FOREIGN DIRECT INVESTMENT AND BALANCE OF PAYMENTS IN LATINAMERICA (1990-2011) 1 Douglas Alcantara Alencar 2 Eduardo Strachman 3 ABSTRACT When the world economy is in an upswing, international liquidity expands and thereby also capital flows toward the peripheral countries. However, when these countries engage in speculative finance, they become vulnerable because a change in expectations can generate anoutflow of capital, causing a crisis and also seizures (or at least this last measure is feared by many agents of those indebted countries, as was seen during the debt crisis of the 1980s and also in some recent seizures of Argentinian assets, in the USA). This unstable process is consistent with theMinskian (1977) hypothesis of financial instability, applied to an economic open environment.Empirically, in the 1990s there was an expansion of international liquidity and the reintegration of Latin America in the international financial system, especially after the Brady Plan. Several countries in the region have then resorted to external financing. However, from the Mexican crisis of 1995 on, capital flows consisted mainly of Foreign Direct Investment (FDI). Some authors, including Kregel (1996) and Laplane and Sarti (2002) began to question whether FDI and other capital flows, besides current account results,could constrain economic growth, more or less following in broad terms (not recurring to mathematical or more elaborated statistical data) an analysis of Balance of Payments restrained growth. That is to say, if FDI and other capital flowswere staunched and if this is accompanied by capital outflows that originated from this FDI in previous periods, there could happen a Balance of Payment constraint to economic growth. The aim of this work is to identify whether there is a relationship between foreign direct investment (FDI) and other flows, on the one hand, and long-term growth, on the other,in Latin America, in the period between 1990 and 2011. Keywords: capital flows, economic growth, external constraint JEL: E12 1. INTRODUCTION When the world economy is in times of expansion, the international liquidity also tends to expand and capital flows also are directed toward the peripheral countries. However, latter this speculative finance turn these countries vulnerable to reversals in these flows because changes in expectations can reverse the flows of capital and cause crises. This process is consistent with Minsky’s (1977)financial instability hypothesis, if applied to an open economic environment. In the 90’s there was an expansion of international liquidity and a reintegration of Latin America into the international financial system, especially after the Brady Plan. Several countries in the region have then resorted to external financing. However, from the Mexican crisis of 1995 on, capital flows to Latin America consisted in great part of foreign direct investment (FDI). Some authors (Kregel, 1996; Laplane and Sarti, 2002) began to question whether these FDI flows could limit economic growth, from their impact in the Balance of Payments. The purpose of this paper is to analyze whether economic growth in Latin America has been hampered by external constraints, especially through the Balance of Payments. Through the model created by Thirlwall (1979), one can basically express this constraint as follows: y=x/π, where y is the economic growth compatible with the Balance of Payments equilibrium; x is the export growth rate; and π 1 Este trabalho contou com o apoio da FAPEMIG 2 PhD Candidate in Economics, Economics Department, Federal University of Minas Gerais (UFMG, Brazil). e-mail: dougsky@gmail.com . 3 Associate Professor, Department of Economics, São Paulo State University (Unesp). e-mail: edstrach@fclar.unesp.br .