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Macroeconomic policies in times of crisis: options and perspectives



The global economic crisis has put an end to a period of six consecutive years of growth in Latin America and the Caribbean, growth on a scale that had not been seen for decades. This crisis is different from those which had been seen in the past, not only because its origin is different but also because, as the Economic Commission for Latin America and the Caribbean (ECLAC) has reported on several occasions, the region is much better prepared to deal with it. The favourable international environment which had been enjoyed by most of the countries of the region in recent years went hand in hand with clear progress in the design and management of macroeconomic policy, so that the countries were able to go through the boom period with twin surpluses on the public and external accounts. This made possible a generalized reduction in levels of debt and, at the same time, a buildup in international reserves.Nonetheless, in no way can the region be considered immune to this crisis; among other things, it is affected by falling external demand and export prices, difficult access to the financial system, capital outflows and high levels of uncertainty. In such situations, public policies have a dual responsibility: to stabilize the countries' economic growth by means of countercyclical measures, and to design instruments to protect the most vulnerable sectors of the population from negative distributive impacts.It should be borne in mind that one of the major lessons of the previous crises is that recovering from the resulting levels of poverty takes much longer, practically twice as long, as the recovery of economic indicators. Analysis of the region's per capita GDP trend in the major recessionary cycle of the 1980s shows that it took some 14 years to return to the pre-crisis level. However, the region took 25 years to fall to the pre-crisis poverty level, of about 40% of the population.The challenge for fiscal policy is dual, considering that the greatest demand for spending occurs at a time when fiscal resources are expected to decrease as a result of falling commodity prices and levels of activity, at a time when access to credit is reduced. This demonstrates the vital importance of the discussion of public policy contained in this document.Chapter I, Crisis and public policies in Latin America, examines the impact of the international crisis on the economies of Latin America, focusing mainly on how the crisis spread throughout the region. As highlighted in the chapter, the period characterized by the region's fastest economic growth in four decades was interrupted by a global crisis which reached practically all economies in the developed and developing world alike, and suddenly put the brakes on an extraordinarily intense and widespread economic expansion.This crisis, which found the region much better prepared than it had been in the past, clearly originated in the developed countries and from there spread to the periphery, in particular to Latin America and the Caribbean. Around two years after the onset of the financial turmoil, the nature of the impact on the countries of the region and their capacity to respond have clearly been very different from what was observed during the recurring episodes from the 1980s debt crisis to the early 2000s.The first chapter highlights a changing macroeconomic trend in the region from 2002 to 2008. Unlike previous booms, it encouraged savings, which in turn translated into reduced dependence on external financial resources and, in many cases, decreases in the absolute value of debt obligations with the rest of the world.Despite the clear differences between this crisis and others, the region will not escape unscathed. GDP is expected to decrease and unemployment will rise, probably accompanied by increasing informality. Unlike the situation in 2003-2008, this combination of events will likely lead to increased poverty and the emergence of new impediments to achieving the Millennium Development Goals.In the area of public finances, increased solvency was expressed as a decrease in total nonfinancial public sector debt as a percentage of GDP. In many cases this was thanks to increases in fiscal revenue and economic growth as well as public debt reduction. In addition, improvements were seen in public debt management in terms of currency, rates and terms. One cause for concern, however, is the significant narrowing of macroeconomic and fiscal space caused by weakening average fiscal balances in the region.The chapter entitled Crisis, volatility and fiscal policy in Latin America looks at the relationship between macroeconomic fluctuations and fiscal policy in order to identify structural and behavioural trends relevant to the design of fiscal stabilization policies.As the authors state, there was initial speculation that the region might be able to remain detached from the downturn in the United States and Europe. Today, however, no one doubts that the governments of the region will face serious macroeconomic challenges. This applies both to fiscal policy in general and to its stabilizing role in particular. It is only natural, therefore, that many in Latin America are anxious to identify effective initiatives to lessen the macroeconomic effects of the crisis, which are referred to in the document as exogenous trade shocks and sudden stops in capital flows. Although for the moment the situation seems better than in other episodes of contagion, there is no room for optimism because the contraction which has occurred has been sufficient to induce strong recessionary forces.The final chapter, The role of tax policy in the context of the global crisis: limits and possibilities, discusses how the effects of the international crisis on tax revenues in the region will differ from one country to another, explaining that the extent of the fiscal impact on each one will depend not only on its economic characteristics, but also on its tax system, in particular its tax structure, level of collection and sources of financing.To that end, the authors analyze taxation issues and their interaction with the current economic situation. First, they present an analysis of the main stylized facts which arise out of the evolution of fiscal and tax policy in recent years. Second, they consider the possible repercussions of the crisis in this situation and the level of exposure of each country in the region. They then examine the main fiscal and taxation measures adopted by governments, and the political-economy issues which may influence the implementation of reforms in response to the crisis. Lastly, they put forward some ideas on the paths the countries should follow in the coming years.In sum, this publication draws attention to the fact that the fiscal space achieved in recent years may continue to contract if the worldwide situation fails to improve. This would make it harder for public-policy decision-makers to choose between preserving the sustainability of public debt and alleviating the financial and social effects of the crisis; between protecting liquidity in the payment system and maintaining international reserves and controlling inflation; between shoring up macroeconomic stability and supporting specific sectors to prevent politically sensitive sectoral and social conflicts; and between subsidizing at-risk sectors and resorting to protectionism.Beyond the current situation, as this document points out, the crisis offers an opportunity to analyze the characteristics of macroeconomic policies which could bring about a sustained growth trend and limit the vulnerability of the region's economies to disturbances, whether of internal or external origin. The region has made progress in this respect, but much remains to be done, and the need to take advantage of favourable situations to accumulate resources with a view to financing countercyclical policies is clearly an important lesson of the current crisis. Alicia BárcenaExecutive SecretaryEconomic Commission forLatin America and the Caribbean (ECLAC)

Prologue by Alicia Bárcena

Includes bibliography

Spanish version available at the Library

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