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1,300 | <s>[INST] accountid=28034 Abstract: Argentines are not sure they [/INST] want their controversial president, Carlos Menem, to stand for a 2nd presidential term. </s> |
1,301 | <s>[INST] Elections to half of the Chamber of Deputies [/INST] and to all provincial assemblies on October 3, 1993, will help to decide his future. </s> |
1,302 | <s>[INST] Full text: Asked if they can think of a better president in living memory than Carlos [/INST] Menem, many Argentines scratch their heads as they think back to the list of military thugs and civilian incompetents who have misruled the country, and to years of seemingly unconquerable hyperinflation. </s> |
1,303 | <s>[INST] But they are not so sure that they [/INST] would like the controversial Mr Menem to stand for a second presidential term. </s> |
1,304 | <s>[INST] Elections to half of the Chamber of Deputies [/INST] and to all provincial assemblies on October 3rd will help to decide his future. </s> |
1,305 | <s>[INST] If he is to stand again in December 1994, Mr Menem [/INST] must first get the constitution changed, which demands a two-thirds majority in both the Senate and the Chamber of Deputies. </s> |
1,306 | <s>[INST] Strong gains by his Peronist party in Sunday's voting would give him [/INST] a big boost, and might encourage him to hold a (non-binding) referendum on the issue before the two houses of Congress vote. </s> |
1,307 | <s>[INST] A clear victory would also discourage rivals among the Peronists, [/INST] such as Senators Antonio Cafiero and Jose Octavio Bordon, who have presidential ambitions themselves, from trying to block him. </s> |
1,308 | <s>[INST] If he can change the constitution--which he unconvincingly [/INST] says is "not an obsession"--Mr Menem would stand a good chance of re-election. </s> |
1,309 | <s>[INST] The opposition Radical party, which, [/INST] subject to possible horse-trading, rejects constitutional reform, is split. </s> |
1,310 | <s>[INST] One faction is led by ex-President Raul Alfonsin, others by Senator Fernando [/INST] de la Rua and Governor Eduardo Angeloz of Cordoba (who, embarrassingly, had his province's constitution changed to allow him to be re-elected). </s> |
1,311 | <s>[INST] To add to their troubles, the [/INST] two latter men broadly support Mr Menem's economic reforms. </s> |
1,312 | <s>[INST] After winning the presidency in May 1989, he took office five months [/INST] ahead of schedule, at the urgent request of President Alfonsin, with the country in economic chaos and inflation running at 200% a month. </s> |
1,313 | <s>[INST] Four years later the budget is more or less balanced, the huge [/INST] state sector has mostly been privatised, money is pouring into the country and inflation was 9% in the 12 months to August. </s> |
1,314 | <s>[INST] Besides that, the armed forces seem to [/INST] have been politically neutered, at least while the country remains stable. </s> |
1,315 | <s>[INST] Mr Menem has also transformed Argentina's reputation abroad for being both insular and nationalistic by [/INST] sending two frigates to help the coalition in the Gulf war, 1,000-odd soldiers to UN units in ex-Yugoslavia and a smaller unit to the UN force in Cyprus. </s> |
1,316 | <s>[INST] Argentina's long-strained relations with [/INST] the United States have been much improved. </s> |
1,317 | <s>[INST] Yet much of the credit for [/INST] Argentina's economic miracle must go to the economy minister, Domingo Cavallo. </s> |
1,318 | <s>[INST] And suspicions lurk about the [/INST] standards of probity in Mr Menem's entourage. </s> |
1,319 | <s>[INST] In August, Gustavo Beliz, a 32-year-old lawyer sworn [/INST] in nine months previously as an honest interior minister, resigned abruptly over re-election manoeuvres. </s> |
1,320 | <s>[INST] In a parting shot, he said that "if [/INST] some cowboy operator thinks the constitutional reform can be obtained by buying votes, he's crazy". </s> |
1,321 | <s>[INST] ___ Document 188 of 400 Perils of openness [/INST] Author: Crook, Clive Publication info: The Economist 328.7830 (Sep 25, 1993): Survey 28,33+. </s> |
1,322 | <s>[INST] accountid=28034 Abstract: Because rapid inflows of foreign capital greatly complicate the conduct [/INST] of macroeconomic policy in third-world countries, some economists fear that the financial breakthrough of the early 1990s may end in another bust. </s> |
