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1,400 | <s>[INST] The same circumstances that have attracted [/INST] the capital inflow may be fuelling an economic boom. </s> |
1,401 | <s>[INST] Lower interest rates would [/INST] increase domestic borrowing, adding to inflationary pressures. </s> |
1,402 | <s>[INST] For the reasons explained above, [/INST] this is harmful and unlikely to work for long. </s> |
1,403 | <s>[INST] This looks attractive, except for one thing: many of the countries [/INST] that have done it have found that allowing more capital to flow out has encouraged even more capital to flow in. </s> |
1,404 | <s>[INST] This happened in Britain [/INST] in 1979 (and in Yugoslavia in 1990). </s> |
1,405 | <s>[INST] Foreign investors may take the reform as a sign of better economic [/INST] times ahead, and/or be reassured that having put their money in, it will be easier than hitherto to get it out. </s> |
1,406 | <s>[INST] Whatever the reason, this experience adds weight to the [/INST] view that liberalising capital controls is not a policy well-suited to influencing aggregate inflows or outflows. </s> |
1,407 | <s>[INST] This is known as sterilising the inflow: its effect is [/INST] to reduce any effect that the sure in inward investment might have on the domestic money supply. </s> |
1,408 | <s>[INST] Where the inflationary impact of the inflow [/INST] is the most pressing worry, this may look like a good answer. </s> |
1,409 | <s>[INST] The trouble is that if the sterilisation is conducted on [/INST] a large scale, the government will have to raise its interest rates to make the bonds attractive. </s> |
1,410 | <s>[INST] That will draw in more foreign [/INST] capital, calling for more sterilisation, and so on--a vicious circle. </s> |
1,411 | <s>[INST] In the meantime, either the finance ministry or the central bank is [/INST] running up a bill for debt service that is likely, in due course, to become a big problem in its own right. </s> |
1,412 | <s>[INST] It reduces demand in the domestic economy, [/INST] helping to meet any worries the government may have about rising inflation. </s> |
1,413 | <s>[INST] Yet at the same time it is likely, other [/INST] things being equal, to reduce interest rates, which ought to encourage a slower inflow of capital. </s> |
1,414 | <s>[INST] This will mitigate the rise in [/INST] the exchange rate and reduce the undue pressure on exporters' profits. </s> |
1,415 | <s>[INST] That combination is exactly right--and the greater the proportion of [/INST] "hot money" in the inflow, the more sense it makes to resist the currency's appreciation in this way. </s> |
1,416 | <s>[INST] In practice, it is extremely difficult to [/INST] know how much of the inflow is hot, and how much not. </s> |
1,417 | <s>[INST] And, by itself, a fall in public borrowing (or a rise [/INST] in the public sector's surplus) will be nowhere near big enough to offset a really large-scale rise in inward investment. </s> |
1,418 | <s>[INST] Weighing these pros and cons, it seems [/INST] that a mixture of three of the policies may be best. </s> |
1,419 | <s>[INST] One, tighten fiscal policy with a [/INST] judicious mixture of cuts in public spending and higher taxes. </s> |
1,420 | <s>[INST] Two, partially sterilise the inflows--best of all, by privatising [/INST] some state-owned enterprises, for that avoids the debt-servicing difficulties that may follow heavy sales of government bonds. </s> |
1,421 | <s>[INST] And three, allow any remaining upward [/INST] pressure on the exchange rate to cause a moderate appreciation. </s> |
1,422 | <s>[INST] This is a good description of present macroeconomic policy [/INST] in several Latin American countries, notably Mexico and Argentina (though Argentina's exchange-rate appreciation looks increasingly immoderate). </s> |
1,423 | <s>[INST] BETTER START FROM SOMEWHERE ELSE Dealing with the macroeconomic implications [/INST] of a capital inflow in this way presupposes that the government has good control of its own fiscal policy. </s> |
1,424 | <s>[INST] In many developing countries, where the tax base [/INST] is insecure and public spending out of control, this is not the case. </s> |
