Down and out for nearly a decade, Latin America is back with a roar. Capital flows tell the story clearly.

Last year alone, more than $40 billion in private capital flowed into Latin America, up from $13.4 billion in 1990, according to estimates by Salomon Brothers Inc.

Just as much, or more, is likely to come in this year, fueling one of the biggest comebacks in economic history.

From Buenos Aires to Caracas to Mexico City, phones are ringing, airports are jammed, and investors are excited.

"A new Latin America really is emerging," International Monetary Fund managing director Michel Camdessus noted in an address this year. "Only a few years ago, one had the general impression that many countries in the region were caught in a web of high inflation rates, economic stagnation, and seemingly insurmountable overindebtedness."

The surge in enthusiasm for Latin America is somewhat surprising because ample investment opportunities exist elsewhere. And there is no getting around the fact that Latin America hasn't had a particularly consistent record of making good on its debts.

But the region has several things going for it.

First, with interest rates on dollar deposits falling to their lowest level in decades, an ever growing number of international investors are looking for greater returns, even if it means taking on additional risk.

Second, South America remains one of the world's richest yet least populated continents; opportunities abound.

Third, investors have been heartened by the fall of military dictatorships and the rise of democracy and free markets.

In Mexico, President Carlos Salinas' observation that good economics makes good politics has almost become the slogan of the country.

In Argentina, Chile, and Venezuela, governments are similarly sticking to market reform as the best answer to the continent's chronic poverty. Their goal is to build modern industrial and financial infrastructures.

That means reducing state budget deficits, trimming foreign debt, privatizing state-owned companies, reducing inflation, deregulating financial systems, and liberalizing international trade.

The renewed confidence in Latin America is reflected in the continent's booming stock markets and an explosion of issues on international capital markets.

Argentina has led the way, with a 400% rise in the stock market in dollar terms so far this year, followed by Colombia, with 191%; Brazil, 173%; Mexico, 107%; Chile, 99%; and Venezuela, 48%.

Could It Be Just Mirage?

It seems almost heretical to ask right now, but one must: Could Latin America once again prove to be the eternal mirage, holding out promises of fabulous gains only to slide back into political and economic chaos, leaving investors high and dry?

Progress varies sharply from country to country.

"There's a hell of a lot of differentiation within the region," remarked Richard M. Johnston, director of Latin American investments at Ofitbank in New York.

Meanwhile, political instability in countries like Venezuela, Brazil, and Peru could once again upset the apple cart, reversing reforms of the last few years with a reassertion of state control over the economy.

"The problems aren't necessarily over. You can still have all sorts of corrections," noted Lane Grijns, executive vice president for Internationale Nederlande Bank in New York and head of its international operations.

In fact, several of the region's overheated stock markets have been sliding since June.

"If voters [in Latin America] are persuaded that the experiment with free market economics is failing, they may turn against it," said Elliot Abrams, former assistant secretary of state for inter-American affairs and senior fellow at the Hudson Institute, an Indianapolis-based think tank.

Others point to more short-termcall factors that endanger the success of economic reform in Latin America.

Much of the foreign investment money coming back, including capital that fled Latin America in the '80s, is skittish money. Any sign of instability could send such funds flowing back out as fast as they came in.

Trade deficits are rising in a number of countries, too, and stock markets remain highly volatile and thinly capitalized, with much of the capital concentrated in a handful of issues.

When shares in the Mexican telephone company, Telmex, fell in June on rumors that unions were about to unload a large holding, for example, the rest of the Mexican market crashed as well.

Immature Markets

"Stock markets still have some way to go in Latin America," the International Finance Corp. noted in a recently released report. In Argentina, the World Bank investment unit said, the 10 largest stocks account for 70.7% of capitalization on the Buenos Aires Bolsa. In Brazil, the 10 largest account for 31.9% of the capitalization; in Chile, 49.3%; in Colombia, 76.3%; in Mexico, 55%; and in Venezuela, 69.8%.

On top of all this, Latin America remains highly dependent on foreign bank loans, bond issues, and investors for its funding. Right now, that's fine. But if local capital markets fail to develop, the continent will never break out of its long-term dependence.

Despite the nay-sayers, most observers believe that Latin America is moving in the right direction and that foreign investors have little to fear.

"No doubt, in some countries, public support will flag, skepticism or pessimism will set in, and policies will be reversed," Mr. Abrams predicted. "As whole, however, Latin America has turned the corner, and there will be no going back."

"The changes will not be reversed," said Geoffrey Dennis, senior vice president and head of Latin America research at James Capel in New York. "The liberalization process is real and permanent and will guarantee a much better economic performance in the 1990s than in 1980s."

Evidence for Optimism

The evidence so far supports such optimism.

Multinationals like Bell Telephone and Spain's Iberia are acquiring operations in Latin America while domestic companies like Mexico's Cemex are reaching out to expand across borders into the United States and elsewhere.

Regional trading blocks are harmonizing regulations and spurring additional trade and development.

Mexico's recent agreement with the United States and Canada on a free trade zone opens up a market of 370 million people with a combined economy of $6 trillion.

Argentina, Chile, Brazil, and Paraguay are setting up their own common market, Mercosur, and Chile expects to reach its own free trade agreement with the United States within a year or two.

Concrete progress is being made, meanwhile, toward developing pools of local investment money.

Private pension funds and insurance funds are burgeoning in Chile, where the government is easing regulations to allow investments in the equity market, in project finance, and in real estate markets. Mexico and Argentina are similarly seeking to bolster their capital markets.

"Many countries are taking a realistic approach toward their problems and their new-found opportunities," said the IMF's Mr. Camdessus. "There is widespread conviction that the problems of Latin America can be solved."

The success of the region's current gamble on free market policies does not concern only Latin Americans. Both the United States and the rest of the industrialized world have a vested interest in ensuring that Latin America succeeds.

With the developed economies of North America, Europe, and Japan mired in recessions, Latin America's development could mean new customers and new markets.

Among developed nations, the United States probably has the biggest stake in the region. U.S. exports to Latin America already exceed exports to Japan and are still growing.

With Europe and Asia gradually retreating into regional trading blocs, many believe that the best prospect for international growth among U.S. banks and manufacturing companies lies in Latin America.

By the same token, if Latin America fails, U.S. economic growth may falter, too.

"There is remarkably little appreciation in the United States of the importance of Latin America," said Mr. Abrams. "People are not aware of how much we dominate the Latin American market and how much we benefit as Latin America profits."

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