Volume 5, Number 19, Page 4

Congressional Highlights

MEXICO

Compiled by Alfonso Trujillo from Cámara de Diputados press releases

Note: Both houses of the Mexican Congress were in recess for several months. During the recess period, which began April 30, 1998, the Permanent Commission was installed. This commission is comprised of 34 representatives from both houses and conducted the daily operations of the Congress during this recess period, including the release of press bulletins.

On September 1 the Mexican Congress reconvened. The session was opened by the State of the Union by President Ernesto Zedillo.

Next issue the InterAmerican Trade Report will continue its coverage of the sessions of the Congress—AT

From the Editor:

Capital Controls in Latin America?

Latin American countries tend to eliminate any barrier to investment. By enacting special new laws and modernizing existing commercial and investment laws, Latin American countries compete among each other to attract foreign investment. The most recent economic crisis affecting mainly non-developed countries has raised the issue of protecting investment in these countries.

According to Alfonso Reymond from a law firm in Chile, the model for control on investment has been operating in Chile since 1991. A mandatory deposit known as the “encaje” is imposed by the Central Bank on deposits or investments from other counties made in foreign currencies. Applied on credits and investments, the encaje seeks to protect the economy from short-term influxes of foreign capital. The Central Bank of Chile’s justifications for the use of the encaje include the following: the fall of international interest rates; the disruption of reducing interest rates internally; the impact on currency exchange rates of large amounts of foreign currency obtained at low interest rates; and the advantage of having foreign investment available in the medium and long term.

In Mexico, several congress members recently suggested the application of controls similar to those established in Chile to avoid speculative capitals. According to a recent report from the UNCTAD, the United Nations suggests that emerging markets apply controls on investments in order to protect economies from “predatory investments.”

Not all experts, however, believe the application of controls to be a good idea. For example, Luis R. Luis of Scudder, Stevens & Clark, Inc. considers the application of capital controls to be a mistake. He mentions that Chile is looking toward reducing the required amount of time that capital must stay in the country.

I believe that it will be hard for Latin American countries to establish controls on investments. The competition among countries to attract foreign investment is growing each year. There is a constant stream of trade missions between the U.S. and Latin America, and increasingly local governments from various countries are opening “commercial offices” in the U.S.

Establishing controls on investment should be carefully analyzed. Even though Chile could be considered an emerging market and is part of Latin America, the formula they are applying may not work for other countries. Some countries, such as Brazil or Mexico, may be able to create controls similar to those in Chile, but it is logical to expect a drop in foreign investments. On the other hand, smaller economies, like those in Central America, may benefit from other countries applying controls on investments by promoting themselves as “more open” economies.

Another issue to consider when applying controls on investments is the impact on current trade agreements. Trade agreements like NAFTA establish the concept of “national treatment”, meaning that a country must treat foreigners as nationals. Imposing controls on foreign investment violates this principle and could negatively impact momentum on the FTAA.

- Lic. J. Felipe Garcia