Latin
American
Development
Forum
Series
This series
was
cr eat ed
in
2003
t o
pr omot e
debat e,
disseminat e
information and
anal y sis,
and
c on v ey
the
e x cit ement
and
comple xity
of
the
most
t opical
issues
in
ec onomic
and
social
dev elopment
in
Latin
America
and
the
Caribbean. It
is
sponsored
b y
the
Int er- American
Dev elopment
Bank,
the
Unit ed
Nations
Economic
Commission
for
Latin
America
and
the
Caribbean,
and
the
W orld
Bank, and
r epr esents
the
highest
quality
in
each
institution’s
r esear ch
and
acti vity
output. Titles
in
the
series
ha v e
been
select ed
for
their
r elev anc e
t o
the
academic
c ommunit y , policy
mak ers,
r esear cher s,
and
inter est ed
r eaders,
and
ha v e
been
subject ed
t o rig or ous
anon ymous
peer
r eview
prior
t o
publication.
Ad visor y
Committ ee
Member s
Alicia
Bár c ena
Ibarra,
Executi v e
Secretar y , Economic
Commission
for
Latin America
and
the
Caribbean,
Unit ed
Nations
Inés
Bustillo,
Dir ect or , W ashingt on
Offic e,
Economic
Commission
for
Latin America
and
the
Caribbean,
Unit ed
Nations
Eric
P arr ado
Herr er a,
Chief
Economist
and
Gener al
Manag er , Resear ch Department,
Int er- American
Dev elopment
Bank
Elena
Iancho vichina,
Deputy
Chief
Economist
of
the
Latin
America
and
the Caribbean
Region,
W orld
Bank
Martin
R ama,
Chief
Economist
of
the
Latin
America
and
the
Caribbean
Region, W orld
Bank
Robert o
Rig obon,
Pr ofessor
of
Applied
Economics,
Sloan
School
of
Manag ement, Massachusetts
Institut e
of
T echnology
Ernest o
T al vi, Dir ect or , Br ookings
Global-CERES
Economic
and
Social
P olicy
in Latin
America
Initiati v e
Andr és
V elasc o,
CIEPLAN
(Corpor ación
de
Estudios
par a
Latinoamérica),
Chile
T itles
in
the
Latin
American Development
Forum
Series
Fiscal
Rules
and
Economic
Size
in
Latin
America
and
the
Caribbean
(2020)
by Fernando
Blanc o,
P ablo
Saa v eda,
Friederik e
Koehler-Geib,
and
Emilia
Skrok
Who
Decides
Social
P olic y?
Social
N et w ork s
and
the
P olitical
Econom y
of
Latin America
and
the
Caribbean
(2020)
b y
Alejandr o
Bon v ec chi
and
Car los
Scartascini
W ag e
Inequalit y
in
Latin
America:
Under st anding
the
Past
to
Pr epar e
f or
the
Futur e
(2018)
b y
Julián
Messina
and
Joana
Sil v a
Stop
the
V iolence
in
Latin
America:
A
Look
at
Pr e v ention
fr om
Cr adle
to
A dulthood
(2017)
b y
Laur a
Chioda
Inno v ati v e
Experiences
in
A ccess
to
Finance:
Mark et -Friendl y
Roles
f or
the
Visible
Hand?
(2017)
b y
A ugust o
de
la
T orr e,
Juan
Car los
Gozzi,
and
Sergio
L.
Schmukler
Be y ond
Commodities:
T he
Gr o wth
Challeng e
of
Latin
America
and
the
Caribbean (2016)
b y
Jorge
Thompson
Ar aujo,
Ekaterina
V ostroknuto v a,
Mar k us
Brueckner , Mat eo
Cla vijo,
and
Konstantin
M.
W ack er
Left
Behind:
Chr onic
P o v ert y
in
Latin
America
and
the
Caribbean
(2016)
b y
Renos Vakis,
Jamele
Rig olini,
and
Leonar do
Luc chetti
Cashing
in
on
Education:
W omen,
Childcar e,
and
Pr osperit y
in
Latin
America
and
the Caribbean
(2016)
b y
Mercedes
Mat eo
Diaz
and
Lourdes
Rodriguez-Chamussy
W ork
and
F amil y:
Latin
American
and
Caribbean
W omen
in
Sear ch
of
a
N e w
Balance
(2016)
b y
Laur a
Chioda
Gr eat
T eacher s:
Ho w
to
Raise
Student
Learning
in
Latin
America
and
the
Caribbean
(2014)
b y
Bar bar a
Bruns
and
Ja vier
Luque
Entr epr eneur ship
in
Latin
America:
A
Step
Up
the
Social
Ladder?
(2013)
b y
Eduar do Lor a
and
Fr anc esca
Cast ellani,
edit or s
Emerging
Issues
in
Financial
De v el opment:
Lessons
fr om
Latin
America
(2013)
by T atiana
Didier
and
Sergio
L.
