Handling “Hot Money”: US Policy toward Latin American Capital Flight in Historical Perspective

Abstract

It is widely recognized that capital flight was a major contributor to the Latin American debt crisis of the 1980s. According to one estimate, the accumulation of foreign assets by Latin American citizens was equal to as much as 50 percent of the total external debt acquired by the ten largest Latin American debtors between 1975 and 1985. For some countries, such as Argentina, Mexico, and Venezuela, the value of the foreign assets of their citizens was almost equal to or even greater than the value of their external debt in the 1980s.1 These statistics suggest that if the foreign assets of Latin American citizens could have been returned home, the debt crisis would have been greatly eased. How could Latin American flight capital have been repatriated? Throughout the 1980s, orthodox thinkers argued that it was necessary to address the economic problems in the debtor countries that were said to have caused the exodus of hot money, that is, overvalued exchange rates and inflationary domestic economic policies. This view, however, ignored the extent to which capital flight was also related to factors more difficult to correct by economic reforms, such as political instability, tax evasion, and money laundering from illegal earnings. Moreover, critics have argued that the deflationary policies advocated by orthodox thinkers in the 1980s often depressed production, which may have encouraged a further flight of money escaping low returns on capital.2 A final and more profound criticism