Latin America: The Case for Fiscal Prudence

Bloggers at the IMF are looking at why Latin America fared better in this crisis than during previous episodes of financial duress. Their explanation: financial soundness mixed with enhanced credibility.

This improvement can be attributed to the fact that the region faced the crisis equipped with economic policy frameworks that were more solid and credible than in the past, and with smaller financial, external, and fiscal vulnerabilities. This allowed a number of countries of the region to implement countercyclical monetary and fiscal policies.

The estimates here suggest that these countries were able to “save” about 4 percentage points of GDP during the crisis, thanks to their better preparations for confronting external shocks.

A key element of this preparedness was credibility. Those countries which had responsibly managed their monetary and fiscal policies before the crisis were able to quickly lower interest rates, while increasing public expenditure and fiscal deficits. Countries such as Brazil, Chile and Peru managed to store away enough revenues from the commodity booms of the previous years in order to enact the necessary mix of countercyclical policies. Mexico, which is suffering from dwindling oil reserves, had less of a cushion, and has in turn struggled more than most of its neighbors.

Update: Vox has an interesting paper on the policy responses of Latin America Central Banks during the crisis, written by the former governor of the Central Bank of Ecuador.

Comments

[Dave Wrixon]

Perhaps a good example for the rest of America to follow.

Perhaps it is time to arrange a few seminars where the Latins lecture Obama and Co. on how to run a country?

2009 Oct 23 04:40 AM

[bob adamson]

Arguably there is a more prosaic answer. The last 30 or so years have been marked by a series of regional and national financial crises, primarily in Asia and Latin America. One can argue whether these crises needed to happen in every case and whether the measures taken to stem these crises needed to be as draconian in each case as they were. That said, those countries were in relatively good shape as a result of the reforms instituted to end their individual crises (Argentina being an exception) and have therefore weathered the current recession well. Australia, New Zealand and Canada faced the prospect of having similar crises in the 1990s and instituted reforms to forestall this happening with happy consequences at present.

The US, UK, Ireland, Iceland, Spain etc did not go through this reforming process prior to 2008 and are now feeling the brunt of the crisis.

Japan is a special case in that it entered a banking and deflationary crisis more than a decade ago which it attempted to resolve through massive but not sufficient stimulus. It stemmed the downturn but neither recovered nor reformed its financial system. Japan’s experience is a cautionary tale for the US and UK today; half measures (even if they seem massive) aren’t sufficient.

2009 Oct 24 12:29 AM