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Internationalfinance689108 perotti r 2007 fiscal

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Unformatted text preview: times.118 To the extent that these political and institutional constraints remain unchanged, it could be difficult to scale back expansionary programs once the region’s economies start their cyclical recovery. This could in turn negatively affect their future creditworthiness and further limit the potential for shifting, in the medium term and on a sustainable basis, from pro‐cyclical to counter‐cyclical fiscal policies. Although LAC has traditionally had a poor fiscal policy track record … Latin America’s pro‐cyclical approach to fiscal policy has negatively affected its long term growth through at least two channels. First, pro‐cyclicality has helped amplify economic fluctuations.119 Second, governments have tended to penalize public investment in the fiscal adjustment programs implemented during downturns.120 Besides hurting growth, this anti‐investment bias has arguably also had unintended negative consequences on long term government solvency.121 This effect has been reinforced by the fact that most Latin American countries have failed to systematically adjust their fiscal policies to the requirements of long term debt sustainability, at least until the 1990s.122 In particular, during this period, countries experiencing increasing ratios of debt to GDP were not able to systematically tighten their discretionary revenue and expenditure policies. Finally, the pro‐cyclicality of the region’s fiscal policies has made it difficult to expand social safety nets. In this sense, the behavior of fiscal policies has been 117 See Gavin, Hausmann, Perotti and Talvi (1996) and Caballero and Krishnamurthy (2004). See Tornell and Lane (1999), Braun (2001), Talvi and Végh (2005), Perry (2007), Alesina, Campante and Tabellini (2008), Ilzetzky (2008). 119 See Fatás and Milhov (2007) and Perry (2007). On the pro‐cyclicality of the region’s fiscal policies, see Gavin and Perotti (1997), Suescún (2005), Perry (2007), Perry , Servén, Suescún and Irwin (2007) and the references therein. 120 The “perversity” of fiscal adjustments biased against public investments is related to the fact that the latter have the potential to increase future government revenues, for instance through tolls, tariffs and growth‐related increases in general tax collection. See Easterly and Servén (2003) and Calderón and Servén (2004). 121 See Servén (2007). 122 See Suescún (2005) and Perry , Servén, Suescún and Irwin (2007). 118 98 especially harmful for the poor, given their fewer assets, limited access to credit and lower ability to smooth consumption during downturns.123 …this record has improved during the present decade Have these stylized facts been altered during recent years? Increasing concerns with debt sustainability, for example, have been apparent in many LAC countries during the last decade. In fact, the region has reduced its net dependency on external capital inflows. As shown in Figure 2, Latin America’s general government debt as a share of GDP has exhibited a clear downward trend after 2003. This has be...
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