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This article argues, using the example of Brazil, that the changing nature of developing
and emerging countries’ (DECs) financial integration has created new forms
of external vulnerability, causing large and volatile capital and exchange rate movements.
Despite sound fundamentals and a substantial reduction in its traditional
external vulnerabilities, the Brazilian real has been one of the most volatile currencies
over recent years. The article argues that this has been the result of the surging
exposure of foreign investors in an increasingly complex set of very short-term
domestic currency assets. Following a Minskyan analysis, we demonstrate that the
changing nature of Brazil’s external vulnerability confirms both the inherent and
endogenous instability of international capital flows and DECs’ subordinate role
in the international financial system. We conclude with policy recommendations to
reduce DECs’ external vulnerability sustainably.
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