| Abstract: |
This paper studies the experience of Latin-America [LATAM] with financial
liberalization in the 1990s. The rush towards financial liberalizations in the
early 1990s was associated with expectations that external financing would
alleviate the scarcity of saving in LATAM, thereby increasing investment and
growth. Yet, the data and several case studies suggest that the gains from
external financing are overrated. The bottleneck inhibiting economic growth is
less the scarcity of saving, and more the scarcity of good governance. A
possible interpretation for these findings is that in countries where private
savings and investments were taxed in an arbitrary and unpredictable way, the
credibility of a new regime could not be assumed or imposed. Instead,
credibility must be acquired as an outcome of a learning process.
Consequently, increasing the saving and investment rates tends to be a time
consuming process. This also suggests that greater political instability and
polarization would induce consumers to be more cautious in increasing their
saving and investment rates following a reform. Hence, reaching a sustained
take-off in Latin-America is a harder task to accomplish than in Asia. |