American depositary receipts (ADRs) from Latin-America: an opportunity for American investors

American Depositary Receipts (ADRs), based on stocks of firms registered in Latin-America, are rapidly gaining popularity among investors in the U.S. ADRs serve a dual purpose. First, they enable Latin firms to raise capital in the US without having to meet cumbersome security listing requirements. Second, they enable US investors to benefit from possible high returns in Latin-American securities without the inconvenience of having to deal with foreign currencies or the inconvenience of buying and selling in foreign stock markets. In academic literature, there has never been a thorough examination of the nature of ADRs issued by Latin-American firms. This study presents an overview of the patterns and trends of ADR utilization within the Latin-American region: by country; by industry; by security exchange; and, by “sponsorship”, the role played by the issuing company.     

Partner reciprocity,telecommunications flows and balance of trade patterns between the United States and latin America

From 1982 to 1994, the balance of trade deficit for U.S. telecommunications services increased by tenfold. The Central and South American countries contributed greatly to this increase. Our analysis identifies partner reciprocity as a core issue of the international long-distance industry. We apply an economic anthropology perspective to suggest that the antecedent conditions of cultural distance, economic nearness and relative country-risk will affect a foreign partner's reciprocity and examine U.S.- Latin American contracts over 11 years to test our respective hypotheses.     

The new business environment of latin america and the caribbean

Latin America and the Caribbean Region experienced dramatic changes in the 1990s. Politically, all but one country, are governed by a democratically elected government. Economically, import substitution industrialization policies (ISI) followed in the past, were replaced by liberalization programs aimed at reducing inflationary pressures and creating a competitive environment.

The significant increase in capital flows to Latin America in one single year, 1990, buried the 1980s as the “lost decade,” and the successful implementation of privatization programs region-wide prompted to affirm that the 1990s might constitute the “Latin America's decade.” Where does the euphoria come from? Is there any implicit promise to be derived from such international capital flows? Will the pattern be sustained? Has Latin America begun a new era? Are unfolding events on defiance of fundamentals?

These and many other questions can be raised regarding the spectacular transformation of Latin America and the Caribbean, particularly when analysts still debate about the Mexican crisis of 1994, investors eagerly pursue the agenda of a second privatization wave, experts around the world get fascinated with the high-tech push found in Latin America, bankers apply Latin American lessons to deal with the currency crisis in Asia, and casual observers recognize the value-creation process added by Latin American entrepreneurs who challenge the most adverse circumstances. Indeed, Latin America and the Caribbean is a land full of promises and contrasts, where there exists a head to head competition between globalization and nationalism, the haves and the have-nots, capitalism and communism, literature and high-technology, markets and governments, East and West, North and South, myth and reality, and … “despair and hope.”

There is no question, however, that Latin America and the Caribbean, being she a detached wide-land, is a region of great opportunity. Since the external debt crisis of 1982 and its aftermath, democracy, open markets, economic reform and privatization have blended to offer great expectations and opportunities for business and investment in the region. The new vision strongly questioned the status quo to render a new business environment to open the doors and light up the roads of the upcoming millennium.

It is the purpose of the International Journal of Public Administration to offer to its readers, for the very first time, a special issue devoted entirely to the discussion of the new business environment of Latin America and the Caribbean. We are, therefore, grateful to all the authors who generously are sharing with us the findings from their scholarly research. Given the far reaching consequences of their contributions, we, as guest editors of this special issue, had no other choice but to incorporate the fruits yielded by this symposium of thirty-seven papers in four issues in one single volume. The papers have been sorted according to the following four focal points: Privatization of State Owned Enterprises; Mexico; Economic, Financial and Foreign Investment Issues; and Economic Integration, Trade and Cultural Issues.

Part I of this special issue on “The New Latin American Business Environment” looks at one element of the broad economic strategy followed by most Latin American countries: Privatization of State Owned Enterprises. The role of governments is to provide the framework that will allow the private sector to create wealth. Notwithstanding, this partnership between the public and private sectors must ensure the inclusion of the poorer sections of the population. In many ways, the long-term sustainability of these economic programs will largely depend on this. The ten papers selected for this part, provide insight on how this phenomenon is affecting different Latin American countries.

The first paper by Shamsul Haque argues that there is a need to analyze the social consequences of privatization programs. Further research is needed to identify the main advocates and beneficiaries of privatization programs. According to the author, “critical economic conditions have not improved significantly after privatization, and in many instances, the conditions have deteriorated.” About fifty percent of Latin America's population of 470 million people live under poverty.

