Investment grew rapidly, especially in Colombia, where new oil fields attracted capital. But in 1996, the bank lending boom slowed, real interest rates rose dramatically, and investment demand slumped. Ecuadorian and Colombian authorities had to correct fiscal imbalances just as private demand was weakening, a double blow to economic growth. The challenge to Ecuadorian and Colombian policymakers, says the IDB, is to manage the correction to minimize the likelihood of a major economic downturn. The correction is likely to be short-lived, and the Peruvian economy is showing little sign of stress.
Money demand continues to rise and capital flows remain high.
But there is concern that Peru may undergo an inflated boom in bank lending, thus becoming vulnerable to a correction so severe it could destabilize the financial system and derail otherwise impressive economic accomplishments. The country's growth is expected to hit 4.5 percent in 1997, earning it a place with Argentina, Bolivia, Mexico and Uruguay as a solid achiever in the reform process. Jamaica is another example of the reform, boom, and correction cycle. When inflation in that country reached 80 percent in 1991, the government began a stabilization program that cut price rises in half the subsequent year. Inflation now stands at 15 percent.