Nothing will affect the future of Latin America (and the rest of
the developing world) more than the movement of international
capital. Unprecedented inflows of foreign capital have fueled Latin
America's growth in the 1990s, and offer the region its best hope for
sustained economic and social advance. But these same flows, when
they reverse course and become capital flight, provoke economic
crisis.
The hazards of international capital movements became evident to
Latin America in 1995 when investors pulled their money from Mexico.
The peso quickly lost two-thirds of its value, and ordinary Mexicans
saw promised gains from years of austerity evaporate. Mexican stocks
plummeted, the economy shrank, and wages took a nosedive. The
effects swept through Latin America, with Argentina averting a full
breakdown but suffering a sharp contraction in economic activity and
skyrocketing unemployment. A $50 billion international rescue
package was required to reassure foreign investors that it was safe
to return to Mexico with capital the country needed for its recovery.
Now Russia is teetering on the brink - while most of Asia has been
plagued by financial crisis for the past year.
Strengthened by earlier reforms and responding mostly with
intelligent policy, Brazil and other Latin American governments have
managed to stave off the effects of the Asian and Russian turmoil,
but the battle isn't over, and high costs have been paid. Brazil's
economy is static, and unemployment is rising. Latin America's best
performers - Chile and Mexico - are watching their currencies
devalue. Stock markets throughout the region have dropped
precipitously.
The threat to Latin America goes beyond any immediate economic
setbacks. In the past 15 years, the region has made a dramatic
turnabout - its economies were restructured and disciplined, and
democratic politics became the norm. But confidence in market
reforms will not last if they bring economic trauma in their wake.
It will become harder and harder to defend free trade, privatization,
and balanced budgets if, instead of sustained progress, they lead the
region into the same old boom and bust cycles. That the alternatives
are certain to produce worse results will not remain a convincing
argument for long. Unrelenting economic insecurity, in turn, is a
recipe for political turbulence and demagoguery, not for democratic
progress.
It's up to each government to adopt measures to secure the
benefits of international capital flows and protect against their
perils. …