PERSPECTIVE ON LATIN AMERICA : Nail-Biter for Emerging Economies : The investment boom of recent years is fading as nervous capital flows out, responding to global interest-rate shifts.

A serious warning signal has begun to flash in several Latin American economies (starting in Mexico, as with the 1982 debt crisis, and like then, spreading rapidly to the rest of the hemisphere). Instead of continuing to flow in, money is beginning to leave; instead of moving up, stock and bond markets are drifting downward. The felicitous reversal of fortune seen in recent years is fading.

From 1982 through the early 1990s, largely because of the now nearly forgotten debt crisis, Latin America was a net capital exporter. Absurdly, for a developing region of the world, it sent far more money abroad than the funds it received through loans, foreign investment and repatriated flight capital. Latin America was financing the industrialized world with its deficient savings, instead of the other way around.

Then, just a few years back, interest rates began to fall, foreign debts were renegotiated and macro-economic reforms took hold. Trade openings, privatizations and ensuing lower inflation made the hemisphere’s finances more alluring. Money began pouring in. Countries like Mexico, Argentina, Venezuela (spectacularly) and Colombia and Chile (more consistently) received huge sums of foreign investment and private lending. Their stock exchanges boomed, the state-owned companies they placed on the auction block fetched fantastic amounts of cash and privately owned firms were borrowing again at reasonable rates on the international markets. Latin America re-established itself as a capital-importing region and its economies began to grow, albeit slowly.

Several explanations were proffered for fascination with the area’s so-called emerging markets. The newly achieved reforms--exchange-rate stability plus sound public finances--initially were given credit. That explanation was soon found wanting. As much money was flowing into Brazil, where the currency was devalued daily and inflation was above 50% monthly, as into Argentina, which had virtually eliminated inflation and practically adopted the U.S. dollar as its currency. Brazil, the presumed economic basket case, has been growing at five times the rate of Mexico, the supposed head of the class, and its foreign reserves are almost exactly twice Mexico’s. Successful privatizations were also brandished as a reason for the boom, but again, counter-examples complicated matters. Mexico, for instance, received inflows well after its privatization program had ended.

Economists soon understood the importance of a third factor: the tremendous difference in interest rates and investment yields between the emerging markets and the United States or Europe. Low rates in the United States, coupled with virtually guaranteed high investment return, paid in dollars, in Latin America, constituted an explosive combination. It made sense for pension funds, insurance companies, mom-and-pop investors and high-rolling speculators to place part of their money in Argentine and Brazilian stocks or Mexican Treasury certificates: they paid out 20%, 30%, even 40% yields, in dollars, yearly.

Of course, when interest-rate differentials started shrinking and uncertainty over several nations’ political futures revived, as happened in the first two months of this year, the money that flowed in began to flow out. First the U.S. Federal Reserve Bank raised short-term interest rates, reversing the trend of the last several years. Then came the Chiapas uprising in Mexico, along with the assassination of presidential candidate Luis Donaldo Colosio and the kidnaping of two Mexican billionaires. The Banco Latino bankruptcy in Venezuela, where a new government raised some uncertainty, added nervousness to increasingly interconnected markets.

Between the Latin stock markets’ peak at the beginning of the year and the beginning of May, the Mexican Bolsa lost 23%, the Argentine market 25%, the Sao Paulo exchange nearly 40% and the Venezuelan stock market more than 30%. J.P. Morgan’s Emerging Markets Bond Index, which tracks the trend of Latin debt rather than stocks, went from a peak of slightly above 100 in January to a low of 77 and has stabilized since in the low 80s. Somewhere in the vicinity of $20 billion has left Latin America since the beginning of the year: $10 billion to $12 billion from Mexico alone, $2 billion to $3 billion from Venezuela, the rest from Argentina and Brazil. This total is worrisome but manageable. There is no need to panic, but it is time to ponder the excessive optimism of recent times.

What Latin America does to attract and keep investment funds from abroad is important, but it is a marginal economic region, still terribly sensitive to what goes on elsewhere. Latin America is not, in any sense of the word, a master of its own financial destiny.