Financial Instability in Latin America:
A Minskian-Kaleckian Perspective
Tsuyoshi Yasuhara

The rate of increase in international commerce fell from 7.1% in 2007 to 4.9% the following year. In this same time period, there was a net exit of financial resources, shown in the capital and financial balance, as a consequence of the reduced inflow of fdi and portfolio investment from industrialized economies.

Focusing on these external conditions, most hypotheses assume that: i)the economy of the region did not have any internal or external imbalance before the 2008 crisis, because this crisis originated in the external market; and ii)the differing levels of economic contraction among Latin American countries can be attributed to varying levels of commercial openness and export diversification.2 In other words, according to this analysis, internal demand has registered a sustained level of growth before and after the crisis, as the gdp annual growth rate for the region recovered to 5.9% in 2009.

Figure 4. The Capital and Financial Balance of Latin America, as a percentage of gdp
Source: eclac. Latin America and the Caribbean: Historical Series of Economic Data, Latin America, Balance of Payments 1980-2008; Balance of Payments in Dollars at Current Prices, and Preliminary Economic Balance of Latin America and the Caribbean 2011, pp. 99, 110, 111.

The above allows us to identify a growth mechanism accompanied by the transfer of resources to outside of the region. Figure 3 indicates the evolution of fpi, the net liabilities per participation in capital (inflow of foreign portfolio investment and cross-border mergers and acquisitions), and the net liabilities per debt bonds. A certain structural change also stands out in the capital and financial balance, which allows us to conclude that cross-border mergers and acquisitions and debts have obligated the regional economy to make additional payments of profits and interests abroad.

Facing growth rates of 4.6% or 5.8% between 2003 and 2006, the monetary authorities of the regional countries applied an anti-cyclical policy by increasing the nominal interest rate. In reality, this had no effect on the level of fixed investment, although it did encourage private entities to issue debt bonds in the international market. A 2002 eclac document analyzes this issue, concluding that (following the global uncertainty of 2002) Latin American countries had to recover access to sources of foreign financing with normal interest rates. However, this implied restructuring external debt.3

This observation orients us towards examining the relationship between fixed investment, domestic savings and payments of profits and interests, in the years before the crisis. However, excessive savings and a surplus in the capital and financial balance cannot be explained by national accounts in the neoclassical theoretical framework. In the following section, we build the model of financial stability/instability, based on the Minsky hypothesis.

2eclac, Preliminary Economic Balance of Latin America and the Caribbean 2009, p. 59.

3eclac, Preliminary Economic Balance of Latin America and the Caribbean 2002, p. 16.