11485 - Macroeconomic volatility and fiscal space for social spending in Latin-America.

Latin America is well known for its high levels of inequality on the one side, and strong macroeconomic volatilities and frequent crisis episodes, on the other. There is clear evidence that macroeconomic volatility increases inequality and that economic stability is a necessary condition for a better income distribution. Yet, economic macroeconomic policy and social spending in Latin America has tended to be enigmatically pro-cyclical, mostly in order to cope with financial crises and capital outflows. As poorer people are more vulnerable to negative shocks, this has attenuated inequality in the region. Thus, the regressive impact of social policies in Latin America has been added by instable and declining social spending during crisis periods.

Academic response to this phenomenon is puzzling. Although social spending and macroeconomic policies are overlapping concepts, the explanations for both phenomena differ significantly. While studies about the pro-cyclicality of macroeconomic policies have been focused on transnational factors such as international rules, terms of trade and financial shocks and the way they restrict the “policy space” to fight volatility, the analysis of social spending cyclicality completely ignores transnational components and is based mainly in domestic variables such as the tendency for spending profligacy and the negative distributional effect of welfare regimes in the region.

The proposed paper intends to link these two strands, integrating the discussion about the policy space to pursue countercyclical policies with the discussion on specific welfare regimes for the Latin American case. Our focus will lay the analysis of fiscal income regimes linked to macroeconomic volatility and to specific export patterns within the region which mainly differ between commodity and maquila exports. Special emphasis will be given on the export boom of the last decade and its coincidence with redistributive policy efforts of mostly leftist governments.

Keywords: Policy Space, Macroeconomic Policies, Social Spending, Macroeconomic Volatility, Socioeconomic Inequality.

Author: Fritz, Barbara (desigualdades.net, Germany / Deutschland)
Co-Author: valdes, maria fernanda (desigualdades.net, Berlin, Germany / Deutschland)


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