Friday, April 20, 2018

World Bank Says Latin America Is Growing

The World Bank released a report saying that Latin American economies are recovering and growth will be stronger in 2018 and 2019. Here is the executive summary and here is the full report. To anyone who studies Latin America at all, it will sound familiar and for the many years I've done this blog I have written more posts than I can count about World Bank, IMF, and CEPAL economic projections. Growth goes up and down, but two things stay constant: reliance on global commodity prices and debt. Latin America needs to move away from commodities and reduce debt. It has been thus forever and there is no end in sight.

Their advice is measured and should once again make us wary of the vague term "neoliberal."

In terms of short-run costs, we draw several important conclusions from our empirical analysis. First, 85 percent of the 136 fiscal adjustment episodes that we identify in the region for the period 1960-2017 have involved only cuts in government spending, as opposed to 4 percent involving only tax hikes (the remaining 11 percent involved both). While this is, in principle, good public policy (especially if it is feasible to cut unproductive government spending), we show that the short-run costs of raising taxes (specifically, value-added taxes) are highly non linear: costs are essentially zero for low initial levels of the tax rate (around 10-12 percent) and quite substantial for high initial levels (above 20 percent). Hence, low-taxation countries may actually find it in their best interest to raise taxes as part of a fiscal adjustment rather than cutting public investment or reducing social transfers (particularly to the most vulnerable). Second, the shortrun output costs of reducing primary spending are also non-linear (i.e., marginal costs increase with the size of spending cuts), which makes a strong case for gradual versus shock fiscal adjustments. Finally, even when policymakers should be careful not to rely too heavily on cutting public investment, it should not be done at the cost of reducing social transfers which are found to have important costs on both output and poverty.

The disaster of structural adjustment and shock therapy in the 1980s is now permanently ingrained and the real advances that social spending has achieved is recognized as valuable and important.

As a side note, the Venezuela numbers look very much like the Cuban Special Period. Almost identical. As you might guess, the report shows projections both including and excluding Venezuela because it cannot be fruitfully part of any average.


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