The late Sister Martin Byrne (1) documents in her paper, “Cananea Consolidated Copper Company from Nationalization to Privatization: 1972-1991 ,” the problems of ownership and management faced by La Cananea, a Mexican copper mine. Sister Byrne argues that “The Cananea mines were profitable under entrepreneurial and MNC ownership, but proved to be a financial drain on the government during the paraestatal period.”

The third paper by Garcia and Dyner, examined the reform and regulation of electricity in Columbia. According to the authors, the regulatory framework adopted by the government is going to determine the success of these programs. Furthermore, “the challenge is the change of public intervention in the sector, so that it regulates, supports, and supervises the decentralized activities of the firms, and liberates resources to be invested in other areas.”

Walter and Gonzalez provide interesting philosophical arguments on technology and human resources management derived from the cases of privatized companies in Argentina. The authors consider two variants, “systemic modernization and revamping of existing teams” to invite a reopening of the old debate on technological blending. They argue, however, that “to compete you do not necessarily need to ‘ be on the frontier.’”

Joan B. Anderson examines, the “Privatization, Efficiency and Market Failure: Transforming Ecuador's Public Sector,” privatization in Ecuador through the shift experienced by development theory with respect to the role of the public sector. In this paper the author points out that “while careful privatization can be positive, privatizing monopolies like the electric utility and/or quasi-public goods like highways are likely to be detrimental to long run economic development.”

Doshi identifies the successes and failures of the privatization program in Mexico by analyzing the cases of Mexicana Airlines, Aeromexico and Telmex. The author argues that even though the government was able to sell a number of state owned enterprises, a “successful” privatization program required appropriate macroeconomic policies and defining the role of foreign investment in economic development. One can argue then, that even though the size of the state is shrinking, its role is becoming more important.

The article by Vetter and Zanetta analyze also the case of Argentina. The authors argue that in order to consolidate the economic reforms implemented by the national government, provincial reform has to take place. A number of important lessons were identified.

John M. Kirk and Julia Sagebien present, in “Cuba's Market Rapprochement: Private Sector Reform - Public Sector Style,” the highlights of Cuba's process of transition towards a market economy by analyzing the conditions that lead to a market opening as well as the ends, the means and the actors of the ensuing process of economic reform.

Walter T. Molano contributes a paper, “The Lessons of Privatization,” based on his book The Logic of Privatization: The Case of Telecommunications in the Southern Cone of Latin America by looking at privatization as a process that may end up in varied outcomes as seen from microeconomic-, macroeconomic-, and political perspectives of analysis.

The focal point of Part II is Mexico. It is very clear that since the beginning of the decade, Mexico has made major efforts to transform its economy in order to play a more significant role in the global economy. Different attempts have been undertaken leading to: first, address the aftermath of the debt crisis of 1982; second, modernize and open the economy through a structural change that have included, among other programs, privatization, deregulation, fiscal deficit reduction, and trade liberalization: and third, change the political landscape.

Ephraim Clark models, in his “Agency Conflict and the Signaling Snafu in the Mexican Peso Crisis of 1994,” the conflict as a government held option to default and introduce signaling by assuming that the Mexican government had monopolistic information on the economy's true situation. The author argues that “if steps had been taken in late 1993 and early 1994, the crisis element of the adjustment could probably have been avoided.”

Blaine's article examines the role of foreign capital in economic development. By studying the Mexican case, the author answers a number ofvery important questions: How are once protected markets going to react to a large inflow of foreign capital? How did Mexican authorities deal with these inflows? What are some of the lessons that could be derived from the Mexican experience?

Hazera's paper discusses the history and legal basis of Mexican financial groups. On the basis of various stock market and financial statement data, an examination is also made of the groups’ evolution from 1991 to 1994.

Eugene M. Salorio and Thomas L. Brewer consider, in “Expanding the Levels of Analysis of FDI for Improved Understanding of Policy issues: The Case of Mexico,” both macro-, and micro-level shifts of analysis which mutually complement one another, and yield, for example, a “components profile” of disaggregated national level FDI flows which depends on the type of the project. The authors identify far reaching implications for public policy that may be extrapolated from the case of Mexico to the new business environment faced by the Latin American countries.

