falls into a crisis. Mexico benefits from its significant export diversification and its close integration to the U.S. economy but faces severe pressures from lower oil prices and, especially, from its weak banking sector. Capital controls, though popular, are no solution at times of crisis. A correction of the fundamental macroeconomic imbalances, on the other hand, is a necessary but not sufficient condition to prevent currency crises.

Inversión Privada e Impuestos Corporativos: Evidencia para Chile

Using annual data from Chile since the beginning of the eighties, we show that an increase in the corporate tax reduces firms investment. However the impact differs across firm size. In small and medium firms, investment as a fraction of the capital stoc

¿Importa la Opción de Régimen Cambiario?: Evidencia para Países en Desarrollo

Hasta hace no mucho tiempo, se daba poca importancia al arreglo cambiario que un pais escogiera como determinante de su desempeno macroeconomico. Esta situacion ha cambiado luego de la crisis asiatica de 1997-98 y sus secuelas en Rusia y America Latina. Casi todos los paises que cayeron en crisis tenian tipos de cambios ajustables o reptantes (por ejemplo, Tailandia, Indonesia y Corea, luego Rusia, Brasil y Ecuador). La presion causada por la reversion masiva de los flujos de capital y el debilitamiento de los sistemas financieros domesticos no fue soportada por el sistema cambiario, aun en aquellos paises que siguieron politicas macroeconomicas razonablemente sanas y que parecian tener reservas abundantes. El fracaso de los tipos de cambio ajustables o reptantes ha provocado una busqueda de alternativas. Gran parte del debate reciente refleja lo que los analistas han llamado “la ley del medio excluido”: no parece haber un regimen cambiario intermedio apropiado para los mercados emergentes. La fijacion dura o el cambio libre serian las unicas opciones. Sin embargo, la teoria no provee de resultados claros de manera que este nuevo consenso pueda servir como una pauta util de politica economica. Por tanto, el problema es fundamentalmente empirico.1 Este trabajo, mediante un analisis empirico exhaustivo, investiga la relacion entre la opcion de sistema cambiario y el desempeno macroeconomico de largo plazo en los paises en desarrollo, medido este ultimo por dos variables resultado: crecimiento del PIB per capita y volatilidad del crecimiento del PIB per capita. Nuestro analisis se diferencia de la literatura existente en tres formas distintas. Primero, utilizamos una clasificacion para los regimenes cambiarios de facto o efectiva; no nos basamos, entonces, en el arreglo cambiario que los paises declaran formalmente tener en el reporte anual del Fondo Monetario Internacional, que es la opcion utilizada por la mayoria de los estudios previos. Segundo, ampliamos la muestra de estudios anteriores hasta el ano 2000, considerando asi los numerosos colapsos y cambio de regimenes cambiarios que han ocurrido en este ultimo tiempo. Por ultimo, aspiramos a mejorar la especificacion de los modelos utilizados Cuadernos de Economia, Ano 40, No 121, pp. 635-645 (diciembre 2003)

Central America’s Foreign Debt Burden and the HIPC Initiative

This paper reviews the foreign debt burden in Central America with special emphasis on Honduras and Nicaragua. These countries have a large debt overhang and they have lagged behind the rest of the region in terms of economic growth. Our work suggests that Honduras and Nicaragua require alleviation of their foreign debt as a prerequisite to achieve sustained economic growth. The paper also reviews the initiative aimed at reducing the debt burden of the highly indebted poor countries (the HIPC Initiative) and evaluates alternative scenarios of debt reduction for both Honduras and Nicaragua. It ends with a critical assessment of the implications of the fiscal and openness criteria established in the HIPC Initiative.