The World Bank's chief economist for Latin American and the Caribbean, Augusto de la Torre, discusses ways to increase the value of foreign direct investment in the region and how to manage short-term capital flows.
Capital inflows used to have a very pronounced affect in Latin America, given their association with the financial instability of the 1990s. The region used to be regularly shaken by what one economist called "sudden stops", massive reversals in capital inflows, says Augusto de la Torre, chief economist for Latin American and the Caribbean at the World Bank.
“Our analysis shows that the region is now more integrated into international capital markets and inflows are not nearly as vulnerable today,” says Mr de la Torre. Residents used to save in dollars because of credibility issues with local currencies. Financial dollarisation is slowly disappearing in the region. “More flexible exchange rates mean that currency movements, instead of amplifying shocks, have now become a shock absorber. Today, the fear of currency depreciation has been replaced by a fear of appreciation. The concept of sudden stops has to be revisited."
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