Fiscal Policy in Latin America: Prudence Today Means Prosperity Tomorrow


Alejandro WernerBy Alejandro Werner

(Versions Español and Português)

Public finances in most Latin American countries strengthened significantly before the global financial crisis. Since 2009, countries have generally increased public deficits, drawing down on their fiscal coffers.

These expansionary policies continue and are yet to be reversed. With further pressures likely to build over the period ahead—as economic growth has slowed, commodity prices have softened, and external funding costs are bound to rise—now is the right time to rethink fiscal policies across the region.

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Fiscal Adjustment: Too Much of a Good Thing?


By Carlo Cottarelli

(Versions in  عربي中文EspañolFrançais, Русский, 日本語)

The IMF has argued for some time that the very high public debt ratios in many advanced economies should be brought down to safer levels through a gradual and steady process. Doing either too little or too much both involve risks: not enough fiscal adjustment could lead to a loss of market confidence and a fiscal crisis, potentially killing growth; but too much adjustment will hurt growth directly.

At times over the last couple of years we called on countries to step up the pace of adjustment when we thought they were moving too slowly.

Instead, in the current environment, I worry that some might be going too fast.

Risk to recovery

The latest update of the Fiscal Monitor shows that fiscal adjustment is proceeding pretty quickly in the advanced economies—on average the deficit is projected to fall by a total of 2 percentage points of GDP in 2011-12. The decline is even larger in the euro area—about 3 percentage points of GDP. In a reasonably good growth environment this pace of adjustment would be fine. But in the current weaker macroeconomic environment bringing deficits down this quickly could pose a risk for the economic recovery. Continue reading

Exit from Crisis Interventions


By José Viñals

Governments and central banks rose to the challenge as the 2008–09 financial crisis unfolded, taking unprecedented steps to avoid the collapse of the global financial system and avert a devastating impact on the global economy. Liquidity support, capital infusions, and public guarantees were provided to banks and other financial institutions; policy interest rates were lowered substantially; and fiscal stimulus packages were introduced.

On top of this, international institutions like the IMF enhanced their lending facilities to help emerging markets and developing economies better cope with the threats posed by the crisis.

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