Schmukler , edit or s
N e w
Centur y,
Old
Disparities:
Gaps
in
Ethnic
and
Gender
Earning s
in
Latin
America and
the
Caribbean
(2012)
b y
Hug o
Ñopo
Does
What
Y ou
Export
Matter?
In
Sear ch
of
Empirical
Guidance
f or
Industrial P olicies
(2012)
b y
Daniel
Lederman
and
W illiam
F . Maloney
From
Rig ht
to
Realit y:
Incenti v es,
Labor
Mark ets,
and
the
Challeng e
of
A chie ving Univ er sal
Social
Pr otection
in
Latin
America
and
the
Caribbean
(2012)
b y
Helena Ribe,
Da vid
Robalino,
and
Ian
W alk er
Br eeding
Latin
American
T ig er s:
Oper ational
Principles
f or
Rehabilit ating
Industrial P olicies
(2011)
b y
Robert
Devlin
and
Gr aciela
Moguillansk y
N e w
P olicies
f or
Mandator y
Defined
Contribution
P ensions:
Industrial
Org anization Models
and
In v estment
Pr oducts
(2010)
b y
Gr eg orio
Impa vido,
Esper anza Lasag abast er , and
Manuel
Gar cía-Huitr ón
T he
Qualit y
of
Lif e
in
Latin
American
Cities:
Mark ets
and
P er ception
(2010)
b y Eduar do
Lor a,
Andr ew
Po well,
Bernar d
M.
S.
v an
Pr aag,
and
P ablo
Sanguinetti, edit or s
Discrimination
in
Latin
America:
An
Economic
P erspecti v e
(2010)
b y
Hug o
Ñopo, Albert o
Chong,
and
Andr ea
Mor o,
edit or s
T he
Pr omise
of
Earl y
Childhood
De v el opment
in
Latin
America
and
the
Caribbean
(2010)
b y
Emiliana
V eg as
and
Lucr ecia
Santibáñez
J ob
Creation
in
Latin
America
and
the
Caribbean:
T r ends
and
P olicy
Challeng es
(2009)
b y
Carmen
P ag és,
Gaëlle
Pierre,
and
St ef ano
Scarpetta
China’s
and
India’s
Challeng e
to
Latin
America:
Opportunit y
or
T hr eat?
(2009)
b y Daniel
Lederman,
Marc elo
Olarr eag a,
and
Guillermo
E.
Perr y , edit or s
Does
the
In v estment
Climate
Matter?
Micr oeconomic
F oundations
of
Gr o wth
in
Latin America
(2009)
b y
P ablo
F ajnzy lber , Jose
Luis
Guasch,
and
J . Humbert o
López, edit or s
Measuring
Inequalit y
of
Opportunities
in
Latin
America
and
the
Caribbean
(2009) b y
Ricar do
P aes
de
Barr os,
Fr ancisc o
H.
G.
Ferr eira,
José
R.
Molinas
V eg a,
and
Jaime Saa v edr a
Chandu vi
T he
Impact
of
Pri v ate
Sector
P articipation
in
Infr astructur e:
Lig hts,
Shadows,
and the
Road
Ahead
(2008)
b y
Luis
Andr es,
Jose
Luis
Remitt ances
and
De v el opment:
Lessons
fr om
Latin
America
(2008)
b y
P ablo F ajnzy lber
and
J . Humbert o
López,
edit or s
Fiscal
P olic y,
St abilization,
and
Gr o wth:
Prudence
or
Abstinence?
(2007)
b y Guillermo
Perr y , Luis
Serv én,
and
Rodrig o
Suescún,
edit or s
Raising
Student
Learning
in
Latin
America:
Challeng es
f or
the
21st
Centur y
(2007) b y
Emiliana
V eg as
and
Jenn y
Petro w
In v estor
Pr otection
and
Corpor ate
Go v ernance:
Firm-Le v el
Evidence
acr oss
Latin America
(2007)
b y
Albert o
Chong
and
Flor encio
López-de-Silanes,
edit or s
N atur al
Resour ces:
N either
Cur se
nor
Destin y
(2007)
b y
Daniel
Lederman
and W illiam
F . Malone y , edit or s
T he
St ate
of
St ate
Ref orm
in
Latin
America
(2006)
b y
Eduar do
Lor a,
edit or
Emerging
Capit al
Mark ets
and
Gl obalization:
T he
Latin
American
Experience
(2006)
b y
A ugust o
de
la
T orr e
and
Sergio
L.
Schmukler
Be y ond
Sur vi v al:
Pr otecting
Households
fr om
Health
Shock s
in
Latin
America
(2006) b y
Cristian
C.
Baeza
and
T ruman
G.
P ackar d
Be y ond
Ref orms:
Structur al
Dynamics
and
Macr oeconomic
V ulner abilit y
(2005)
b y José
Ant onio
Ocampo,
edit or
Pri v atization
in
Latin
America:
Myths
and
Realit y
(2005)
b y
Albert o
Chong
and Flor encio
López-de-Silanes,
edit or s
K eeping
the
Pr omise
of
Social
Securit y
in
Latin
America
(2004)
b y
Indermit
S.
