FORMS OF EXTERNAL CAPITAL AND ECONOMIC-DEVELOPMENT IN LATIN-AMERICA -1820-1997

This paper examines the risks and constraints of different forms of ca pital inflows and costs of not honoring these obligations in Latin Ame rica from independence in the 1820s through 1997. The constraints and risks of inflows during each period are shown To depend on the maturit y structure, nature of risk sharing and whether the inflow is from pri vate or official sources. The penalties imposed depend on the linkages among creditors and among different financial contracts such as debt and equity. We show the importance of distinguishing between new forms of short-term portfolio debt and equity and different forms of portfo lio equity inflows such as ADRs, closed and open-end country funds and domestic equity purchases by examining their behavior in the aftermat h of the Mexican crisis. The policy recommendation is that portfolio e quity and long-term portfolio debt inflows should be encouraged over s hort-term debt inflows, especially those with explicit or implicit gov ernment guarantees on the banking system and exchange rate policy. (C) 1997 Elsevier Science Ltd. All rights reserved.