1,323 | <s>[INST] The hardest task in many [/INST] poor countries is the reform of domestic finance. </s> |
1,324 | <s>[INST] Full text: THE past ten years have [/INST] been a time of great financial stringency for the debt-burdened developing countries. </s> |
1,325 | <s>[INST] Rich-country suppliers of capital (until recently, the banks) had to have their [/INST] arms twisted to maintain even a severely reduced flow of resources; meanwhile savers in the developing countries illicitly sent billions of dollars abroad. </s> |
1,326 | <s>[INST] Now that many countries seem to be putting these financial problems behind them--they [/INST] have regained voluntary access to new sources of foreign capital, and their own savers are bringing home their smuggled savings--it may seem churlish to complain. </s> |
1,327 | <s>[INST] But some developing-country governments have found [/INST] that their recent success has brought a different sort of difficulty. </s> |
1,328 | <s>[INST] It is this: rapid inflows of [/INST] foreign capital greatly complicate the conduct of macroeconomic policy. </s> |
1,329 | <s>[INST] These complications can be so severe that [/INST] the countries' broader efforts to reform their economies may come to nothing. </s> |
1,330 | <s>[INST] The sorts of capital that are now flowing so freely to parts of Latin America and elsewhere in the third world [/INST] are indeed superior in many microeconomic respects to the flows of bank lending of the 1980s; but in the challenge they pose to finance ministries and central banks in setting their monetary, fiscal and exchange-rate policies they are no less difficult. </s> |
1,331 | <s>[INST] That is why some economists fear that the [/INST] financial breakthrough of the early 1990s may end, in due course, in another bust. </s> |
1,332 | <s>[INST] Whereas the failures of the 1980s were (rightly, on the whole) attributed to failures of [/INST] policy in the debtor countries, especially to large budget deficits and excessive intervention by the state, the next crisis, if it comes, may well be blamed on liberalisation. </s> |
1,333 | <s>[INST] That would be a formidable [/INST] setback to development throughout the third world. </s> |
1,334 | <s>[INST] FEELS LIKE OLD TIMES [/INST] In fact, these difficulties are nothing new. </s> |
1,335 | <s>[INST] One of the most notorious episodes in the recent history of economic [/INST] development was the failure of attempts at financial reform in the Southern Cone of Latin America in the late 1970s and early 1980s. </s> |
1,336 | <s>[INST] Economists are still arguing about what went [/INST] wrong with renewed urgency, now that some see parallels with more recent events. </s> |
1,337 | <s>[INST] Ignoring many important differences between the three [/INST] cases, what happened in Argentina, Chile and Uruguay is roughly as follows. </s> |
1,338 | <s>[INST] During the 1970s all three countries embarked [/INST] on a variety of reforms in their banking and financial systems. </s> |
1,339 | <s>[INST] They removed their ceilings on domestic [/INST] interest rates, giving their banks much greater freedom of action. </s> |
1,340 | <s>[INST] Also, early on, Argentina and Uruguay removed most of their [/INST] capital controls; Chile, moving more slowly in this respect (though faster in others) removed its controls only partially. </s> |
1,341 | <s>[INST] Over the following years, all three countries [/INST] saw their interest rates rise, to more than 30% in real terms. </s> |
1,342 | <s>[INST] Such levels were not brief "spikes"; they [/INST] were sustained for months at a time, and in Chile's case for years. </s> |
1,343 | <s>[INST] As a result, foreign capital [/INST] flooded in, causing the countries' exchange rates to appreciate. </s> |
1,344 | <s>[INST] Between the first quarter of 1977 and the first [/INST] quarter of 1981, Argentina's trade-weighted exchange rate more than trebled in real terms (see chart 13). </s> |
1,345 | <s>[INST] (Chart 13 omitted) The countries saw their trade balances deteriorate, to [/INST] such an extent that all three were forced to abandon their reforms, in varying degrees, in the early 1980s. </s> |
1,346 | <s>[INST] (Chile quickly resumed its bold efforts [/INST] at reform; Argentina and Uruguay turned reformist again only recently. </s> |
