What’s Next for
In the heat of the global reces- sion, Latin American policymak- ers took unprecedented actions
to break the downward spiral in
aggregate demand. Beyond aggressively supporting financial markets,
including interest-rate cuts and liquidity injection measures in some
cases, many governments also pursued significant fiscal stimulus
packages. Success in mitigating the
crisis reflected a country’s overall
fiscal preparedness. But now may
be the time to tighten fiscal belts.
Together with the deterioration
of public-sector finances, discretionary stimulus policies in 2008
pushed the overall fiscal balance
of governments worldwide from
an average deficit of 2. 6 percent of
GDP to a gap of almost 7 percent
last year. Latin America was not an
exception. One third of the region’s
fiscal deficit increase—which widened from 0.6 percent of GDP in
2008 to 2. 9 percent in 2009—can be
attributed to the fiscal cost of discretionary measures.
But the degree to which countries could use fiscal policy to cushion the impact of the crisis varied.
In general, commodity exporters
like Brazil, Chile, Colombia, Mexico,
and Peru pursued prudent policies
in advance of the crisis, either saving part of the windfall from high
commodity prices during the boom
years or using it to reduce net external liabilities. This opened the door
for either the adoption of counter-cyclical fiscal measures in Brazil,
Chile, Mexico, and Peru, or, as in
Colombia, the avoidance of big fiscal spending cuts to help contain
the decline in aggregate demand.
Even so, there was a wide variety
in the type and scale of measures.
They included increases in public
infrastructure spending (Mexico
and Peru), transfers to vulnerable
groups (Brazil, Chile, Mexico, and
Peru), tax breaks for auto purchases
(Brazil), and freezes on government-controlled prices (Mexico). The fiscal cost ranged from 1 percent to
3 percent of GDP, well below that
of developed and other emerging
economies. But off-budget initiatives—including the massive loans
granted by Brazil’s state development bank that added up to 6 percent of GDP—did not represent an
immediate fiscal cost.
The story was quite the opposite for those Latin American countries where high revenues during
the preceding boom years were
matched by even higher expenditure growth. At a time of collapsing
commodity prices and shrinking
external demand for goods and services, these policymakers could
not pursue aggressive counter-cyclical policies and were forced to
push the brakes on public spending. Many such countries—
including commodity exporters like
Argentina, Ecuador and Venezuela, and importers (including most
of the Caribbean)—either experienced a deeper recession or are re-covering at a slower pace.
It is fair to say that regional stimulus spending—in countries that
could afford it—was quite effective in cushioning the effects of
the global crisis. The Brazilian,
Chilean and Peruvian economies,
which deployed the largest stimulus packages, will grow at the fastest pace in 2010, above 5 percent.
How long can these countries
maintain fiscal largesse? Strictly
judging by the fiscal room to spend,
the countries positioned to pursue