Capital flows in Chile: from the tequila to the Asian crises

Abstract

Latin America experienced sharp swings in net capital inflows in the last two decades, with significant effects on the domestic economy. Chile, in particular, recorded the highest rise in external debt in the years up to 1981, and in 1982 exhibited the sharpest drop in GDP (15 per cent) in all of Latin America. This took place in an already deeply liberalized and privatized economy, with a persistent fiscal surplus. In the early 1990s, already in transition to democracy, Chile was at the head of the 'emerging economies' facing a return of external finance. This renewal of supply took place in an international atmosphere of strong pressures from multilateral institutions, and the US authorities, for across-the-board capital account opening in recipient nations. Chile moved against the stream, with a selective opening, including the introduction of regulations on short-term and other volatile inflows. The outcome has been highly successful, particularly at the time of the Mexican and Argentinean crises of 1995. But also Chile, in spite of some untimely relative weakening of the regulations in 1996-97, has been facing in rather good shape the Asian crisis, notwithstanding a severe worsening of her terms of trade. Here we review the policies implemented by Chile in the 1990s and their effects.