Public Spending Policies in Latin America and the Caribbean - (Latin American Development Forum) by Daniel Riera-Crichton & Guillermo Vuletin

About the Book

This report highlights structural differences in public spending policies between emerging markets and industrialized nations. Emerging markets commit to long-term (rigid) spending based on short-term (cyclical) economic conditions, causing challenges in addressing fiscal imbalances and prompting changes in public spending composition.

Book Synopsis

In low- and middle-income economies, public spending policies diverge significantly from those of industrialized nations due to structural differences. Low- and middle-income economies often make long-term commitments based on short-term economic conditions, leading to mismatches between spending maturity and economic cycles. These mismatches can exacerbate fiscal imbalances and hinder economic growth by forcing compositional changes in public spending. Public Spending Policies in Latin America and the Caribbean: When Cyclicality Meets Rigidities describes significant cyclical behavior variations in low- and middle-income markets. Contrary to Keynesian principles, public spending in these economies tends to be procyclical during economic booms, driven by increased borrowing and political pressures to address social deficits, but policy makers are unable or unwilling to retrench during economic busts. This approach not only amplifies macroeconomic volatility but also plants the seeds for fiscal distress, which is typically addressed by diminishing the quantity and quality of public investment--with serious consequences for long-term growth. Labor market informality further complicates matters, rendering automatic stabilizers like unemployment insurance impractical. Instead, governments rely on public employment and social transfer programs, which are downwardly rigid and can contribute to the expansion of government size over time. Addressing these anomalies requires policy interventions beyond traditional recommendations. Implementing fiscal rules to restrain overspending during economic upturns, enhancing the efficiency of public goods provision, and establishing mechanisms to adjust social programs during economic fluctuations are suggested approaches. In addition, measures to protect public investment and mitigate biases against pension benefits could aid in fostering long-term economic sustainability and welfare improvement. Public Spending Policies in Latin America and the Caribbean will be of interest to policy makers, researchers, and anyone with an interest in developing mechanisms for helping low- and middle-income economies weather economic storms.

About the Author

The World Bank came into formal existence in 1945 following the international ratification of the Bretton Woods agreements. It is a vital source of financial and technical assistance to developing countries around the world. The organization's activities are focused on education, health, agriculture and rural development, environmental protection, establishing and enforcing regulations, infrastructure development, governance and legal institutions development. The World Bank is made up of two unique development institutions owned by its 185 Member Countries. The International Bank for Reconstruction and Development (IBRD) focuses on middle income and creditworthy poor countries and the International Development Association (IDA), which focuses on the poorest countries in the world.