Fiscal Adjustment - Fiscal Adjustments in Latin America

Fiscal Adjustments in Latin America

Due to a combination of factors, including previous debt-based development policies, high interest rates, high oil prices and a decline in the terms of trade Latin American countries experienced a dozen of years of continuous economic depression during the 1980s, known as the lost decade, in which hyperinflation episodes were common. One of the most pressing issues was to manage the debt burden.

And, to this end, during this period, the economic policies of Latin American countries evolved from import substitution industrialization to a flawed version of neoliberal economics, sponsored by some international financial institutions like the World Bank or the International Monetary Fund (IMF), and also known as the Washington Consensus, that advocated for fiscal discipline and for a tax reform based on a flattering of the tax curve (lowering the tax rates on proportionally high tax brackets, and raising the tax rates on the proportionally low tax brackets).

The IMF designed structural adjustment policies that advocated for fiscal adjustments based on expenditure cuts, because they usually included, among other conditionalities:

• Cutting social expenditure,
• Removing price controls and state subsidies,
• Privatization, or divestiture of all or part of state-owned enterprises.