In it’s semiannual report for the region entitled “Leaning against the Wind: Fiscal Police in Latin America and the Caribbean in a Historical Perspective”, the Washington based institution 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 (GDP) in the region is expected to grow by 1.5 per cent 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.
The bank says 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 World Bank says 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.”
However, the institution says that 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 per cent of the region’s economies.
Countries such as Chile, Colombia, Costa Rica, El Salvador, Guatemala, Mexico, Paraguay, and Peru begun to increase public spending and/or lower taxes in an attempt to stimulate the economy.
The bank says while such measures produced fiscal deficits, they were the result of a concerted effort to minimize the downturn.
On the other hand, countries that continued with pro-cyclical policies must now further consolidate their fiscal accounts to minimize the risks of deterioration in their credit ratings and an increase in borrowing costs, the report argues.
“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.”
- Countries: United_States