Rigidities and fiscal space in Latin America: a comparative case study

Abstract

Despite the macroeconomic and fiscal bonanza experienced by the region from 2003 until mid-2008, the spread of the international crisis necessitated a fiscal response to the challenges it created. This situation has put the increased fiscal-policy space achieved in previous years to the test. An important aspect to consider in this context is the limited flexibility of public budgets in the region.The emergence of fiscal rigidities (which affect budget flexibility) cannot be explained by any single factor, but is rather a reflection of societal decisions about the role of the State, numerous public-policy priorities and their means of financing. This paper proposes that determining the degree of budget flexibility is less critical than understanding the type of rigidity inherent in a given budget, its origin and the reasons behind it.The paper begins with a conceptual overview and comparative analysis of the cases studied. First, there is an analysis and review of the theoretical justifications and arguments used in the political debate which underlies the emergence and persistence of rigidities in countries of the region, following a typology which allows for the classification of the reasons for rigidities.Based on the case studies, which include countries in Central America (Costa Rica, Guatemala and Honduras) and the Andean Region (Colombia, Ecuador, Peru and the Plurinational State of Bolivia), the potential effects of fiscal rigidities on public budgets and their impact on fiscal-policy management are evaluated. The ultimate goal of this comparative study is to provide a set of recommendations to help guide future improvements in the management of public budgets.