Francis A. Lees suggests also, from another angle, that the crisis of December 1994 could have been avoided because the financial disequilibrium was clearly evident by mid-1994 just be looking at Mexico's GDP and balance of payments.

C. Bulent Aybar, Riad A. Ajami, and Marca M. Bear provide a comparative study of the recent experiences of Mexico and Turkey. The authors identify common elements in the development and eruption of the crises to conclude that “under capital mobility strong internal and external shocks may lead to explosive crises … even though overall macroeconomic balances are sound.”

James P. D’Mello shows in “An Analysis of Mergers and Acquisitions in Mexico: 1985-1996,” that the Mexican crisis has led to an escalation of corporate restructuring such as mergers, acquisitions and joint-ventures.

Jiawen Yang joins the current debate on the causes of the recent Mexican financial crisis by arguing that “capital inflows that are not well absorbed by the private sector will cause financial instability under a fixed exchange rate regime.”

Part III of the new business environment of Latin America and the Caribbean includes ten papers on Foreign Investment, Economic and Financial issues which add significantly to the understanding of the overall transformation carried out in recent years by this region of the world.

Christopher Korth and Ajay Samant, and Craig A. Peterson andK. C. O’Shaughnessy recognize, respectively in the following two papers, “American Depositary Receipts (ADRs) from Latin America: An Opportunity for American Investors.” and “Financial Investment Via ADRs in Mexico and South America,” the usefulness of ADRs for operationalizing international diversification.

Juan Espana surveys the literature on models and tools currently used to predict exchange rate movements, and aims to suggest market solutions, economic policy measures and institutional arrangements to currency crises. The author analyzes the origin and evolution of the 1994 Mexican Peso crisis, its contagion effects on other Latin American economies, and the measures taken by the affected countries to manage the crisis.

Prakash L. Dheeriya and Mahendra Raj provide, in “An Investigation in Exchange Rate Behavior of Emerging Countries,” insights on the role that exchange rate risk plays by identifying similarities and differences through international comparisons.

Kumar's paper examines the important role of foreign direct investment in promoting economic development. The emphasis here is on the transfer of technology through foreign direct investment.

Neupert and Montoya study the characteristics of’ Japanese foreign investment in Latin America, with a focus on Brazil and Mexico. The authors looked at the preferred modes of entry and the post-entry performance of these subsidiaries.

Thomas M. Fullerton, Jr. shows, in “Currency Movements and International Border Crossings,” through two ARIMAmodels that “northbound bridge traffic to El Paso is nonrandom and follows fairly well defined patterns each year.”

Trevor Campbell makes, in “A Note on the Current and Capital Accounts Compilation of Barbados under the Fourth and Fifth IMFEditions,” a comparison with respect to the composition and structure of the current and capital accounts of Barbados.

Janet Kelly and Alexeis Perera argue, in “Antitrust Policy in a Hostile Environment: Institutional Building in Venezuela's Procompetencia,” that the theories of bureaucracy in Latin America generally stress institutional weakness, political volatility and the politicized nature of government agencies which motivated, in Venezuela, the creation of the anti-monopoly agency called “Procompetencia.”

G. Scott Erickson and Andrea Nhuch recommend in ‘The Latin American Business Environment: Patent Protection Issues” a general hybrid system to deal with patent rights issues.

Finally, Part IV deals with a blend of Trade, Economic Integration and Cultural issues. Since much of the world still tends to view Latin America and the Caribbean in terms of stereotypes, it seems appropriate to end this special issue on the new business environment of the region with a group of papers that revisits the rich mosaic of Latin America, and permits appreciate her new reality.

Isaac Cohen argues, in “Hispanics and Foreign Policy.” that though the primacy of economics in Hemispheric relations provides an opportunity for Hispanic businesses, yet this community will have to act deliberately to benefit from the opportunities that are emerging.

Eva Kras contributes, in “The Viable Future of Mexico and Latin America: A New Business Paradigm,” with a South looking North approach for doing business that challenges the traditional view of business relations.

Guillermo Duenas argues, in “Cultural Aspects in the Integration of the Americas,” that managing cultural integration successfully requires a process of “intercultural learning.”

Andres A. Thompson, Francisco B. Tancredi and Marcos Kisil introduce, in “New Partnerships for Social Development: Business and the Third Sector,” the novel argument that corporate philanthropy can make the difference in social development because grantmaking is still the least frequent used strategy in Latin America and the Caribbean region.

