Americas Quarterly - Spring 2010

POLICY UPDATE

STIMULUS SPENDING

What’s Next for Latin America LUIS OGANES

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.