Stimulus Spending: What’s Next for Latin America?

In the heat of the global recession, Latin American policymakers 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.

Read the full text of the article at www.AmericasQuarterly.org.

Luis Oganes is the head for Latin America in the Emerging Markets Research Group at JPMorgan Chase & Co.