Chris Robertson, Pol Herrmann and Kevin Duffy measure, in “Exploring Perceptions of Technology Between the United States and Ecuador,” perceptions of technology on the basis of the typology of motivators and inhibitors of technological growth.

Melissa H. Birch argues, in “Mercosur: The Road to Economic Integration in the Southern Cone,” that Mercosur represents, in contrast to the historical record of economic integration in the region, an adaptation to the contemporary political climate.

Wu and Longley discuss the rationale for extending NAFTA to Chile. Their study examines also how NAFTA negotiators may address issues such as trade and investment rules, intellectual property rights, and labor and environmental standards among other things.

Roger Kashlak and Srinath Beldona identify, in “Partner Reciprocity, Telecommunications Flows and Balance of Trade Patterns Between the United States and Latin America,” partner reciprocity as the issue at the core of the international long-distance industry.

Ines Bustillo extends, in “Overview of Economic-wide NAFTA Models” computable general equilibrium models to the case of NAFTA.

We hope that this special issue is informative and interesting to business-decision makers, regulatory policy makers, and students concerned with gaining an understanding of the ongoing transformation of Latin American and the Caribbean.

Finally, we are again most grateful to the contributors of articles for making this special issue possible. We would also like to thank Jack Rabin, editor-in-chief of the International Journal of Public Administration, for trusting us the delicate mission of providing to the readers a fresh view of the new business environment of Latin America and the Caribbean.     

Innovation and growth in traditional agriculture of the lower Volta,Ghana

This article addresses the important question of whether foreign direct investment enhances economic growth and labour productivity in Mexico, both from a theoretical and empirical perspective. After briefly reviewing the Mexican experience with net FDI inflows during the 1990s, the article presents a simple endogenous growth model which explicitly incorporates any positive (negative) externalities generated by additions to the foreign capital stock. Using cointegration analysis, the article estimates a dynamic labour productivity function for the 1960-95 period that includes the impact of the growth rate in the stocks of both private and foreign capital (as opposed to the flows) and the economically active population (EAP) (rather than the rate of population growth). The error correction model (ECM) estimates suggest that increases in both private ad (lagged) foreign investment spending, as well as the rate of growth in exports, have a positive and economically significant effect on the rate of labour productivity growth. In addition, the results show that increases in the EAP have a negative and statistically significant effect on the rate of labour productivity growth, while changes in the government consumption variable have a negative but marginally significant impact. The error correction terms of the estimated models are negative and statistically significant, thus suggesting that deviations of actual labour productivity growth from its long-run value are corrected in subsequent periods. Finally the article generates historical simulations from the estimated ECM's and offers some policy recommendations to enhance the positive externalities associated with FDI inflows.     

Characteristics and performance of Japanese foreign direct investment in latin America

This paper describes the characteristics of Japanese foreign investment in Latin America. In examining FDI patterns, we identify the countries and industries most attractive to Japanese multinational corporations, the preferred modes of entry, and the post-entry performance of these subsidiaries. We find that most Japanese FDI has occurred in Brazil and Mexico, that joint ventures are the most common mode of entry, and that performance varies by country and mode. The observations have implications for three groups of executives: managers of non-Latin American firms, managers of Latin American firms, and public policy makers.     

Expanding the levels of analysis of fdi for improved understanding of policy issues: the case of mexico

Foreign Direct Investment (FDI) inflows are a key component of the restructuring and external integration now underway in many Latin American national economies. This paper suggests that understanding of policy issues concerning FDI can be enriched by two complementary shifts in the levels of analysis of FDI, each of which entails more detailed attention to the strategies and operations of multinational corporations (MNCs). At the macro-level, we show why it is beneficial to expand beyond the normal analytic concern with aggregate total FDI flows to focus instead on the separate, disaggregated components of those flows--that is, equity, reinvested earnings and other long-term and short-term capital flows between parent firms and their affiliates, as recorded in the national balance of payments capital account. The microlevel shift emphasizes the importance of focusing on varieties of types of FDI, not only across different foreign investors but within individual companies as well. It demonstrates the significance of switching from the usual concentration on firms as a whole to instead accentuating examination of individual projects and products--especially the dichotomy between market-access projects producing for the host country domestic market and production-efficiency projects producing for export markets, including the home country market. These two shifts in the level of analysis complement one another, and they interact in the sense that the mix of component flows can depend in part on the type of FDI. These analytic themes are developed using evidence concerning FDI in Mexico, with special reference to the automotive industry. Such improved comprehension of FDI is particularly germane for Latin American countries that are contemplating liberalization of foreign direct investment rules or have already undertaken them and witnessed the ensuing increase of inbound FDI.     

