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Fiscal Rules and Economic Size in Latin America and the Caribbean Latin American Development Forum Latin American Development Forum FISCAL RULES Following the collapse of commodity prices in Latin America and the Caribbean (LAC) in 2014–15, many countries in the region were unable to cushion the impact of the shock in order to experience a more gradual adjustment, to a large extent because FISCAL RULES they had not built adequate fiscal buffers during the commodities’ windfall from 2010–14. Many LAC countries entered 2020 and the COVID-19 crisis in an even more difficult AND AND position, with rising debt and limited fiscal space to smooth the negative impacts of the pandemic and adequately support their economies. ECONOMIC SIZE ECONOMIC Fiscal policy in most LAC countries has been procyclical. Public expenditure and debt ECONOMIC SIZE levels have expanded in good times and contracted in severe downswings due to insufficient fiscal buffers, making crises deeper. Fiscal rules represent a promising IN LATIN AMERICA policy option for these and other economies. If well-designed and implemented, they can help build buffers during periods of strong economic performance that will be AND THE CARIBBEAN available during rainy days to smooth economic shocks. IN LATIN AMERICA AND THE CARIBBEAN IN LATIN This book—which was prepared before the COVID-19 crisis—reviews the performance and implementation of different fiscal rules in the region and world. It provides analytical and practical criteria for policy makers for the design, establishment, and feasible implementation of fiscal rules based on each country’s business cycle features, external characteristics, type of shocks faced, initial fiscal conditions, technical and institutional capacities, and political context. While establishing new fiscal rules would not help to attenuate the immediate effects of this pandemic crisis, higher debt levels in the aftermath of COVID-19 will demand rebuilding better and stronger institutional frameworks of fiscal policy in LAC and emerging economies globally. Having stronger fiscal mechanisms that include fiscal rules can help countries prepare for the next crisis and should be on the front burner for policy makers in coming years. The findings and lessons discussed apply to economies of different sizes, with some differences under certain scenarios in terms of the technical design and criteria needed for implementation. In this book, policy makers will find that fiscal rules, if tailored to country characteristics, can work and be an essential fiscal tool for larger and particularly smaller economies. KOEHLER-GEIB KOEHLER-GEIB BLANCO BLANCO • SAAVEDRA SAAVEDRA • ISBN 978-1-4648-1382-5 SKROK Fernando Blanco, 90000 Pablo Saavedra, Friederike Koehler-Geib, 9781464 813825 SKU 211382 and Emilia Skrok FISCAL RULES AND ECONOMIC SIZE IN LATIN AMERICA AND THE CARIBBEAN FISCAL RULES AND ECONOMIC SIZE IN LATIN AMERICA AND THE CARIBBEAN Fernando Blanco, Pablo Saavedra, Friederike Koehler-Geib, and Emilia Skrok © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 23 22 21 20 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. RIGHTS AND PERMISSIONS This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org /licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: • Attribution—Please cite the work as follows: Blanco, Fernando, Pablo Saavedra, Friederike Koehler-Geib, and Emilia Skrok. 2020. Fiscal Rules and Economic Size in Latin America and the Caribbean. Latin American Development Forum. Washington, DC: World Bank. doi:10.1596/978-1-4648-1382-5. License: Creative Commons Attribution CC BY 3.0 IGO • Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. • Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. • Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: [email protected]. ISBN (print): 978-1-4648-1382-5 ISBN (electronic): 978-1-4648-1581-2 DOI: 10.1596/978-1-4648-1382-5 Cover art and design: Bill Pragluski, Critical Stages, LLC. Library of Congress Control Number: 2020944303. Latin American Development Forum Series This series was created in 2003 to promote debate, disseminate information and analysis, and convey the excitement and complexity of the most topical issues in economic and social development in Latin America and the Caribbean. It is sponsored by the Inter-American Development Bank, the United Nations Economic Commission for Latin America and the Caribbean, and the World Bank, and represents the highest quality in each institution’s research and activity output. Titles in the series have been selected for their relevance to the academic community, policy makers, researchers, and interested readers, and have been subjected to rigorous anonymous peer review prior to publication. Advisory Committee Members Alicia Bárcena Ibarra, Executive Secretary, Economic Commission for Latin America and the Caribbean, United Nations Inés Bustillo, Director, Washington Office, Economic Commission for Latin America and the Caribbean, United Nations Eric Parrado Herrera, Chief Economist and General Manager, Research Department, Inter-American Development Bank Elena Ianchovichina, Deputy Chief Economist of the Latin America and the Caribbean Region, World Bank Martin Rama, Chief Economist of the Latin America and the Caribbean Region, World Bank Roberto Rigobon, Professor of Applied Economics, Sloan School of Management, Massachusetts Institute of Technology Ernesto Talvi, Director, Brookings Global-CERES Economic and Social Policy in Latin America Initiative Andrés Velasco, CIEPLAN (Corporación de Estudios para Latinoamérica), Chile v Titles in the Latin American Development Forum Series Fiscal Rules and Economic Size in Latin America and the Caribbean (2020) by Fernando Blanco, Pablo Saaveda, Friederike Koehler-Geib, and Emilia Skrok Who Decides Social Policy? Social Networks and the Political Economy of Latin America and the Caribbean (2020) by Alejandro Bonvecchi and Carlos Scartascini Wage Inequality in Latin America: Understanding the Past to Prepare for the Future (2018) by Julián Messina and Joana Silva Stop the Violence in Latin America: A Look at Prevention from Cradle to Adulthood (2017) by Laura Chioda Innovative Experiences in Access to Finance: Market-Friendly Roles for the Visible Hand? (2017) by Augusto de la Torre, Juan Carlos Gozzi, and Sergio L. Schmukler Beyond Commodities: The Growth Challenge of Latin America and the Caribbean (2016) by Jorge Thompson Araujo, Ekaterina Vostroknutova, Markus Brueckner, Mateo Clavijo, and Konstantin M. Wacker Left Behind: Chronic Poverty in Latin America and the Caribbean (2016) by Renos Vakis, Jamele Rigolini, and Leonardo Lucchetti Cashing in on Education: Women, Childcare, and Prosperity in Latin America and the Caribbean (2016) by Mercedes Mateo Diaz and Lourdes Rodriguez-Chamussy Work and Family: Latin American and Caribbean Women in Search of a New Balance (2016) by Laura Chioda Great Teachers: How to Raise Student Learning in Latin America and the Caribbean (2014) by Barbara Bruns and Javier Luque Entrepreneurship in Latin America: A Step Up the Social Ladder? (2013) by Eduardo Lora and Francesca Castellani, editors Emerging Issues in Financial Development: Lessons from Latin America (2013) by Tatiana Didier and Sergio
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