1,425 | <s>[INST] For governments just embarking on the path of economic reform, adequate fiscal [/INST] control should therefore be a precondition for other measures that might encourage a bigger inflow of capital--including the liberalisation of capital controls. </s> |
1,426 | <s>[INST] Indeed, the consensus among those who have studied [/INST] the issue of sequencing is that freeing an economy's capital account should ideally come last. </s> |
1,427 | <s>[INST] However desirable it may be to admit inflows and allow outflows [/INST] once the economy has been substantially liberalised in other ways, these freedoms may be counter-productive in the early stages of reform. </s> |
1,428 | <s>[INST] Suppose, for instance, that the government's [/INST] budget deficit has not yet been brought under control. </s> |
1,429 | <s>[INST] Freeing capital controls under these circumstances not only risks, as already explained, a [/INST] strong appreciation of the currency that would harm industry; it also makes it likely that the budget deficit will stay too big for longer. </s> |
1,430 | <s>[INST] As long as the inflow of capital [/INST] lasts, the government will find it easier to finance its own borrowing. </s> |
1,431 | <s>[INST] Measures to curb the deficit, which are often painful and politically [/INST] unpopular, are therefore likely to be postponed--so that the inevitable fiscal crunch, when it comes, will be all the worse. </s> |
1,432 | <s>[INST] Or suppose that capital flows are [/INST] liberalised before trade in goods and services has been freed. </s> |
1,433 | <s>[INST] High trade barriers, among other things, divorce [/INST] domestic prices from world-market prices; the higher the barriers, the greater this distortion. </s> |
1,434 | <s>[INST] Domestic prices, not international ones, [/INST] guide firms in choosing how to invest. </s> |
1,435 | <s>[INST] If cement manufacturers, for instance, are protected from [/INST] foreign competition, their prices will be artificially high--and producing cement will be artificially profitable. </s> |
1,436 | <s>[INST] New cement factories may be built that make money [/INST] at local prices, but big losses if prices and costs are measured in the international market. </s> |
1,437 | <s>[INST] In some developing countries, and in parts of [/INST] Eastern Europe and the former Soviet Union, distortions of this kind have been exceptionally severe. </s> |
1,438 | <s>[INST] Investments have gone ahead which [/INST] are not merely unprofitable at world-market prices, but "value-subtracting". </s> |
1,439 | <s>[INST] A value-subtracting enterprise is one that would lose money even if its labour were supplied free [/INST] of charge--in other words, it is an enterprise that takes in energy and raw materials and turns them into things that are worth less than they were to begin with. </s> |
1,440 | <s>[INST] When prices are this badly or even somewhat distorted by high trade [/INST] barriers, so that investment is failing to earn the economy an appropriate rate of turn, there is no case for liberalising capital inflows. </s> |
1,441 | <s>[INST] In the most distorted economies, the new investment [/INST] that will be financed by such inflows may even reduce the country's output (properly measured). </s> |
1,442 | <s>[INST] Some countries have attracted foreign direct investment by creating enterprise [/INST] zones within which producers pay free-trade prices for their materials and receive free-trade prices for their products. </s> |
1,443 | <s>[INST] A capital inflow of this kind [/INST] may make good sense even in an otherwise distorted economy. </s> |
1,444 | <s>[INST] And there are other ways to [/INST] offset the effect of distorted internal prices on investment decisions. </s> |
1,445 | <s>[INST] Much the easiest way of ensuring that capital inflows [/INST] finance only sound investment projects, however, is to bring down trade barriers before letting the capital in. </s> |
1,446 | <s>[INST] Finally, suppose that the capital account [/INST] is freed before the domestic financial system has been reformed. </s> |