Prediction and management of currency crises in latin America

In recent decades, currency crises in Latin America have often marked the beginning of prolonged periods of inflation, economic recession, and depressed foreign investment. Attempts to anticipate such financial breakdowns have met with relatively little success. As the survey of existing models indicates, there seems to be little hope for the development of a forecasting framework able to predict exchange rate movements with a sufficient degree of accuracy and anticipation that would allow policy makers to mount a timely intervention in currency markets. The analysis of past currency crises, however, shows some common elements which might help formulate benchmarks that could be used as predictive parameters in the future. This paper provides a survey of the models and tools currently used to predict exchange rate movements. It analyzes the origin and evolution of the 1994 Mexican Peso crisis, its contagion effects on other Latin American economies, and the measures taken by the affected countries to manage the crisis. We summarize some of the market solutions, economic policy measures and institutional arrangements adopted in the wake of the December 1994 events as well as some of the lessons that seem to have transpired from this experience.     

What Drives Japanese INGOs to Operate in Latin American Countries?

International nongovernmental organizations (INGOs) provide essential aid and public services to less-developed countries. Although most literature focuses on Western INGOs, Asian INGOs have also become globally active. Little is known about what motivates INGOs to provide services in other regions, such as Latin America. In this study, we seek to identify the criteria Japanese INGOs use to select Latin American recipient countries. We propose that Japanese INGO operational location decisions are a function of Japanese foreign policy agenda, Japan-recipient country business relations, and recipient country’s need and liberalization. Using data from Japanese INGOs working in Latin America and 24 Latin American countries on contextual, macroeconomic, and demographic indicators, we find that the significant factors driving INGO decisions to operate in Latin American countries are need and the presence of Japanese businesses in the recipient country. Results have practical implications for foreign aid targeting and economic development.     

Modelling the demand for foreign savings in developing countries: Testing a hypothesis with Latin American data

The demand for foreign savings is an important feature of the economy in many LDCs, and it would be helpful to have a better understanding of its determinants. This paper considers one approach to modelling the demand for foreign savings in LDCs. If the demand for investment shifts out more buoyantly than does the supply of domestic saving in response to current macro‐economic conditions, persistent demand for foreign savings will be generated as a normal feature of the development process. We test this hypothesis with elasticities computed from the parameters of investment and domestic saving equations estimated for a sample of 21 Latin American countries. The empirical results show that in approximately half of the countries in the sample (and most notably in Brazil and in Mexico), the demand for foreign savings is rooted in the parameters of the investment and domestic saving functions.     

The debate over the U.S. government's role in health care financing:"deja vu,all over again"

Yogi Berra's famous quote captures the continuing debate over the legitimate role of the U.S. government in health care financing. The issues of individual choice, equity of access, and concern about income security are just as unresolved today as they were in the early twentieth century. Until we engage in an explicit national debate on these issues and come to a national consensus on the human and political values underlying our current health care situation, a “solution” to the health care financing problems will never be found. This article discusses the history of the issue of government's involvement in health care financing, American ambivalence about government regulation, and the role of American business as a major health care insurer.     

Policy responses to capital inflows: lessons from mexico

This paper has two basic objectives. The first is to examine the impact large inflows of foreign capital have on the economies of developing countries. This is important because international investment in many “emerging” markets has increased rapidly, particularly since 1990. The second objective is to explain Mexico's recent (1994-95) currency and financial crisis and to assess the role large capital inflows (and outflows) played in these events. In general, the paper concludes that the Mexican crisis was a direct outgrowth of the large inflows of foreign portfolio investment that followed the announcement of the NAFTA in early 1990. But while these capital inflows served as the catalyst, the policy responses adopted by the Mexican authorities to deal with these flows bear the ultimate responsibility for the crisis. Accordingly, this paper reviews the most common alternatives for redressing the effects of capital inflows on the recipient's economy and balance of payments, and uses Mexico's recent experience to draw general lessons for countries that encounter similar situations in the future.     

