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The risks of a capital surge

Experts predict a rebound in capital flows to Latin America and the Caribbean this year, but warn that countries must build and maintain sound financial systems and improve the institutional environment to make the flows sustainable.

“We’re looking for a resumption of growth ,” Inter-American Development Bank Chief Economist Ricardo Hausmann told participants at the seminar “The New Wave of Capital Inflows: Sea Change or Just Another Tide?,” which was held in conjunction with the IDB’s annual meeting in New Orleans. He added that the challenge is to avoid another “boom and bust cycle.”

Hausmann said that total capital inflows declined in 1998–99, while foreign direct investment (FDI) rose to constitute almost 100 percent of the net private capital inflows. He welcomed the increase in fdi, but noted that it took place in the context of collapsing overall capital flows.

Countries need to attract portfolio capital flows as well as direct foreign investment, Hausmann said, adding that fdi accounts for a larger share of the investment mix in developing countries than in industrial countries in part because fdi is seen as less risky.

Ernest Stern, managing director of J. P. Morgan, told seminar participants that portfolio investment in Latin America and the Caribbean is expected to double this year, reflecting recovery from the 1999 slowdown. As for foreign investment as a whole, “I do not expect a tidal wave,” he said.

Shahid Javed Burki, chief executive officer of EMP Financial Advisors, said “we are at the beginning of an economic boom.” He predicted “a long expansion that will not be interrupted by systemic busts.” But he warned that individual countries will fail to benefit if they “go off the track” and fail to adopt or maintain sound financial policies.

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