Volume 44, Number 172,
January-March 2013
Financial Instability in Latin America:
A Minskian-Kaleckian Perspective
Tsuyoshi Yasuhara
Profits, Domestic Savings and Payments of Profits and Interests Abroad

The capacity utilization rate is considered the endogenous variable in the previous section, as we do not propose a balance between investment and savings by adjusting this rate. Moreover, we identify the function of savings and that of payment of profits and interests abroad, based on the Minskian financial instability hypothesis. Minsky’s theory focuses on the excess and/or scarcity of the cash flow generated by investment, in comparison with the balance of interest payments to the external fund to finance it. The function of investment in the neoclassical theoretical framework is based on the hypothesis that the behavior of sources of investment financing does not affect the level of investment, and as such, financing from external funds does not have a negative influence on the level of additional investment. The key point of the Minskian theory is that the risk for the debtor and the lender is elevated, in the same way that investment financing depends on an external fund, as well as the issuance of bonds and the raising of bank loans.

At the beginning of a boom in the economic cycle, companies tend to finance investments with their own resources, and this is called hedge finance. Additional investment brings about the need to raise external funds. High interest rate debts lead to the need for companies to obtain some fund with high liquidity before being able to capture profit flows. This obliges companies to refinance their debts for new external funds and the finance in this situation is classified as speculative finance. If most companies are at the stage of speculative finance, some will need to sell their assets to have liquidity. This phase is defined as Ponzi finance.10

Minsky’s analysis focuses on the balance of a representative entity, and as such, we must adopt a different point of view to apply this to macroeconomic research. If an entity is in the stage of speculative or Ponzi finance, another may transfer its funds to the former in order to not increase the risk of the debtor. In emerging economies, companies tend to depend on the issuance of bonds and raising bank loans in the international market to start meeting the need for additional investment. On the other hand, small entities do not have access to the international financial market and are also excluded from the domestic market. As such, they must continue their financing with their own resources. The increase in net liabilities due to the issuance of debt bonds and capital participation bonds brings about the need to make payments of profits and interests. This obliges some entities to take on even more debt. Even when investment is increasing and the economy has a high growth rate, the need to pay profits and interests abroad introduces the risk of uncertainty for the real exchange rate.

The risk of the debtor in the macroeconomic context is interpreted in this way. The hypothesis of this work is that financial instability in emerging economies is defined as a situation where additional investment does not produce accumulated profits in the domestic economy, as a consequence of increased payments of profits and interests abroad. In these circumstances, additional investment brings about the need to take on additional debt to pay interest, as it increases the risk of devaluation and/or capital flight. Our analysis is supported by Foley (2003), which presents the function of investment with the explanatory variable of the interest rate, and explains external debt as an increased function of the domestic interest rate. A high interest rate leads to elevated investment costs and higher payments for debt at the same time.

On the macroeconomic level, the company at stage V + I > R ≥ V , where D ≥ 0 and D < 1, is in the speculative stage of financing. A company with R < V, and as such D > 1, is at the Ponzi financing stage.

In macroeconomics, debt corresponds to the surplus of the capital and financial balance (= deficit of current accounts) and , where s represents the propensity to save of businessmen, with the assumption that consumption and savings of the businessmen come from profits P and In the space (g, i) that demonstrates the different financial conditions, the area of correspond to the hedge financing stage, indicate speculative financing and demonstrate the economics of Ponzi financing. In the Foley model, the function of the surplus of the financial capital account D and investment I are functions of the interest rate, and as such, capital accumulation and payment of interest abroad are affected at the same time by the interest rate.

Because the average level of the interest rate for countries in the region is not given, we can take a look at the approximate evolution of financing in Figure 7, which indicates the annual rate of variation for: capital accumulation domestic savings and the net liabilities of the income balance The data for the income balance are negative during this time period, as their rate of negative variation indicates the increase in payment of profits and interests abroad. With the assumption that savings reflect a part of the profit P, we can compare the rate of variation of and savings. The rate of increase in savings drastically falls between 2004 and 2005, as we observe that between 2004 and 2009.

10 Minsky, 1986, pp. 190-196.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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