The Liquidity Trap: Latin America's Free-Market Past

Courtesy Reuters

The story is well known in economics lore: A famous academic, one of the world's leading proponents of deregulation and free markets, is invited to Chile, which is in economic trouble. He and his followers propose a series of measures to open the economy, including easing banking restrictions, freeing credit, and eliminating tariffs. Their prescriptions are followed, and, as foreign capital pours in, the Chilean economy booms and becomes a model for the region. Or another version: In Mexico the president turns against the policies that have left the country heavily indebted and starved for domestic investment. He places a group of young foreign- trained economists and engineers in the trade and finance ministries, and they move rapidly to free up key areas of the economy and renegotiate Mexico's external debt. One of the most striking results of their reforms is a dizzying rise in inflows of foreign capital. In

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