Understanding Immigration and Psychological Development

Abstract

Approximately one in five children in the U.S. are born to immigrant families in which at least one parent is foreign-born. Existing theoretical frameworks suggest that immigration experiences can increase acculturative stress and lead to developmental psycholopathology in immigrant children. These models, however, do not account for levels in the environment that trigger this stress and/or serve as forms of resilience. Drawing from Bronfenbrenner's multilevel, bioecological model of development, this paper presents a framework that charts environmental processes which generate or buffer acculturative stress and, therefore, mediate the impact of immigration on psychological well-being. Empirical research shows that Mexican immigrants, on the whole, fare better than U.S.-born groups in terms of mental health outcomes. These results are explained in the context of the presented theoretical model. Though further research is needed, preliminary evidence suggests that encouraging “enculturation,” as opposed to “acculturation,” has positive mental health repercussions for Mexican American children. Further research using the presented theoretical framework as well as policies and practices that incorporate and leverage the cultural strengths of Mexican immigrant children should be pursued.     

On the apparent benefits of higher productivity: An arithmetical illustration a comment

During the 1980s, like many other developing countries Nepal attempted actively to attract direct foreign investment. This article reports the results of a survey of the foreign‐owned firms in operation at the end of the 1980s. The motives of firms for their investment decisions in Nepal are summarised. The impact of foreign investment is assessed quantitatively using both financial and economic cost‐benefit criteria. In general, it appears that foreign investment has been beneficial to both the foreign investors and the national economy. Foreign investors from India have played a particularly important role. However, much of the national returns from foreign investment is derived from the payment of taxes, so that an excessively generous policy of tax incentives may not maximise national returns.     

Why East Asia overtook Latin America: Agrarian reform,industrialisation and development

Scholars and policy makers have long debated the causes of the spectacular economic success achieved by the East Asian newly industrialising countries ( NICs ) as well as the lessons that other developing countries can learn from this development experience. Latin America started to industrialise many decades before the East Asian NICs and yet was quickly overtaken by them in the last few decades. This article explores the agrarian roots that may explain the different development trajectory and performance of the East Asian NICs, particularly South Korea and Taiwan, and Latin America. The analysis focuses mainly on three interconnected factors in seeking to understand why the East Asian NICs outperformed Latin America: 1) state capacity and policy performance or 'statecraft'; 2) character of agrarian reform and its impact on equity and growth; 3) interactions between agriculture and industry in development strategies.     

The Evolution of the Foreign Direct Investment Regime in the Americas

The purpose of this article is to describe the international regime governing foreign direct investment in the Americas and assess its implications for regional economic governance. The article develops a novel methodology to map the multi-layered patchwork of investment agreements according to the level of investment protection offered by each agreement. The mapping exercise demonstrates the existence of two distinct legalization projects in the Americas, one which broadly corresponds to the investment protection concerns of the United States, and a second, overlapping regime, which better reflects the interest of many Latin American governments in maintaining their policy autonomy. The article argues that these distinct visions are anchored in a common dispute settlement system based on binding international arbitration, which tends to harmonize the governance effects of the regime.     

How Efficient are Africa's Emerging Stock Markets?

The development of financial institutions has been viewed in recent years as critical to the economic development process. This research uses recent data from the eight largest African stock markets to test whether these markets meet the criterion of weak-form stock market efficiency with returns characterised by a random walk. Results are then compared with similar tests on emerging stock markets in South-east Asia and Latin America. Conclusions from the research indicate that test results for weak-form efficiency in the emerging African stock markets compare favourably with those performed on other emerging stock markets.     

THE ROLE OF PUBLIC CAPITAL IN THE ECONOMIC DEVELOPMENT PROCESS

This paper reviews the evidence of public infrastructure's impact on economic development. The evidence indicates the marginal net social returns is low. The paper also examines the effect of economic, demographic, and political forces on infrastructure investment. Finally, the literature suggests that improving maintenance and reducing congestion can greatly increase the benefits from the existing public capital stock.     

