beyondbrics

Counter-cyclical spending has never been popular in Latin America. As a new IMF paper argues, the region’s governments have spent as they have received – in the boom years.

So, with the continent’s economic recovery picking up and commodity prices set to remain high, why are Chilean and Colombian politicians talking about austerity?

Colombia’s new finance minister says “austerity will be the new buzzword” of the Santos government, while his Chilean counterpart proudly pledges that “the economy will grow faster than public spending on average [during Sebastian Piñera's four-year administration].”

Chile’s approach is less surprising – as those familiar with Michelle Bachelet’s windfall fund will know. Yet prudence predates Bachelet. The IMF analysis by Leandro Molina finds that since 1995 Chilean government spending has been unchanged in the face of commodity price shocks – putting it on par with developed commodity exporters like Australia and New Zealand. At the other end of the scale is Venezuela, whose spending has correlated dramatically with higher commodity prices.

Chile’s record still doesn’t add up to a counter-cyclical policy, as Molina detects in Canada and, especially, Norway. Yet its feat is impressive given that Chilean exports are concentrated around copper – unlike Australia, whose exports feature different minerals whose prices may rise at different times.

Nonetheless, the IMF paper is cautious on generalising from Chile’s experience:

The adoption of fiscal rules specifically designed to encourage public saving in good times may have helped in this effort in the case of Chile.

[But for Latin America overall, it] seems that formal fiscal rules may help – or they may not.

That’s relevant to Colombia, whose past record on bonanza-led public spending is closer to Venezuela’s than Chile’s. The Santos administration has proposed a fiscal rule, which would mandate spending cuts in line with growth. While his predecessor Álvaro Uribe saw a deficit as the necessary price for security improvements, Santos wants to balance the deficit by 2014.

But Molina’s paper suggests that the key factor may not be formal rules, but the underlying political consensus. So it’s welcome that Colombia’s mining minister last week tried to shape his country’s mainstream, saying that, despite increased exports of coal and oil, “we’re not a mining or an oil-drilling country”. He also warned against the term “bonanza”.

Yet allusions to austerity can also be seen from a short-term perspective. The governments of Chile and Colombia share two key scenarios. First, they have recently been elected, so don’t need to pledge spending to win votes. Second, they are facing rapid currency appreciation, and are concerned with hot money flows (and, to a lesser extent, uncompetitive exports).

Such factors are less important for Chile, which has proved its commitment to prudence over time. But the real test of Colombia’s conversion will come when the dollar strengthens – and the electoral cycle rotates.