Gill, T ruman
G.
P ackar d,
and
Juan
Y ermo
Lessons
fr om
N AFT A
f or
Latin
America
and
the
Caribbean
(2004)
b y
Daniel Lederman,
W illiam
F . Malone y , and
Luis
Serv én
T he
Limits
of
St abilization:
Infr astructur e,
Public
Deficits,
and
Gr o wth
in
Latin America
(2003)
b y
W illiam
East er l y
and
Luis
Serv én,
edit or s
Gl obalization
and
De v el opment:
A
Latin
American
and
Caribbean
P erspecti v e
(2003) b y
José
Ant onio
Ocampo
and
Juan
Martin,
edit or s
Is
Geogr aph y
Destin y?
Lessons
fr om
Latin
America
(2003)
b y
John
Luk e
Gallup, Alejandr o
Ga viria,
and
Eduar do
Lor a
Guasch,
Thomas
Ha v en,
and
V i vien
F oster
All
books
in
the
Latin
American
Dev elopment
Forum
series
ar e
a v ailable for
fr ee
at
https://openkno wledge.w orldbank.org/handle/10986/2167.
TITLES
IN
THE
LATIN
AMERICAN
DEVELOPMENT
FOR UM
SERIES
ix
Contents
Preface
xvii Ackno wledgments
xix
About
the
Authors
xxi
Abbrevia tions
xxiii
Over view
1
Setting
the
Scene
1
Fiscal
Rules
and
Economic
Size
7
Small
Countries:
Structur al
F eatur es,
Business
Cy cles,
and
Rec ent
Economic P erformanc e
8
A
Snapshot
of
Fiscal
Rules
12
Fiscal
Rules
in
Pr actic e:
Pr esenc e,
Complianc e,
and
Effecti v eness
16
Designing
Effecti v e
Fiscal
Rules
in
Smaller
Countries
32
Annex
O A.
Smaller
Countries
in
the
W orld,
b y
P opulation
Size
and
Land
Ar ea
38
Not es
40
Refer enc es
41
Chapter
1:
Structural
Features
and
Business
Cycles
in
Smaller
Countries
43
Intr oduction
44
Structur al
Char acteristics
of
Small
Economies
45
Business
Cy cles
in
Smaller
Economies
53
Summary
of
Findings
58
Not es
59
Refer enc es
60
xi
Chapter
2:
The
Impact
of
Fiscal
Rules
on
Fiscal
Perfor mance
63
Intr oduction
64
T ax onom y
of
Fiscal
Rules
65 Pr esenc e
of
Fiscal
Rules
67
Complianc e
with
Fiscal
Rules
and
Contributing
F act or s
73 P erformanc e
of
Fiscal
Rules
83
Summary
of
Findings
91 Not es
92
Refer enc es
93
Chapter
3:
Designing
Effective
Fiscal
Rules
in
Smaller
Countries
95
Intr oduction
95
Objecti v es
of
Fiscal
Rules
97
Comparing
the
W elf ar e
Effects
of
Fiscal
Rules
in
Smaller
Economies
102 Summary
of
Findings
112
Not es
114
Refer enc es
115
Chapter
4:
Summing
Up:
Implementing
Pr actical
Fiscal
Rules in
Smaller
Countries
117
Boxes
2.1
Fiscal
Councils
79
3.1
Establishing
W ell-Defined
Escape
Clauses
101
3.2
Key
Principles
for
Establishing
a
Sa vings
F und t o
Addr ess
High
Volatility in
Smaller
Economies
103
Figur es
O.1 A v er ag e
Fiscal
Balance
and
Debt
Lev el
as
a
P er centag e
of
GDP
in
LA C
Countries, 2000–08
v er sus
2009–19
2
O.2 Fiscal
Balance
as
a
Shar e
of
GDP
in
LA C
and
the
W orld,
b y
Country
Size, 2000–17
3
O.3 Go v ernment
Debt
as
a
Shar e
of
GDP
in
LA C
and
the
W orld,
b y
Country
Size, 2017
3
O.4 Gr owth
and
Volatility
of
GDP
per
Capita
and
Pri v at e
Consumption
in
LA C
and the
W orld,
b y
Country
Size,
2000–17
5
O.5 Structur al
F eatur es
of
Countries
in
LA C
and
the
W orld,
b y
Country
Size
10
O.6 Losses
Due
t o
Natur al
Disast er s
in
LA C
and
the
W orld,
b y
Country
Size
12
O.7 A
Basic
T ax onom y
of
Fiscal
Rules
14
O.8 Number
of
Fiscal
Rules,
b y
T ype
of
Rule,
1985–2015
17
O.9 Number
of
National
or
Supr anational
Fiscal
Rules
in
LA C,
1985–2019
17
O.10 Use
of
Fiscal
Rules,
b y
T ype
of
Rule,
Region,
and
Country
Size,
2015
18
O.11 Complianc e
with
Fiscal
Rules,
b y
Country
Size
and
Region,
2000–15
23
O.12 Complianc e
with
Fiscal
Rules
in
LA C
and
the
W orld,
b y
T ype
of
Rule
and
Country Size,
2000–15
24
O.13 Fiscal
Rule
Str ength
Inde x
(FSRI),
b y
T ype
of
Rule
and
Complianc e,
1985–2013
26
O.14 Impact
of
Fiscal
