Stimulus Packages: How Much Can the Region Afford?

By Claudio Loser
Published in the Dialogue’s Latin America Advisor, January 29, 2009

Stimulus Packages: How Much Can the Region Afford?

Originally published in Claudio Loser’s monthly “By the Numbers” column for the Dialogue's daily Latin America Advisor

WASHINGTON—John Maynard Keynes, long relegated to history books describing his fundamental contributions to macroeconomics, has returned with a vengeance. Everybody has become a Keynesian, even some of us recalcitrant Friedmaniacs. Fortunately, we now know that in times of crisis, large countries can stick both to government spending stimuli (as Keynes proposed) and an adequately ample supply of money in times of financial implosion (as Friedman discovered).

Latin America has been a fertile ground for Keynesian demand-enhancing measures, Chicago Boys notwithstanding, even if it frequently misunderstood the master. Now at a time of widespread economic crisis, and with large countries seeking to avoid falling into a depression, authorities in the region have been announcing fiscal and credit packages aimed at softening the impact of lower commodity prices and reduced external demand. These measures are being taken on top of significant currency devaluations in many larger countries, with the exception of Ecuador, Venezuela, and to a lesser extent, Argentina.

Several questions arise in this regard: Are the packages large enough to shore up demand? How do they compare to the efforts of other countries? Can Latin Americans afford to do it? The attached table may help elucidate these questions. It lists the recently announced stimulus packages for some Latin American countries, as well as for China, India, the US, Germany and the UK. The numbers are adjusted to reflect what can be expected to be the annual spending in 2009. For example, in the case of China the program will extend for two years, and in the US, the numbers include the unspent portion of the package of October. The table includes numbers for public debt, both total and net of international reserves, to reflect the ability of the countries to finance the increased spending. It does not include, however, the requirements arising from reduced government revenues on account of lower export earnings, which will decline by more than 2 percent of GDP in virtually all of Latin America.



Even with these constraints the numbers are revealing. First, the packages in the region are considerably smaller than those expected to be implemented in the US (6 percent of GDP) and China (7 percent). In the US and Germany, even with high levels of debt to GDP, their size and the depth of capital markets allows them, at least in the short run, to increase spending. In China, a very low level of debt and high reserves allows for the proposed effort. In Latin America, the two countries that have announced significant packages are, not by coincidence, Chile and Peru. Both countries have a very low level of net debt, and in the case of Chile, the authorities have been building a successful stabilization fund. Mexico may be in a solid position for a stimulus package, but as is even more the case with Venezuela, will face a significant decline in revenues on account of lower oil prices, thus reducing their margins of action. Argentina and Brazil have announced packages amounting to 1 percent of GDP, about the maximum they can afford given their level of debt. In Argentina additional financing beyond the expropriation of pension funds is limited. In Brazil and elsewhere, both domestic and foreign borrowing is constrained.

In the end, Latin America only has limited room for expansion and many countries have used it. Thus, they will need to rely on the effect of the external stimulus packages and of their devalued currencies. All this is not a good omen for growth; the Latin economies are better prepared, but unfortunately the shock is far greater than at any time in the recent past.

Claudio Loser is a Senior Fellow at the Inter-American Dialogue and former head of the Western Hemisphere Department at the International Monetary Fund.