1,447 | <s>[INST] In many developing countries, banking systems have [/INST] been either explicitly state-run or else subject to all manner of heavy-handed regulation. </s> |
1,448 | <s>[INST] It is still common for the interest rates paid to depositors and by [/INST] certain favoured borrowers to be much lower than the rate of inflation--so that the banking system is, in effect, taxing saving and subsidising some borrowers. </s> |
1,449 | <s>[INST] As in the case of trade protection, this [/INST] represents a price distortion--and the price of capital is an especially important one. </s> |
1,450 | <s>[INST] Under these circumstances, inflows of [/INST] foreign capital are likely to be inefficiently allocated. </s> |
1,451 | <s>[INST] For all these reasons, reformers in developing and ex-communist countries would [/INST] be well-advised, whenever possible, to put the liberalisation of capital controls towards the end of their overall programmes of reform. </s> |
1,452 | <s>[INST] Fiscal control, and hence low inflation [/INST] and a background of macroeconomic stability, should come first. </s> |
1,453 | <s>[INST] In some countries--and above all in Eastern Europe and [/INST] the former Soviet Union--fiscal reform will be impossible without a parallel reform of the domestic financial system. </s> |
1,454 | <s>[INST] When all that is done, controls [/INST] on capital outflows and inflows can be safely reduced. </s> |
1,455 | <s>[INST] The trickiest prescription in this list (but one on [/INST] which everything else may depend) is not fiscal reform or trade reform, difficult though these may be. </s> |
1,456 | <s>[INST] The hardest task in many poor countries--witness the [/INST] difficulties it has caused throughout the industrial world--is the reform of domestic finance. </s> |
1,457 | <s>[INST] Private capital, whatever its source or form, is [/INST] powerless to promote development unless the domestic financial system is doing its job. </s> |
1,458 | <s>[INST] ___ Document 200 of 400 Argentina: Confidence [/INST] man Author: Anonymous Publication info: The Economist 328.7821 (Jul 24, 1993): 46. </s> |
1,459 | <s>[INST] accountid=28034 Abstract: On one day, with foreign investors [/INST] in mind, Argentina's President Carlos Menem boasts that his economic reforms are irreversible. </s> |
1,460 | <s>[INST] On another, eyeing the presidential election in [/INST] 1995, he warns his own people that the program might falter without him. </s> |
1,461 | <s>[INST] His measures - privatization of nearly all state [/INST] industry, cutting the public payroll, deregulation, and exchange-rate stabilization - have transformed the economy. </s> |
1,462 | <s>[INST] On one day, with foreign investors [/INST] in mind, he boasts that his economic reforms are irreversible. </s> |
1,463 | <s>[INST] On another, eyein the presidential election in [/INST] 1995, he warns his own people that the proggramme might falter without him. </s> |
1,464 | <s>[INST] His measures--privatisation of nearly all state industry, [/INST] cutting the public payroll, deregulation and exchange-rate stabilisation--have transformed the economy. </s> |
1,465 | <s>[INST] His supporters have introduced a [/INST] bill in the Senate to allow that. </s> |
1,466 | <s>[INST] It needs the backing of two-thirds of both [/INST] chambers of Congress; more than Mr Menem's Peronists and their allies can show. </s> |
1,467 | <s>[INST] Mr Menem hopes congressional elections [/INST] in October will make up the shortfall. </s> |
1,468 | <s>[INST] Even if so, the [/INST] bill will still face a tough fight. </s> |
1,469 | <s>[INST] The opposition Radical Civic Union [/INST] will do nothing to speed up congressional debate. </s> |
1,470 | <s>[INST] The presidential campaign will start in earnest quite early next [/INST] year, and several Peronist hopefuls are eager to get going as soon as they know Mr Menem's position. </s> |
1,471 | <s>[INST] Jose Octavio Bordon, a respected senator, [/INST] has already said he will stand regardless of that. </s> |