Rules
on
the
Responsi v eness
of
the
Primary
Balance
t o
Chang es
in the
St ock
of
Debt,
b y
T ype
of
Rule
and
Country
Size
28
O.15 Impact
of
Fiscal
Rules
on
Public
Debt
Levels
and
Fiscal
Balanc es,
b y
T ype
of
Rule and
Country
Char acteristics
29
O.16 Impact
of
Fiscal
Rules
on
10-Year
Expenditur e
Pr ocy clicality , b y
T ype
of
Rule
and Country
Char acteristics
30
O.17 Impact
of
Combined
Fiscal
Rules
on
the
Responsi v eness
of
the
Primary
Balance
t o Chang es
in
the
Debt
St ock,
b y
Combination
of
Rules
31
1.1
Char acteristics
of
Small
Countries
45
1.2
Structur al
F eatur es
of
Countries
in
LA C
and
the
W orld,
b y
Country
Size, 2000–15
47
1.3
Conc entr ation
of
Exports
in
LA C
and
the
W orld,
b y
Country
Size,
1995–2013
48
1.4
Go v ernment
Spending
as
P er centag e
of
GDP
in
LA C
and
the
W orld,
b y
Country Size,
2000–15
49
1.5
P er centag e
of
Countries
with
Fix ed
Exchang e
R at e
Regimes
in
LA C
and
the
W orld, b y
Country
Size,
2000–15
50
1.6
V alue
of
Losses
Due
t o
Natur al
Disast er s
in
LA C
and
the
W orld,
b y
Country
Size, 2000–15
51
1.7
Unemplo yment
Levels
and
Volatility , b y
Country
Size
56
2.1
A
Basic
T ax onom y
of
Fiscal
Rules
65
2.2
Number
of
Fiscal
Rules,
b y
Country
Size
and
Region,
1985–2015
67
2.3
P er c ent
of
Countries
with
Fiscal
Rules,
b y
Country
Size
and
Region,
2015
68
2.4
Number
of
Fiscal
Rules,
b y
T ype
of
Rule,
1985–2015
69
2.5
Use
of
Fiscal
Rules,
b y
T ype
of
Rule,
Region,
and
Country
Size,
2015
70
2.6
Use
of
a
Combination
of
Fiscal
Rules,
b y
Country
Size
and
Region,
2015
72
2.7
A v er ag e
Complianc e
with
Fiscal
Rules,
b y
T ype
of
Rule
and
befor e
and
aft er
the Global
Financial
Crisis,
2000–15
75
2.8
Complianc e
with
Fiscal
Rules,
b y
Country
Size
and
Region,
2000–15
76
2.9
Complianc e
with
Fiscal
Rules,
b y
T ype
of
Rule,
Country
Size,
and
Region, 2000–15
77
2.10
Fiscal
Rules
and
the
Over all
Fiscal
Fr amew or k
81
2.11
Fiscal
Rule
Str ength
Inde x
(FRSI),
b y
T ype
of
Rule
and
Complianc e,
1985–2013
82
2.12
Impact
of
Fiscal
Rules
on
10-Year
Pr ocy clicality , b y
T ype
of
Rule
and
Country Char acteristics
85
2.13
Impact
of
Fiscal
Rules
on
Public
Debt
Lev els,
b y
T ype
of
Rule
and
Country Char acteristics
86
2.14
Impact
of
Fiscal
Rules
on
the
Responsi v eness
of
the
Primary
Balance
t o Chang es
in
the
St ock
of
Debt,
b y
T ype
of
Rule
87
2.15
Impact
of
Fiscal
Rules
on
the
Responsi v eness
of
the
Primary
Balance
t o Chang es
in
the
Debt
St ock,
b y
T ype
of
Rule
and
Country
Size
88
2.16
Impact
of
Fiscal
Rules
on
the
Responsi v eness
of
the
Primary
Balance
t o Chang es
in
the
St ock
of
Debt,
b y
Combinations
of
Rules
89
3.1
T ypes
of
Fiscal
Rules
and
Objecti v es
98
3.2
W elf ar e
Gains
fr om
Adopting
Structur al
Balance
Rules
or
Budget Balance
Rules
105
3.3
W elf ar e
Gains
fr om
Reducing
Rev enue
Volatility
with
Structur al
Balance Rules
or
Budget
Balance
Rules
106
3.4
W elf ar e
Gains
fr om
Adopting
Structur al
Balance
Rules
or
Budget
Balance Rules
with
an
Initial
Pr ocy clicality
of
1.15
107
3.5
W elf ar e
Gains
fr om
Adopting
Structur al
Balance
Rules
or
Budget
Balance Rules
in
a
Cont e xt
of
Asymmetric
Shocks
108
3.6
W elf ar e
Losses
and
P er sist enc e
of
Shocks
under
Budget
Balance
Rules
and Structur al
Balance
Rules
109
3.7
Spillo v er s
fr om
Oil
Pric es
t o
Nonr esour c e
GDP
in
Alg eria, T rinidad
and
T obag o,
1960–2015
111
T ables
O.1 Regression
Coefficients
of
Go v ernment
Spending
Gr owth
on
GDP
Gr owth
in
LA C
and
the
W orld,
b y
Country
Size,
2000–15
4
O.2 Regression
of
Volatilities
on
Continuous
P opulation
Size
13
