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Can Latin America Afford to Fight COVID-19?

14 18 2

WASHINGTON, DC – Confronting a pandemic is a grueling trial even for the most advanced economies. For indebted governments in Latin America and the Caribbean, it is harder still. Many countries’ fiscal positions are worse now than they were when the 2008 global financial crisis erupted. Worse, stimulus policies that work in normal times will not work against the fallout from COVID-19, and financing is becoming increasingly scarce as investors flee to safer assets and markets.

Between 2008 and 2019, Latin America and the Caribbean’s average overall fiscal balance slid from -0.4% of GDP to -3%, and average public debt grew from 40% of GDP to 62%. These numbers are a consequence of missed opportunities, particularly during and after the “Great Recession” in the United States.

In 2008-09, most governments in the region increased expenditures to sustain aggregate demand. Fiscal packages averaged 3% of GDP, but differed across countries. Those with low debt levels were able to implement substantial stimulus measures, whereas those with high debt had to undergo an economic contraction.

Given today’s higher debt levels, the region will be able to respond with a fiscal expansion of only around half the size of that in 2009, on average. Whereas Chile and Peru have room for spending, Argentina, Ecuador, and other countries will struggle.

Another issue will be the composition of fiscal stimulus, which can have far-reaching implications for the future. True counter-cyclical policies call for only transitory expenditures. But in the 2009 fiscal expansion, almost two-thirds of spending went toward higher salaries and permanent transfers, which are difficult to reverse, and thus not sustainable. By ratcheting up these current........

© Project Syndicate