1,347 | <s>[INST] ) The moral that most economists see in this history is this: do not open your [/INST] economy to inflows of capital too soon in the process of economic reform--especially if you are unable to use other instruments of macroeconomic policy to deal with the exchange-rate consequences. </s> |
1,348 | <s>[INST] Is the revival of private capital flows to Latin America and [/INST] other parts of the third world happening so quickly that, far from supporting those countries' economic reforms, it may jeopardise them? </s> |
1,349 | <s>[INST] The answer is maybe--though there are [/INST] things that governments can do to reduce the risk. </s> |
1,350 | <s>[INST] First, however, it is worth noting that [/INST] the financial world has changed a good deal since the late 1970s. </s> |
1,351 | <s>[INST] The consequence is that today's governments have [/INST] fewer choices than their predecessors over the pace of their financial reforms. </s> |
1,352 | <s>[INST] This, in turn, makes the [/INST] Southern Cone syndrome harder to deal with. </s> |
1,353 | <s>[INST] The recent surge in capital flows to parts of [/INST] the third world is only partly due to a deliberate liberalisation of inflows by governments. </s> |
1,354 | <s>[INST] Most developing countries (and, for that matter, [/INST] most industrial countries) still maintain some controls of one sort or another. </s> |
1,355 | <s>[INST] Usually, these take the form of restrictions [/INST] on certain capital-account transactions (eg, rules forbidding residents to open foreign-currency bank accounts). </s> |
1,356 | <s>[INST] More intrusive systems (still common in the third world) involve dual or multiple exchange rates; [/INST] in effect, the price at which the government is willing to let people or firms buy foreign currency varies according to the purpose for which it is required. </s> |
1,357 | <s>[INST] Despite such controls, capital flows to [/INST] parts of the third world are on the rise. </s> |
1,358 | <s>[INST] First, because capital controls are [/INST] rarely intended to isolate a country entirely. </s> |
1,359 | <s>[INST] Second, because in many countries [/INST] the rules have indeed been liberalised somewhat. </s> |
1,360 | <s>[INST] There may still be controls on inflows of FDI, for instance; but, whereas the government once imposed extremely burdensome conditions [/INST] on a would-be investor (eg, all its sales must be for export, only a small part of its profits could be remitted, the government must be granted a large shareholding), its conditions now, if any, are less demanding. </s> |
1,361 | <s>[INST] Third, because capital controls no [/INST] longer work as well as they used to. </s> |
1,362 | <s>[INST] A favourite way of getting round [/INST] them has long been through false invoicing of exports and imports. </s> |
1,363 | <s>[INST] For instance, an importer wishing to move money abroad could ask his supplier [/INST] to write an invoice for more than the true price; the surplus, instead of going to the supplier, goes into a foreign bank. </s> |
1,364 | <s>[INST] Through this and other methods, third-world investors [/INST] were able to stash away billions of dollars during the 1980s. </s> |
1,365 | <s>[INST] According to the World Bank's estimates, at its peak in [/INST] the 1980s the amount of capital illicitly flowing abroad from the developing countries was $100 billion a year. </s> |
1,366 | <s>[INST] On these estimates, by 1990 [/INST] the stock of flight capital was roughly $700 billion. </s> |
1,367 | <s>[INST] Latin America's share of that outflow to the United States [/INST] and elsewhere was equivalent to more than 30% of the region's GDP (see chart 14 on next page). </s> |
1,368 | <s>[INST] (Chart 14 omitted) It is impossible to be precise, but [/INST] a good part of the capital that has lately flowed into Latin America is drawn from these illicit investments. </s> |
1,369 | <s>[INST] The outflow and subsequent inflow had less to do with changes in [/INST] capital controls than in the judgment of Latin American investors about the safety and profitability of investing their savings at home. </s> |
1,370 | <s>[INST] Nonetheless, it seems certain that capital [/INST] controls, always somewhat porous, are gradually becoming more so. </s> |
1,371 | <s>[INST] Improvements in technology, especially advances in telecommunications, [/INST] also make it ever easier to escape the state's financial clutches. </s> |
1,372 | <s>[INST] And that is why today's governments have [/INST] fewer choices when confronted with a disruptively large inflow of capital. </s> |
