Summary and Keywords
Despite theoretical assumptions about the potential for financial liberalization in Latin America to foster economic growth, empirical developments revealed a different story. With financial liberalization came greater macroeconomic instability, exposing countries to financial crises even when domestic economic fundamentals were mostly in order. At the policy front, capital account liberalization posed crucial challenges to macroeconomic governance. Indeed, international political economy literature on financial globalization has highlighted that developing countries’ governments who chose to implement policies that contradicted financial markets’ expectations could be “disciplined” or “punished” by the threat of capital outflows. Yet, capital flows to emerging economies are not determined solely by domestic (push) factors. Even in the most extreme case of noncompliance with investors’ (creditors’) preferences—i.e., sovereign default—evidence shows that market re-access and the cost of new debt are a function of credit cycles rather than solely determined by investors’ decisions to “punish” defaulters. In addition, to the extent that the “market” can indeed be considered as a single analytical category, industry-specific incentives shape portfolio investors’ bets. Caveats also apply to how market reforms differed in nature and degree, even in Latin American countries subjected to similar external pressures. The same is true for policy responses to the 2008 financial crisis. These dynamics add necessary nuance to broad depictions of financial liberalization as a deterministic process unequivocally constraining domestic policy autonomy in predictable ways.
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