Business Finance in Less Developed Capital Markets

By Klaus P. Fischer; George J. Papaioannou | Go to book overview

NOTES

I thank R. A. Mundell, M. I. Blejer, S. Dell, J. Gil Diaz, A. Giovannini, P. Malan, C. Reinhart, A. Rodriguez, and an anonymous referee and the participants in the International Symposium on Business Finance in Less Developed Capital Markets for many useful comments.

1.
The quadrupling of the international price of oil from 1972 to 1974 had a significant impact in raising the price of Uruguay's imports since petroleum accounted for about one-fourth of total imports supplied about 60 percent of its total energy requirements. The oil crises affected Uruguay's exports as well: Recession in the developed world brewed protectionism, and the imposition of restrictive measures became widespread. Uruguay was particularly affected by the closing of the European Economic Community (EEC) markets to meat imports from third-world countries. As a result, the terms of trade deteriorated by about 50 percent in 1974 and by a further 20 percent in 1975.
2.
The exchange-rate regime was called the tablita since the government published a "table" with the daily exchange parities.
3.
This foreign exchange regime had been adopted by Chile in February 1978 and was subsequently adopted by Argentina in December 1978.
4.
While Uruguay completely liberalized its financial sector first and was never able to make great progress in the area of trade liberalization, Chile followed the opposite path by thoroughly liberalizing trade flows and controls on short-term capital flows. Argentina followed a path somewhere in between by removing most (but not all) restrictions on short-term capital flows before a tariff reform (for details see Corbo, de Melo, and Tybout 1986).
5.
For an analysis of the 1974-82 period, see del Castillo ( 1986).
6.
In a fixed exchange-rate system the exchange rate is by the monetary authorities, and all other variables adjust to it. To fix the exchange rate implies that (1) equilibrium in the foreign exchange market is achieved by the monetary authorities buying and selling foreign exchange; (2) the nominal amount of money in the economy is determined by the public through the balance of payments, a surplus increasing the nominal amount of money and a deficit decreasing it; and (3) the monetary authorities have control only over domestic credit creation (in fact they have control only over their own credit operations), and the level of international reserves of the monetary authorities depends on their domestic credit policies.
7.
Corbo, de Melo, and Tybout ( 1986, pp. 613-619) pointed out that in all three countries of the Southern Cone stabilization programs were implemented in two identifiable phases. In phase 1, anti-inflationary policy was based on major reductions in monetary growth and fiscal deficits under a passive crawling peg regime. They pointed out that the persistence of inflation motivated a major shift of stabilization tactics toward phase 2, in which the exchange rate was used as an anti-inflationary tool.
8.
This is why the probability of collapse of the tablita was very high in Argentina from its inception and in Uruguay starting in late 1981.
9.
An analysis of the exchange-rate policy followed after the ending of the tablita system is beyond the scope of this chapter.
10.
Although empirical evidence seems to validate purchasing-power parity in the long

-347-

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