1,373 | <s>[INST] The obvious solution to the problems caused [/INST] by a sudden inflow of capital is unlikely to do much good. </s> |
1,374 | <s>[INST] Attempting to turn the capital away by [/INST] strengthening controls is to swim against an ever more powerful tide. </s> |
1,375 | <s>[INST] This is not to say, [/INST] as some economists do, that controls have no effect. </s> |
1,376 | <s>[INST] They do, and that is why [/INST] it is well worth removing them when circumstances permit. </s> |
1,377 | <s>[INST] The case for a fully liberalised [/INST] capital account is analogous to the case for free trade. </s> |
1,378 | <s>[INST] Freeing capital privatises decisions about the [/INST] allocation of resources, and promotes efficiency by fostering competition among suppliers. </s> |
1,379 | <s>[INST] They cause rent-seeking and corruption, and [/INST] prevent scarce foreign exchange from being allocated to its best uses. </s> |
1,380 | <s>[INST] Countries that have liberalised inflows [/INST] of capital are often more cautious about liberalising outflows. </s> |
1,381 | <s>[INST] It forbids their financial institutions to seek [/INST] the best returns, or to diversify their holdings of assets in risk-reducing ways. </s> |
1,382 | <s>[INST] Unfortunately, they are likely to be better at twisting flows [/INST] of finance into different, and often illicit, channels than at controlling inflows and outflows in the aggregate. </s> |
1,383 | <s>[INST] Stronger controls, though they would be an even [/INST] greater microeconomic nuisance, can no longer be relied upon as a macroeconomic remedy. </s> |
1,384 | <s>[INST] CRYING ALL THE WAY TO THE BANK The economics literature offers two [/INST] sorts of advice to countries suffering, like the economies of the Southern Cone in the late 1970s, from an embarrassment of riches. </s> |
1,385 | <s>[INST] The first applies to countries where the inflow is [/INST] already pushing the exchange rate to troublesome heights; it concerns the proper response of macroeconomic policy. </s> |
1,386 | <s>[INST] The other is more relevant to countries that do [/INST] not yet face this problem--but may expect to, before long, as their economic reforms proceed. </s> |
1,387 | <s>[INST] This sort of advice concerns, in the jargon, [/INST] "sequencing"--how to reduce likely difficulties by getting your reforms in the right order. </s> |
1,388 | <s>[INST] Countries facing the immediate macroeconomic problem of an unmanageably [/INST] large inflow of capital leading to a sharply appreciating exchange rate have six main options. </s> |
1,389 | <s>[INST] The other possibilities, some [/INST] economists argue, are worse than doing nothing. </s> |
1,390 | <s>[INST] So let the exchange rate [/INST] appreciate: if it is fixed, let it float. </s> |
1,391 | <s>[INST] This will put the country's exporters [/INST] under tougher competitive pressure, but the news is not all bad. </s> |
1,392 | <s>[INST] The resulting current-account deficit is simply the means [/INST] for the country to import the foreign capital that is now available to it. </s> |
1,393 | <s>[INST] After all, the whole point of a capital inflow [/INST] is to allow the country to invest more than it saves (ie, run a current-account deficit). </s> |
1,394 | <s>[INST] This is entirely appropriate for a [/INST] poor country that needs to accumulate lots of capital. </s> |
1,395 | <s>[INST] Remember too that the obverse of a stronger currency [/INST] is greater purchasing power over imports--in other words, an improvement in the country's real income. </s> |
1,396 | <s>[INST] If the increase in capital flows is not a permanent thin, but merely a [/INST] temporary inflow of "hot money", it might make sense to stop the exchange rate over-shooting, thus preventing needless strain on exporters and forestalling future balance-of-payments difficulties. </s> |
1,397 | <s>[INST] But if the larger capital inflow really is [/INST] a long-term change, the exchange rate will have to go up sooner or later. </s> |
1,398 | <s>[INST] What is to be gained from [/INST] postponing this appreciation--especially when it causes damage elsewhere to do so? </s> |
1,399 | <s>[INST] This will discourage the inflow of capital [/INST] and slow or stop the rise in the country's exchange rate. </s> |
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