Challenges to Fiscal Adjustment in Latin America

The Cases of Argentina, Brazil, Chile and Mexico

image of Challenges to Fiscal Adjustment in Latin America

This volume discusses progress made to date in Argentina, Brazil, Chile and Mexico in putting their finances in order and points out the challenges ahead. It provides an overview of trends and highlights the diversity of fiscal adjustment processes in Latin American countries. It also describes the financial market perspective and role of sovereign debt ratings.

The chapter on Argentina debunks the view that fiscal management in the 1990s was irresponsible, arguing instead that the financial crisis was caused by a confluence of costly pension reforms, Brady debt restructuring and the recognition of fiscal “skeletons” in the closet. The chapter on Brazil makes a case for a more entrenched culture of fiscal austerity to make the current achievements sustainable. The Chile chapter describes the role of political cohesiveness following the return of democracy in driving the economy to fiscal rectitude. Finally, the chapter on Mexico discusses different scenarios for debt dynamics and the country’s efforts to contain expenditure pressures.



Fiscal Adjustment in Latin America

Trends and Stylised Facts

This chapter presents general trends and stylised facts about fiscal adjustment in Latin America since the 1990s, with particular emphasis on Argentina, Brazil, Chile and Mexico. It highlights the considerable diversity in the size and scope of government among these countries, as well as in the level of public indebtedness, which continues to be a source of vulnerability in the higher-debt countries in the region. In most countries, the composition of fiscal adjustment has been tilted towards hiking revenue and compressing public investment, rather than retrenching current spending commitments. This imbalance is likely to affect the sustainability of adjustment over time. Moreover, the fiscal stance continues to have a bias towards pro-cyclicality in most cases, reflecting to a large extent high indebtedness and the ensuing vulnerability to shocks in “bad” times, as well as failure to contain the rise in expenditure in “good” times financed by cyclical revenue windfalls.


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