Unformatted text preview: ocusing on providing incentives to non‐
traditional exports (Peru). As for the size of the packages that have been announced, it ranges from 0.6 percent of GDP in Brazil to 2.2 percent for Chile. Overall, the stimulus measures that have been announced by Argentina, Brazil, Chile, Mexico and Peru are equivalent to 1 percent of their combined GDP. Still, it is difficult to ascertain the extent to which the announced fiscal stimulus measures add to already existing plans or reallocate expenditures that had already been budgeted. One important concern, in this context, is that Governments may be placing excessively high expectations on their ability to implement discretionary counter‐cyclical fiscal policies in an effective manner. After all, as documented in an extensive empirical literature, few developing countries have been able to implement such fiscal programs in the past.116 The great majority of emerging market *The views in this note are entirely those of the authors and do not necessarily represent the views of the World Bank, its executive directors and the countries they represent. **LCR Crisis Briefs Series. 116 See Lane (2003), Kaminsky et al. (2005), Talvi and Végh (2005) and, Ilzetzki and Végh (2008). 9 7 economies have systematically cut taxes and raised expenditures during booms, while being forced to adopt contractionary policies during busts, when domestic and external credit constraints become binding.117 True, access to domestic and international financial markets has increased considerably for many Latin American governments during the present decade. This, in principle, could have reduced the financing constraints which in the past limited their ability to implement counter‐cyclical fiscal policies. However, as is well known, this situation has changed drastically with the drying of private credit markets after the onset of the current global financial crisis. Many LAC countries are now facing considerable challenges just to roll‐over their current stock of private and public debt. As a result, in order to finance possible fiscal expansions, or at least to avoid a fiscal contraction, most governments would probably have to rely solely on their own resources, complemented by multilateral financing. The risk is that many of the countries in the region could not have the necessary resources to finance substantial stimulus packages without compromising their hard‐gained macroeconomic stability. A related concern is that some of the political incentives and weaknesses in budgetary institutions which in the past have contributed to the pro‐cyclicality of the region’s fiscal policies may be hard to alter in the short run. This could limit the scope for shifting, at least in a sustainable manner, to a more counter‐
cyclical approach. In particular, governments have been traditionally unable to deal effectively with political pressures during expansions, which have limited their ability to generate significant surpluses during good...
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