Latin American Economic Outlook 2012

Transforming the State for Development

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Even in the midst of a global financial crisis, Latin American and Caribbean economies find themselves in better condition than in years past. Latin America must seize this opportunity to design and implement good public policies. The greatest of the long-term objectives of Latin American states remains development: economic growth and structural change that is rapid, sustainable and inclusive. In particular, governments must reduce inequalities in income, public-service delivery and opportunities, as well as promote the diversification of economies, often concentrated on a few primary-product exports.

Improved efficiency of public administration is crucial to address both the short-term and long-term dimensions of these challenges. The real change, however, will come if Latin American and Caribbean states carry out meaningful fiscal reforms, making them not only more efficient but also more effective. The increased effectiveness of fiscal policy holds the promise to provide resources needed to address the key challenges of economic development. Three key priority areas for investing additional resources have been highlighted by many governments in the region for their potential to raise competitiveness and social inclusion: education, infrastructure and innovation. In each of these areas, more efficient administration and more effective strategic action is needed from states.

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Fiscal policy reform

OECD Development Centre

The countries of Latin America and the Caribbean have made significant progress over the past two decades in the area of public finances. Higher tax revenue has made it possible to reduce debt and increase spending on productive investment and in programmes to fight poverty. The recent crisis has not interrupted this progress, as the fiscal space accumulated in the boom years has made it possible to finance fiscal stimulus programmes similar to those of OECD economies.

Despite the progress made, Latin America continues to face major fiscal challenges. Low levels of personal direct taxes, limited targeting of public spending and the small size of transfers explain the lack of redistribution of public finances. In addition, low tax revenues in most countries are an obstacle to the development of a modern state.

This chapter contends that a combination of advances in fiscal institutions in Latin America could help to address these challenges. It highlights the need for transparent fiscal statistics, multi-year budgetary frameworks and fiscal rules to ensure sustainability, stabilisation and medium and long-term objectives. This could be structured around a fiscal pact to strengthen citizens’ trust in their governments.

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