Growth Re­turns to Latin Amer­ica and Counter-Cycli­cal Poli­cies In­crease

The Star (St. Lucia) - - BUSINESS MATTERS -

In a pos­i­tive de­vel­op­ment, to­day more than ever be­fore, Latin Amer­i­can and Caribbean coun­tries are pur­su­ing counter-cycli­cal fis­cal poli­cies - spend­ing more in bad times and sav­ing in good times, ac­cord­ing to a new World Bank semi­an­nual re­port for the re­gion.

“Lean­ing against the Wind: Fis­cal Pol­icy in Latin Amer­ica and the Caribbean in a His­tor­i­cal Per­spec­tive” ar­gues that the trans­for­ma­tion is sig­nif­i­cant for a re­gion that has of­ten pur­sued pro-cycli­cal spend­ing – in­creas­ing the risks of over­heat­ing economies dur­ing boom times and mak­ing re­ces­sions deeper dur­ing the bad times.

Ac­cord­ing to the Con­sen­sus Fore­casts, Gross Do­mes­tic Prod­uct in the re­gion is ex­pected to grow by 1.5 per­cent this year and 2.5 per­cent in 2018, putting an end to six years of an eco­nomic downturn, in­clud­ing re­ces­sion over the past two years. If they ma­te­ri­al­ize, re­cov­er­ies ex­pected in Brazil and Ar­gentina will largely fuel the re­turn to growth in the re­gion. Mex­ico’s growth is ex­pected to hover at around 1.4 per­cent, while Cen­tral Amer­ica and the Caribbean will main­tain steady growth of around 3.8 per­cent.

How­ever, the fis­cal ac­counts of many coun­tries have suf­fered due to the pro­longed slow­down. As of 2016, 29 out of 32 coun­tries were fac­ing fis­cal deficits, largely due to higher spend­ing. The me­dian gross debt for the re­gion stands at 50 per­cent of GDP. Still - in a sig­nif­i­cant break with the past - many coun­tries now find them­selves in a bet­ter po­si­tion to es­cape this dif­fi­cult fis­cal predicament, ac­cord­ing to the re­port.

“Coun­tries in Latin Amer­ica and the Caribbean have tra­di­tion­ally been pro-cycli­cal, ei­ther be­cause of po­lit­i­cal pres­sures to spend dur­ing good times or lack of ac­cess to in­ter­na­tional cap­i­tal dur­ing bad times,” said Car­los Végh, World Bank Chief Econ­o­mist for Latin Amer­ica and the Caribbean. “As a re­sult, they of­ten found them­selves caught in a fis­cal pro­cycli­cal­ity trap, lead­ing to higher public debt and fis­cal deficits as well as lower credit rat­ings that left them few op­tions to turn things around.”

In re­sponse to the global fi­nan­cial cri­sis of 2008, the num­ber of coun­tries with a coun­ter­cycli­cal fis­cal pol­icy in­creased from 10 to 45 per­cent of the re­gion’s economies.

“While coun­tries may still find it tempt­ing to spend rather than save in the next boom cy­cle, the events of the last decade in fis­cal pol­icy give us hope that coun­tries will play it safe in­stead and be pru­dent,” said Végh. “In an ex­ter­nal en­vi­ron­ment char­ac­ter­ized by fre­quent shocks and volatil­ity, such pru­dence will al­low them to turn fis­cal pol­icy into in­stru­ments to help cope with the next downturn and pre­serve so­cial gains.”

-- World Bank

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