PRIVATE CAPITAL FLOWS TO BRAZIL IN THE 1990s: Capital Controls and the liberalization of the Capital

The liberalization of exchange flows and the renegotiations of the foreign debt allowed the Brazilian economy to be one of the main recipients of foreign capital flows. [...] The nature of such destabilizing capital flows would depend on both the credibility of the reform program and the extent of the differences in the speeds of adjustment in goods, factor and financial markets. [...] The effectiveness of these penalties in inhibiting illegal capital transactions depends on the effort put on the enforcement of the capital controls and on the prosecution of those caught violating the controls. [...] During the period covering 1985-89, the reforms focused on the completion of the restructuring of the banking system, the establishment of indirect methods of monetary control, trade reform, increased scope of transactions by banks, establishment of the autonomy of the Central Bank of Chile, and the selective liberalization of direct and portfolio capital inflows. [...] These developments have sparked debate on the appropriate sequencing of liberalization in two domains: the balance of payments, where the issue is whether the current or the capital account should be liberalized first; and the financial sector, where the issue is whether or not domestic financial liberalization should precede the opening of the capital account.