From current-day Russia to Porfirio’s Mexico

Good economic institutions promote prosperity. Yet bad institutions can persist because they induce patterns of distribution that benefit certain groups, which accordingly have a vested interest in the status quo. InWithout a Map: Political Tactics and Economic Reform in Russia, Andrei Shleifer and Daniel Treisman show how politicians in Russia used a specific kind of deal, a mixture of expropriation and co-optation, to destroy these vested interests in the transition to a market economy. In this essay I show that there are close analogies between institutional change in contemporary Russia, and that which occurred in nineteenth-century Latin America, particularly in Mexico during thePorfiriato. After developing the analogy I draw some conclusions from the Mexican experience for the long-run implications of Shleifer-Treisman deals. The good news is that sustained economic growth is possible with the institutions that Russia seems to have developed. The bad news is that these may lead to extreme social conflict and ultimately revolution. I argue that there are two mitigating factors in Russia that provide grounds for optimism that revolution may be avoided. First, Russia is a democracy; second, the role of foreign investment is limited. Recent publications include the co-authored articles “Reversal of Fourtune: Geography and Institutions in the Making of the Modern World Income Distribution”,Quarterly Journal of Economics 118; “A Theory of Political Transitions”, American Economic Review 91; and “Inefficient Redistribution”,American Political Science Review 95.     

The mexican financial crisis

In the period 1990-93 Mexico's economy experienced expansion and structural change. This was associated with economic opening, market deregulation, and large inflows of foreign capital. Mexico had dealt with the external debt problem through a Brady debt restructuring. This restructuring lowered the financial requirements of the public sector, improved market expectations, and set the stage for a decline in domestic interest rates.

In the early 1990s Mexico attracted fully one-fifth of all capital flows directed into developing countries. These inflows more than financed the current account deficit, and permitted Mexico to expand its official reserve holdings. The portfolio capital inflow bolstered the stock market, which appreciated in value. Mexico's entry into NAFTA provided another reason to be optimistic concerning economic and business prospects.

However, Mexico's external payments position was falling deeper into deficit. By mid-1994 it was possible to observe that the current account in Mexico's balance of payments had shifted further into deficit, and that the high unsustainable level of capital inflow was diminishing. Political violence and assassinations in 1994 caused foreign investors to look more carefully at investment prospects, and steadily rising interest rates in the United States created incentives favoring dollar rather than peso financial instruments. As peso interest rates began to rise, the Mexican government and commercial banks turned to dollar-indexed or outright dollar borrowing. By December 1994 this increased dollar liability position together with a runoff in foreign exchange reserves left Mexico in a difficult liquidity position. The December 20, 1994 devaluation failed to renew confidence in the viability of Mexico's payments position, and two days later the peso was floated. In the early weeks of 1995 a massive Mexican financial assistance package was provided by the United States, the International Monetary Fund, and others.

An analysis of the components of Mexico's GDP and balance of payments suggests that the financial disequilibrium was clearly evident by mid- 1994. Over the period 1993-94 domestic absorption had increased beyond the ability of the economy to sustain it. Parallel to this, the current account deficit had increased beyond the ability of foreign exchange resources to support this deficit. Failure by the government and central bank to take action in the third quarter of 1994 resulted in a runoff of foreign exchange reserves, speculative trading in the financial markets, growing skepticism concerning the viability of existing arrangements. Fiscal and monetary tightening early in 1995 produced an improved financial equilibrium, suggesting that similar action at mid-1994 might have avoided the near debt crisis that manifested itself in December 1994 jand the following weeks.     

Foreign capital in Korea’s economic development, 1960–1985

The relationship between foreign capital and state autonomy is investigated in the rapidly developing South Korean economy. The changing composition and the sectoral distribution of the different types of foreign capital, the role of the Korean state in the acquisition and distribution of foreign capital, and the implications of foreign capital on the autonomy and capacity of the state are studied. The findings show that public loans and state-guaranteed commercial loans in the 1960s and 1970s have supported and strengthened state autonomy, while direct foreign investment (DFI) and commercial loans in the 1980s could potentially undermine it. Significant changes in the 1980s—rapid increase of Japanese DFI in hotels, commerical loans behaving more like DFI, and changing industrial orientation of the Korean economy toward more high-technology sectors—suggest that the types of foreign capital which are more independent of state control and more keen on market signals will increase in the future. This has importnat implications for future Korean economic development. Eun Mee Kim is an assistant professor of sociology at the University of Southern California. Kim has been conducting research on various topics of economic development and political development in South Korea and East Asia, and has published inPacific Focus, andThe Journal of Developing Societies. Kim’s current research includes the industrial organization and growth of the “chaebol” (business conglomerates) in Korea; the political economy of MNC investment by U.S. and Japanese corporations; and economic liberalization and political democratization in Korea and Taiwan.