BIS Papers No 36 New financing trends in Latin America: a by Federal Reserve Bank of Atlanta

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Additional info for BIS Papers No 36 New financing trends in Latin America: a bumpy road towards stability. Proceedings of a joint meeting organised by the BIS and the Federal Reserve Bank (FRB) of Atlanta in Mexico City, May 2007

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It is worth noting that FDI also moves procyclically, although not to the same extent as short-term bank loans and portfolio investment (WB (1999)). FDI can also increase macroeconomic instability, in part because much of FDI takes the form of mergers and acquisitions of firms in developing countries, which depend on the procyclical availability of financing for such operations. To the extent that FDI is geared towards the domestic market, it responds to economic booms and downturns in the same way as domestic investment.

Some Latin American firms, after consolidating 20 BIS Papers No 36 their position in their home markets, acquired companies in the region when foreign firms downsized or closed their operations; this is what happened with Mexico’s Telmex and Chile’s Falabella in the retail sector. Other Latin American firms concentrated on acquiring companies in their home countries, as did Brazil’s Banco Itaú. This local expansion shows not only the strength and competitiveness built by firms during the liberalisation process but also the risk of a takeover by a developed transnational company (WIR 2006).

The widespread shift towards export-led strategies in the developing world has actually accentuated this dependence in all countries. Domestic policies quite often respond procyclically to commodity price volatility, among others, by expanding fiscal expenditures during the boom and reducing spending when prices are down. The latter is reinforced by the conditionality linked to international financial assistance during crises, which involves orthodox macroeconomic stabilisation policy packages.

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