Lessons from the Monetary and Fiscal History of Latin America

Studying the modern economic histories of the ten largest countries in South America and Mexico teaches us the lack of fiscal discipline has been at the root of most of the region’s macroeconomic instability. The lack of fiscal discipline, however, takes various forms not measured in the primary deficit. Especially important have been implicit or explicit guarantees to the banking system, denomination of the debt in US dollars and short maturity of the debt, and especially large transfers to the private sector, especially in times of crisis that are not part of the budget approved the national congresses. Comparing the histories of our eleven countries side by side, we see that, rather than leading to an economic contraction, in general fiscal stabilization leads to growth and that rising commodity prices are no guarantee of economic growth nor are falling commodity prices a guarantee of economic contraction.