IPD AI Insights

From the Boom in Capital Inflows to Financial Traps

05/03/2004
Working Paper
Development

The paper examines the performance of highly indebted countries from the point of view of their links with the international financial market. Although the more analytical parts of the paper do not refer specifically to Latin America (LA) it considers the regional emergent markets' experiences as examples and historical background. Two reasons explain the focus: LA countries participated in the financial globalization process from the beginning, in the late sixties-early seventies and the most important cases of high indebtedness took place in the region.

The paths followed by some countries in the globalization process led them to situations of segmented integration. Persistently high country risk premiums place the country in a sort of financial trap, with high interest rate and low growth, highly vulnerable to contagion and other sources of volatility and imposing narrow limits to the degrees of freedom of economic policy. The paper suggests that domestic policy implemented during the process of financial integration, account for most of the variation in the present situation of the different emergent markets.