O.3 Dur ation
and
Amplitude
of
Expansions
and
Contr actions
of GDP , b y
Country
Size
13
O.4 Effects
of
Fiscal
Rules:
Summary
of
Findings
31
O.5 Crit eria
for
the
Selection
of
Fiscal
Rules
36
1.1
Small
and
V ery
Small
Countries
in
LA C
and
Non-LA C
Regions,
b y P opulation
Size
and
Land
Ar ea
44
1.2
Economic
Size
and
Structur al
F eatur es
of
Smaller
Economies
52
1.3
Volatility
and
Economic
Size,
b y
Country
Size,
1960–2014
55
1.4
Dur ation
and
Amplitude
of
Expansions
and
Contr actions
of
GDP , b y
Country
Size
56
1.5
V arianc e
Dec omposition
of
GDP
Volatility , b y
P opulation
Size
57
2.1
Effects
of
Fiscal
Rules:
Summary
of
Findings
90
3.1
P er sist enc e
of
Commodity
Pric e
Shocks
and
Optimal
Expenditur e
Response, b y
Commodity
110
Pref ace
This stud y
and
its
backgr ound
paper s
w er e
pr epared
befor e
the
CO VID-19
health pandemic
engulfed
the
w orld,
causing
major
ec onomic
f allout.
The
r esear ch
and
wri - ting
w er e
c onduct ed
between
2017
and
2019.
P art
of
the
moti v ation
for
this
w or k came
fr om
the
author s’
r eflections
follo wing
the
c ollapse
of
commodity
pric es
and ensuing
t erms-of-tr ade
shock
in
2014–15,
which
pulled
man y
c ountries
in
Latin America
and
the
Caribbean
(LA C)
int o
a
r ec ession
and
e xposed
massi v e
fiscal
and structur al
vulner abilities.
Onl y
some
c ountries
had
sa v ed
the
c ommodities’
windf all o v er
2010–14,
including
thr ough
the
use
of
fiscal
rules,
cr eating
the
buffer s
needed
t o cushion
this
ad v er se
shock.
Lik e
then,
man y
LA C
c ountries
ent er ed
2020
with
limit ed fiscal
buffer s—at
a
time
when
the
CO VID-19
crisis
r equir es
a
significant
fiscal
impulse t o
support
jobs,
firms,
and
households.
A
lesson
then
and
no w
is
that
fiscal
policy
mechanisms
that
enable
c ountries
t o sa v e
in
g ood
times
so
that
the
savings
can
be
used
during
r ain y
da y s—or
st orm y
ones lik e
those
the
w orld
is
enduring
t oda y—ar e
critical.
A
w ell-designed,
w ell-implemen - t ed
fiscal
rules
fr amew or k
can
be
essential
in
achieving
this
aim.
CO VID-19’s
ec onomic
impact
in
the
LA C
r egion
will
be
deep.
Ac c or ding
t o
the W orld
Bank’s
Gl obal
Economic
Pr ospects
( June
2020),
the
LA C
r egion’s
gross
domes - tic
pr oduct
is
e xpect ed
t o
c ontr act
b y
mor e
than
7
per c ent
in
2020,
leading
t o
massi v e job
losses
and
wiping
out
a
large
shar e
of
the
po v erty
r eduction
achiev ed
o v er
the
past tw o
decades.
Small
c ountries
in
the
r egion
ar e
being
especiall y
hard-hit
gi v en
their
lo w ec onomic
di v er sification
and
high
e xposur e
t o
e xt ernal
shocks.
The
output
c ollapse
of 2020
in
this
r egion
is
e xpect ed
t o
outstrip
the
decline
e xperienc ed
during
the
Gr eat Depr ession
(1929–1933).
In
this
c ont e xt,
fiscal
policy
has
a
big
r ole
t o
pla y , suppor - ting
aggr eg at e
demand
and
k eeping
a
shock
that
c ould
be
t empor ary
fr om
dr agging
on long er . But
as
sho wn
in
this
stud y
and
other s,
fiscal
policy
in
the
LA C
r egion
has
t en - ded
t o
be
highl y
pr ocy clical,
fueling
ongoing
ec onomic
upswings
thr ough
public spending
and
w or sening
do wnswings
thr ough
c ontr actionary
fiscal
polic y . When
the CO VID-19
crisis
hit,
the
LA C
r egion
and
most
emerging
ec onomies
w er e
in
a
period
of
gr o wing
public
spending,
high
public
debt
(c ompar ed
with
2009
and
2014),
and limit ed
fiscal
spac e
o v er all
t o
r eact
c ount er cy clicall y . Heightened
global
risk
a v er sion will
tight en
ac c ess
t o
cr edit
mar k ets,
especiall y
for
highl y
indebted
c ountries
with mor e
vulner able
macroeconomic
positions.
