Latin America and the Caribbean: Finding Space for Countercyclical Fiscal Policy

In this year of global recession, fiscal policy has been able to play a supportive role in some countries of the Latin America and Caribbean (LAC) region.  Even as the downturn caused fiscal revenues to fall, many governments were able to avoid cutting expenditure, and some were able to provide a sizable positive fiscal impulse, actively raising expenditure to provide a boost to domestic demand and GDP.   

This is especially clear among the group we call “commodity exporting, financially integrated countries” (see Figure). Fiscal policy is also playing a countercyclical role in a number of other countries in 2009.  In contrast, some of the region’s other commodity exporting countries—which in general had implemented a procyclical fiscal policy during the previous years of expansion—continue to do so in 2009, with negative fiscal impulses.

And most of the LAC region’s tourism intensive countries are also implementing a procyclical policy, again similar to their previous record.

The different fiscal policy responses this year are not a surprise, but relate to differences in the conditions and policies prevailing in more favorable times. Countries implementing countercyclical fiscal policies in 2009 are those that have the ability to do so.

This is the notion of fiscal space, related to the availability of financial buffers, and the ability to access international capital markets even during bad times, a privilege associated with stronger track records of fiscal discipline—including by having achieved larger fiscal surpluses in the pre-crisis period, when revenues were booming.

Countries with larger debt ratios, lower debt ratings, lesser access to financing or their own financial buffers have less space to conduct countercyclical fiscal policies. In some cases, these restrictions are related to past patterns of rapidly increasing expenditure when rising commodity export prices deliver revenue windfalls.

This year’s experience highlights the value of strengthening fiscal policy frameworks in the future, so that all countries can be better prepared for future episodes of unfavorable conditions.  For a discussion of these policy issues, and a detailed analysis of policy responses to the global crisis, see the October 2009 edition of the Regional Economic Outlook for Latin America and the Caribbean.

Other blogs in this series:

The Commodity Connection: Rising Commodity Prices and the Outlook for Latin America and the Caribbean

Latin America and the Caribbean During the Global Crisis: Better than the Past, Better than Other Regions

Why Did Latin America Do Better in This Crisis? The Benefits of Being Prepared

Spanish versions (Version en español):

La recuperación de los precios de las materias primas y su impacto en las economías de América Latina y el Caribe América Latina y el Caribe durante la crisis: Mejor que en el pasado y que otras regiones ¿Por qué América Latina tuvo un mejor desempeño en esta crisis? Los beneficios de estar preparado

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