The Role of Fiscal Policy in Sustainable Stabilization: Evidence from Latin America


The Role of Fiscal Policy in Sustainable Stabilization:
Evidence from Latin America
by Teresa Ter-Minassian and Gerd Schwartz

This paper reviews the role of fiscal policy in a number of stabilization
programs in Latin America since the early 1980s. The paper highlights the
importance of sustainable fiscal adjustment in successful stabilization
efforts, and discusses the main issues that arise in ensuring such adjustment
-- namely, measuring the degree of the existing fiscal disequilibrium;
determining the size of the adjustment needed to arrive at a fiscal balance
consistent with the macroeconomic objectives of a stabilization program;
selecting high-quality and lasting fiscal measures; and correctly sequencing
these measures. After reviewing the Latin American experience, it is argued
that failed stabilization attempts can be traced to four main factors. First,
the adoption of inconsistent policy mixes, such as excessive reliance on
heterodox elements, or the use of a nominal exchange rate anchor unsupported by
adequate monetary and fiscal restraint, or an imbalance in the fiscal/monetary
mix. Second, the excessive reliance on endogenous and temporary factors, for
example, fiscal improvements that occur even in the absence of explicit fiscal
policy measures, but are short lived. Third, the failure to implement
fundamental fiscal reforms, and the reliance on quick-fix measures that
frequently have adverse allocative implications. And, fourth, a lack of
complementary structural reforms, such as privatization, foreign trade
liberalization, or a redesign of the system of intergovernmental fiscal
relations. The success of some recent stabilization programs in Latin America
can be attributed to the fact that progress has been made in all or most of
these areas. Electorates in several Latin American countries in recent years
have rewarded governments that have introduced durable stabilization plans and
have not shied away from the necessary fiscal reforms.