So
wh y
is
it
critical
t o
talk
about
fiscal
rules
t oda y?
Onl y
the
c ountries
that
sa v ed during
the
g ood
y ear s,
including
thr ough
fiscal
rule
mechanisms,
ha v e
and
ar e
emplo - ying
their
sa v ed
fiscal
fir epo w er
t o
smooth
the
shock
and
pr ot ect
their
r eal
ec onomies and
households.
Indeed,
establishing
a
fiscal
rules
fr amew or k
t oda y
w ould
not
help
in this
crisis.
These
fr amew or ks
r equir e
car eful
design,
a
political
c onsensus,
and
time
t o be
implement ed
adequat el y , if
they
ar e
t o
be
r ead y
and
functioning
b y
the
next
ec ono - mic
cy cle.
Thus,
policy
mak er s
need
t o
start
thinking
t oda y
about
the
need
t o
impro v e fiscal
fr amew or ks
and
adopt
fiscal
rules.
The
CO VID-19
crisis
has
sho wn
us
that “black
sw an”
or
tail-risk
ev ents
might
be
mor e
fr equent
than
in
the
past.
Aside
fr om
all of
the
g ood
r easons
for
establishing
a
w ell-designed,
w ell-implement ed
sy st em
of
fiscal rules,
which
ar e
detailed
in
this
stud y , this
ongoing
global
crisis
has
gi v en
policy
mak er s another
po werful
r eason
for
placing
this
policy
on
the
fr ont
burner
t o
r ebuild
the
fiscal and
institutional
fr amew or ks
of
LA C’s
and
all
emerging
ec onomies
in
a
bett er
and str ong er
w a y .
Car los
F elipe
Jar amillo
V ice
Pr esident Latin
America
and
the
Caribbean
Region
W orld
Bank
Acknowledgments
This stud y
is
part
of
the
Regional
Studies
Pr ogr am
of
the
Offic e
of
the
Regional
Chief Ec onomist,
Latin
America
and
the
Caribbean
Vice
Pr esidency
of
the
W orld
Bank. This main
stud y
was
writt en
b y
Fernando
Blanc o,
Friederik e
Koehler-Geib,
P ablo Saa v edr a,
and
Emilia
Skrok.
The
stud y
was
based
on
a
series
of
backgr ound
and
r esear ch
paper s
pr epared
b y Al v ar o
A guirre,
Jan
Gaska,
Klaus
Schmidt
Hebbel,
V ik t ori y a
Hnatko vska,
P aulina E w a
Holda,
Friederik e
Koehler-Geib,
Arthur
Mendes,
St ev en
P ennings,
Emilia
Skrok, and
Raimundo
Soto.
Substanti v e
c ontributions
w er e
pr o vided
b y
V inc ent
De
P aul T soungui
Beling a,
James
Sampi
Br a v o,
Edg ar do
F a v ar o,
Aleksandr a
Ignaczak,
and Ana
Maria
Jul.
Edit orial
and
pr oduction
assistanc e
was
pr o vided
b y
Elizabeth For sythe,
Am y
Lynn
Gr ossman,
Alfr ed
Imhoff,
P atricia
K aty ama,
and
Sean
Lothr op. P atricia
Chac on
Holt,
Giselle
V elasquez,
and
Miriam
Villarroel
pr o vided
e xc ellent assistanc e.
The
t eam
w ould
lik e
t o
thank
Jorge
Thompson
Ar aujo,
Elena
Iancho vichina, Daniel
Lederman,
A ugust o
de
la
T orr e,
and
Car los
V egh
for
their
e xc ellent
ad vic e
and support.
The
t eam
is
also
thankful
t o
Jorge
Thompson
Ar aujo,
César
Calder ón, Fr ancisc o
Galrao
Carneir o,
Norbert
Fiess,
Zafer
Mustaf aoglu,
and
the
anon ymous peer
r eview er s
fr om
the
Latin
American
Dev elopment
Forum
for
their
v aluable comments.
About
the
Authors
F ernando
Blanc o
is
an
ec onomist
who
has
specialized
in
macroeconomics
and
fiscal polic y . He
joined
the
W orld
Bank
in
2002
and
has
w or k ed
in
the
Africa,
Latin
America and
the
Caribbean,
Middle
East
and
North
Africa,
and
South
Asia
r egions
in
the Macroeconomics,
T r ade,
and
In v estment
Global
Pr actic e.
Curr entl y , he
is
the
princi - pal
ec onomist
for
Eur ope
and
Centr al
Asia
at
the
Int ernational
Financ e
Corpor ation
in the
W orld
Bank
Group.
