Brazil: short foreign money, long domestic political cycles

Brazil: Short Foreign
Money, Long Domestic
Political Cycles
Peter R. Kingstone

Financial globalization and foreign capital flows have come to occupy great attention in Latin America in the mid— I 990s. In political terms. the increased importance of foreign capital has held out both promises and threats fop Latin American democracy. On the one hand, forelen investment and financial liberalization have held out the possibility of financing new growth and replacing the now exhausted sources of state financing for industry. Similarly, these new inflows of capital have also helped support financially strapped governments, allowing them to maintain key services and political support while substantially cutting overall spending. On the other hand, substantial and sometimes rapid capital inflows also posed risks — as the Mexican peso crisis and resulting ‘tequila effect’ dramatically revealed. When financial flows reverse their direction, the resulting payments jioblerns can force politically difficult choices over who should bear the costs.
While Mexico has commanded a great deal of attention in the mid—I 990s as a result of the peso crisis, the issues noted above apply to l3razil as well. Brazil liberalized its trade and financial system later and mote slowly than countries like Mexico. Argentina, and Chile. However, this libetalizatitin. beginning in 1990, has attracted greater and greater inflows of lorcign capital. both direct and portfolio investments. This is especially trite since 1994 when then Finance Minister. Fernando Henrique Cardoso. suceesslullv stabilized inflation through the Retil Plan.’
As dramatic as this new visibility of foreign capital in the legion may he. does not represent a sharp break with the past. Alter all, foreign capital has played a positive and vital role in economic and political development evet since Latin America increasingly integrated into the global eenh1tim’ in the nineteenth century. British capital linanced