Responsible Fiscal Policy and Economic Development: A Challenge for Latin America After COVID-19

Abstract

The COVID-19 pandemic has made it evident that the deep global economic-financial crisis of 2007–2009 has not been overcome. Instability and uncertainty have reached extreme levels in all public and private spheres, demanding to revolutionize the economic structure, promote innovation in methods to manage production, generate originality in the social and institutional organization of the State and to accelerate the advent of new energy sources to promote in unprecedented ways the relationship between human beings and nature. In recent years and during the pandemic, in Latin American economies, unemployment, underemployment and informal employment, public debt, and inflation rates have increased, while the real income of governments fell. This situation is accompanied by persistent operating account deficits, public and private debt negotiations, high interest rates, periods of stability or appreciation in the exchange rate, volatility of foreign capital flows and flight of national capital; all being favorable elements for the mainstream policy based on fiscal discipline. In a post-pandemic stage, during which income concentration accelerates and the prices of basic necessities such as food and medicines increase, the planned government deficit, taking into account the heterogeneity among countries in the region, could avoid another lost decade with a multiplier effect on socio-economic development.

Keywords:

• Latin America
• fiscal deficit
• public debt
• economic development
• COVID-19 pandemic

JEL CLASSIFICATIONS:

• E62
• H12
• H50
• O23
• O54

Acknowledgements

This article was written in honor of the life and contribution to economics of Eugenia Correa, thanking her for all her teachings and collaboration in academic projects. The author would like to thank Alicia Girón, Mario Seccareccia and two anonymous referees for their helpful and insightful suggestions and comments. All errors remain the author’s own.

Notes

1 Towards the end of the 1970s, after the collapse of the Bretton Woods Agreement, modifications began to appear in the capital accumulation regime of developed countries. These changes were important for economic growth, the use and development of new technology, and adjustments to labor markets. The State stopped participating in a set of economic-social activities, it promised to comply with: (1) an independent central bank to maintain low inflation rates by adjusting interest rates, (2) achieving a balanced fiscal budget through austerity policies, (3) issuing government bonds in the financial markets, and (4) guaranteeing high returns to large corporations and institutional financial investors. At the same time, the predominance of the deregulated financial sector, its actors, reasons, objectives and goals over the real sector became visible, from an accelerated and constant process of globalization that has imposed its conditions and promoted the geographical expansion of neoliberalism. This combination of economic, political and social transformations, grouped under the concept of financialization, is the path that Latin America has necessarily had to transit since the 1990s. Thus, in the Latin American region the promotion of economic-social development has been postponed; however, progress has been traced towards growing institutional weakness and financial instability expressed in recurring crises, and an economic-social bipolarization with labor segmentation tending to worsen in the post-COVID-19 pandemic stage.

2 This topic is widely presented and discussed by Arturo Guillén Romo (2012).

3 See Marc Lavoie (2014, 2019).

4 Camdessus (1995) referred to this crisis as the first of the twenty-first century, although Edwards (1996) compares it and finds similarities with the Chilean crises of 1981–1983.

5 Faruk Ülgen deals with this problem in his essay: Ülgen (2015, 148–162).

6 UN ECLAC (2008). Balance preliminar de las economías de América Latina y el Caribe 2007, Santiago de Chile, UN-ECLAC, available at: https://repositorio.cepal.org/bitstream/handle/11362/970/1/S0800885_es.pdf

7 It is possible to highlight the case of Brazil.

8 The numbers were taken from UN ECLAC (2021). Balance preliminar de las economías de América Latina y el Caribe 2020, Santiago de Chile, UN-ECLAC, available at: https://repositorio.cepal.org/bitstream/handle/11362/46501/1/S2000990_es.pdf, 124–25.

9 Alain Parguez (2013). He is emphatic in arguing that austerity embodies and constitutes the modern crisis, and how the governments of the main countries agree to coordinate their policies to protect their financial markets with austerity in charge of restoring and reinforcing the power of the rentiers.

10 The statistical source consulted was: OECD (2021). “Estadísticas tributarias en América Latina y el Caribe 2020”. Available at: https://www.oecd.org/tax/tax-policy/brochure-estadisticas-tributarias-en-america-latina-y-el-caribe.pdf

11 The data were taken from UN ECLAC (2021). Balance preliminar de las economías de América Latina y el Caribe 2020, Santiago de Chile, UN-ECLAC, 93. Available at: https://repositorio.cepal.org/bitstream/handle/11362/46501/1/S2000990_es.pdf

12 The data was taken from UN ECLAC (2021), Balance preliminar de las economías de América Latina y el Caribe, Santiago de Chile, UN-ECLAC, 156. Available at: https://repositorio.cepal.org/bitstream/handle/11362/46501/1/S2000990_es.pdf

13 See Jan Kregel (1998).

14 Keynes referred to the second possibility raised here. See John Maynard Keynes (1980).

15 They include cyclical deficits and structural deficits.

16 Reinhart and Rogoff (2011) have studied eight centuries of external and internal debt in the regions of Latin America, Asia, and Africa.

17 In raising interest rates for the refinancing of public debt, the increase in the reference interest rate is important as an instrument to control the inflation rate, although it also has an impact on the economy in a variety of ways.

18 The reference to the debt-GDP ratio is due to the consequences of the public bonds purchase by non-residents in Latin American countries. This is a recurring situation in the region. Kregel discusses the abandonment of syndicated bank loans as a source of financing in developing countries in the 1980s, to clear the way for equity financing, with the consequent justification for the privatization of state-owned companies and public securities in the financial markets, opening the doors to financial fragility and instability, especially in the current account of the balance of payments (Kregel, 1998, 46–53).

19 Involuntary unemployed are workers without jobs, searching for work and willing to accept the prevailing wage, or even lower remuneration.

20 “As long as the growth of public spending to guarantee full employment, and effective demand over time can be reconciled with budget balances consistent with the stabilization of the relationship between public debt and the GDP, at some desired level in a suitable time horizon” (Lerner, 1943, 353–5, also quoted in Aspromourgos, 2014, 9).

21 Other measures to be implemented are the sale of goods between the public and private sectors.

Additional information

Notes on contributors

Marcia Solorza

Marcia Solorza, PhD, is Professor of Economics at the National Autonomous University of Mexico, Mexico City, Mexico.