1,472 | <s>[INST] It is not the idea of another Menem administration that bothers people, [/INST] but the feeling that he wants to establish a sort of one-man democracy by changing the rules after the game has begun. </s> |
1,473 | <s>[INST] Mr Menem could answer this by [/INST] proposing that the reform take effect after his term is over. </s> |
1,474 | <s>[INST] In his efforts to make Congress pass [/INST] the bill, he talks of a non-binding plebiscite on the issue. </s> |
1,475 | <s>[INST] Argentines like Mr Menem's leadership [/INST] qualities and his decision to free the economy. </s> |
1,476 | <s>[INST] But they have made it clear [/INST] they do not want their democracy adjusted for his benefit. </s> |
1,477 | <s>[INST] They also doubt the president's [/INST] assertion that he has been central to Argentina's revival. </s> |
1,478 | <s>[INST] It was the economy minister, Domingo Cavallo, who designed the economic proramme, [/INST] launched in April 1991, which fixed the exchange rate, balanced the budget and banned the printing of currency to cover budget deficits. </s> |
1,479 | <s>[INST] Mr Cavallo is widely [/INST] seen as the guarantor of low inflation. </s> |
1,480 | <s>[INST] To Argentines, their new-found economic [/INST] stability is valued above virtually everything else. </s> |
1,481 | <s>[INST] To most, the hyperinflation which wreaked havoc four years ago was more [/INST] traumatic than the loss of the Malvinas war to Britain in 1982 or even the savage military repression from 1976 to 1983. </s> |
1,482 | <s>[INST] Memories of shops raising prices [/INST] every hour and youths looting supermarkets still raise shudder. </s> |
1,483 | <s>[INST] When Mr Menem took office [/INST] in July 1989, inflation was nearly 200% month. </s> |
1,484 | <s>[INST] But though a fine [/INST] administrator, he lacks Mr Menem's common touch. </s> |
1,485 | <s>[INST] Argentines like him in his current job [/INST] and want him to stay there, regardless of who the next president is. </s> |
1,486 | <s>[INST] Rumour has it that every Peronist [/INST] would-be candidate agrees, or wants Mr Cavallo as his running-mate. </s> |
1,487 | <s>[INST] On the surface, Mr [/INST] Menem's pitch to foreign investors seems fair. </s> |
1,488 | <s>[INST] Even his Radical rivals say they would not go back on privatisation, crowned [/INST] recently with the sale of 45% of the oil company YPF, at $3 billion, the largest initial pubiic offering in Latin American history. </s> |
1,489 | <s>[INST] Mr Menem began privatisation long before moving [/INST] Mr Cavallo from the foreign ministry to his present post 2-1/2 years ago. </s> |
1,490 | <s>[INST] Argentina's falling import barriers are dictated in large part by [/INST] a treaty that will join it with Brazil, Paraguay and Uruguay in a common market in 1995. </s> |
1,491 | <s>[INST] And no president seems likely to reverse the [/INST] reforms that have made the Buenos Aires stockmarket more accessible to foreign investors. </s> |
1,492 | <s>[INST] The peso, pegged one-for-one [/INST] to the dollar, is by now overvalued. </s> |
1,493 | <s>[INST] That need not mean abandonment [/INST] of the rest of the Cavallo plan. </s> |
1,494 | <s>[INST] Argentines doubt that anyone would say [/INST] No to as many interest groups as Mr Cavallo would. </s> |
1,495 | <s>[INST] To restrain budgets, he has defied [/INST] not just spending ministers but pensioners, farmers and industrialists. </s> |
1,496 | <s>[INST] ___ Document 212 of 400 Chile and Argentina: [/INST] Together at last Author: Anonymous Publication info: The Economist 327.7815 (Jun 12, 1993): 53-54. </s> |
1,497 | <s>[INST] accountid=28034 Abstract: After years of strained relations, Chile and Argentina [/INST] are begining to cooperate in areas such as energy, and trade between the 2 countries is growing. </s> |
1,498 | <s>[INST] Full text: The two countries that occupy so much of southern South [/INST] America, on either side of a 5,300-km (3,300-mile) border along the Andes, are starting to get on better with each other. </s> |
1,499 | <s>[INST] In 1902 Britain's King Edward VII had [/INST] to mediate between Argentina and Chile to stop them coming to blows. </s> |
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