Before
joining
the
W orld
Bank,
he
serv ed
as
an
associat e r esear cher
for
the
Institut e
of
Applied
Economics
Resear ch,
at
a
g o v ernment
think tank
in
Br azil,
and
as
a
pr ofessor
of
public
ec onomics
and
int ernational
ec onomics
at the
Br azilian
Institut e
of
Capital
Mar k ets
and
the
P ontifical
Catholic
Uni v er sity
of
Rio de
Janeir o.
He
holds
a
PhD
in
ec onomics
fr om
the
P ontifical
Catholic
Uni v er sity
of Rio
de
Janeir o.
Friederik e
(Fritzi)
Koehler-Geib
is
KfW
Gr oup’s
chief
ec onomist
and
head
of Resear ch.
In
this
capacit y , she
anal y zes
with
her
t eam
ec onomic
developments
and gr o wth
tr ends
in
German y , Eur ope,
and
the
w orld.
She
has
a
particular
focus
on
small and
medium
ent erprises,
the
r ole
of
inno v ation
and
digitalization
in
impro ving
pr o - ducti vit y , as
w ell
as
issues
r elat ed
t o
the
g oal
of
a
climat e-neutr al
ec onom y . Pr eviousl y , she
spent
mor e
than
10
y ear s
at
the
W orld
Bank,
most
r ec entl y
as
lead
ec onomist
and pr ogr am
leader
for
Centr al
America.
She
has
published
r esear ch
and
w or k ed
with policy
mak er s
in
v arious
c ountries
on
r eforms
r eg ar ding
ec onomic
gr o wth,
financial crises,
and
fiscal
policy
with
a
focus
on
public
e xpenditur es
and
fiscal
rules.
She
holds a
PhD
in
ec onomics
fr om
Lud wig
Maximilian
Uni v er sity
of
Munich
and
tw o
mast er’s degr ees
fr om
Uni v er sity
of
St.
Gallen,
HEC
P aris,
and
the
Uni v er sity
of
Michig an.
Pablo
Saa v edr a
is
an
ec onomist
who
has
serv ed
in
sev er al
positions
of
r esponsibility in
v arious
r egions
and
departments
at
the
W orld
Bank.
He
is
curr entl y
the
W orld Bank’s
c ountry
dir ect or
for
Mexic o.
Pr eviousl y , he
serv ed
as
manag er
of
the
W orld Bank’s
Macroeconomics
and
Fiscal
Manag ement
Department
for
Latin
America
and the
Caribbean,
an
ec onomic
ad viser
for
the
P olicy
and
Str at egy
Department,
a
sect or
leader
for
Economic
P olic y , and
senior
ec onomist
for
Belarus,
Poland,
and
Ukraine, among
other
c ountries.
He
has
c onduct ed
r esear ch
and
w or k ed
with
policy
mak er s
in c ountries
ar ound
the
w orld
t o
implement
r eforms
on
issues
r elat ed
t o
ec onomic gr o wth,
including
macroeconomics
and
fiscal
policies,
tax
and
spending
policies,
and fiscal
rules.
He
holds
a
PhD
fr om
the
Georgia
Institut e
of
T echnolog y . Emilia
Skr ok
is
a
pr ogr am
leader
in
the
W orld
Bank’s
Macroeconomics,
Fiscal Manag ement,
Go v ernance,
Po v ert y , and
Equity
Department.
She
joined
the
W orld Bank
in
2005.
Pr eviousl y , she
serv ed
as
an
ec onomist
on
the
Economic
and
Mar k et Resear ch
T eam
at
the
T r easury
Department
of
Bank
PEKA O
S.A.,
the
larg est
pri v at e bank
in
Poland,
and
as
a
senior
ec onomist
in
the
Department
of
Financial
P olic y , Anal y sis,
and
Statistics
in
P oland’s
Ministry
of
Finance.
She
has
taught
int ernational c ompar ati v e
ec onomics
at
the
W ar saw
School
of
Economics.
Her
r esear ch
focuses
on fiscal
policy
anal y sis,
including
tax
and
spending
policies
and
fiscal
institutions
at
both the
national
and
subnational
lev els.
She
holds
a
PhD
in
ec onomics
fr om
the
SGH W ar saw
School
of
Economics.
Abbreviations
EECU
East ern
Caribbean
Curr ency
Union FDI
for eign
dir ect
in v estment
FRSI
Fiscal
Rule
Str ength
Inde x GDP
gross
domestic
pr oduct GNI
gross
national
income
LA C
Latin
America
and
the
Caribbean
Over view
Setting
the
Scene
The
fiscal
position
of
most
c ountries
in
Latin
America
and
the
Caribbean
(LA C) has
det erior at ed
in
the
last
decade.
T o
addr ess
the
flagging
gr o wth
of
gross d o m e stic
pr oduct
(GDP)
in
the
aft ermath
of
the
2008
global
financial
crisis, g o v ernments
across
the
r egion
launched
pr otr act ed
e xpansions
of
spending, which
in
man y
cases
er oded
the
fiscal
buffer s
built
in
the
pr ecrisis
period.
E v en though
ec onomic
gr o wth
r ec o v er ed
as
a
r esult
of
massi v e
t erms-of-tr ade
g ains o v er
2010–14,
g o v ernments
did
not
use
the
ec onomic
upturn
as
an
opportunity
t o impro v e
their
fiscal
balanc es
and
cur b
indebt edness.
On the
c ontr ar y , g o v ernment spending
and
fiscal
deficits
c ontinued
t o
gr o w
(De
la
T orr e,
Ize,
and
Pienknagur a 2015).
Then,
the
commodity
pric e
shock
in
2014–15
hampered
GDP
gr o wth
at
a time
when
onl y
a
few
c ountries
had
sufficient
fiscal
spac e
t o
att enuat e
its
neg ati v e effects;
deficits
and
indebt edness
det erior at ed
further . The
LA C
r egion’s
a v er ag e fiscal
deficit
r ose
fr om
1.9
per c ent
of
GDP
in
2000–08
t o
3.5
per c ent
in
2009–19, pushing
the
a v er ag e
stock
of
public
debt
fr om
41
per c ent
of
GDP
in
2008
t o 62
per c ent
in
2019)
(figure
O.1).
Smaller
c ountries
in
LA C
ha v e
had
mar k edl y
large
fiscal
deficits. 1
Betw een
2000
and
2019,
these
c ountries
had
an
a v er ag e
fiscal
deficit
of
2.7
per c ent
of
GDP , f ar
abo v e the
a v er ag e
of
0.5
per c ent
for
smaller
c ountries
w orld wide
and
2.2
per c ent
for
larg er c ountries
in
the
LA C
r egion.
The
r egion’s
v ery
small
c ountries
performed
ev en
w or se, r egist ering
an
a v er ag e
fiscal
deficit
of
3.2
per c ent
of
GDP
v er sus
a
global
a v er ag e
for v ery
small
c ountries
of
0.1
per c ent.
The
a v er ag e
fiscal
deficit
for
large
ec onomies
in LA C
was
onl y
marginall y
w or se
than
the
a v er ag e
for
large
c ountries
w orld wide,
which sugg ests
that
the
fiscal
performanc e
of
smaller
LA C
c ountries
is
not
associat ed
solel y with
r egional
patt erns;
it
is
also
associat ed
with
other
featur es
that
ar e
assessed
in
this stud y
(figure
O.2).
Due
t o
large
fiscal
deficits,
public
debt
lev els
ha v e
risen
r apidl y
among
small ec onomies
in
LA C.
By
2019,
small
LA C
ec onomies
had
an
a v er ag e
debt
stock
of 66
per c ent
of
GDP , with
an
a v er ag e
of
76
per c ent
for
v ery
small
c ountries.
W orld wide, small
c ountries
had
a
debt
stock
of
58
per c ent
of
GDP , with
an
a v er ag e
of
60
per c ent
FIGURE
O.1:
A ver age
Fiscal
Balance
and
Debt
Level
as
a
Per centage
of
GDP in
LAC
Countries,
2000–08
versus
2009–19
20
16
12
8
4
0
–4
–8
–12
–16
–20
150
120
90
60
30
0
–30
–60
–90
–120
–150
Fi scal
balance,
2000–08
Fi scal
balance,
2009–19
Debt ,
2008
LA C
debt ,
2019
Source:
Calcula tions
based
on
da ta
from
W orld
Development
Indica tors
(W orld
Bank).
for
v ery
small
c ountries.
In
c ontr ast,
in
LA C
the
a v er ag e
debt
stock
for
larg er
c ountries was
42
per c ent
of
GDP , a
lev el
much
lo w er
than
the
w orld wide
a v er ag e,
wher e
larg er c ountries
had
an
a v er ag e
debt
lev el
of
57
per c ent
of
GDP . Ther efor e,
smaller
c ountries in
LA C,
particular l y
the
v ery
small
ones,
e xhibit ed
higher
indebt edness
that
cannot
be attributed
solel y
t o
their
g eogr aphic
location.
The
poor er
fiscal
performanc e
of
smaller
LA C
c ountries
is
associat ed
with
their gr eat er
e xposur e
t o
e x og enous
v olatilit y ,
including
natur al
disast ers.
Ex og eneous f act or s
ha v e
c ontributed
t o
w or sening
fiscal
balanc es
and
ac c elerating
indebt edness
in smaller
c ountries
in
the
r egion.
Fr equent,
int ense
natur al
disast er s
ha v e
pr essur ed g o v ernment
spending
and
neg ati v el y
affect ed
ec onomic
acti vity
and
g o v ernment r ev enues.
The
neg ati v e
impacts
of
fr equent
natur al
disast er s
suffer ed
b y
small
and v ery
small
LA C
countries—particular l y
Caribbean
c ountries—ha v e
r esult ed
in significant
slo w do wns
in
GDP , high
fiscal
costs
t o
r epair
damag ed
infr astructur e,
and high
v olatility
of
output
and
c onsu...