Volume 43, Number 168,
January-March 2012
Crisis and Economy Recovery: The Role of Fiscal Policy
Moritz Cruz *and Javier Lapa **
Date submitted: June 9, 2011. Date accepted: September 22, 2011.


We develop a comparative analysis of five economies that recently went through financial crises (Mexico 1994, South Korea 1997, Russia 1998, Brazil 1998 and Argentina 2001), in order to identify the role economic policy played during the crises and the subsequent process of economic recovery. Our analysis indicates that only Mexico upheld and maintained its economic policy, including fiscal policy, subject to the restrictions of the economic model that led to the crisis. Although Brazil did the same to confront the crisis, during its recovery process it broke with this restriction. Finally, Argentina, South Korea and Russia were characterized by breaking from the crisis, although to differing degrees, through the restriction of economic policy, a stance they have maintained since.

Keywords: crisis, economic policy, fiscal policy, economic recovery.

From the mid-1990s to the first years of the new millennium, the developing world experienced a surge, in fact a new explosion of economic crises. Publications on the subject have focused essentially on investigating the causes of such crises.1 Heterodox theory, in particular post-Keynesian, maintained that the principal cause of the crises was a rapid process of financial openness (see, inter alia, Arestis and Glickman, 2002, De Paula and Alves, 2000, and Cruz et al, 2006). 2

In spite of the new surge of crises, one of the questions that heterodox and orthodox theory practically failed to raise and consequently address was the part that fiscal policy played in the crisis and afterwards during the period of economic recovery.3 This question gained particular strength during the 2008 global crisis when there was much debate as to how the crisis might be overcome. It was never considered necessary to question how economies faced and overcame the crises, particularly given that the strategy of rapid financial openness responsible for the crises placed limitations on the autonomy of economic policy ex ante and ex post (see Grabel, 1996).4

This study seeks to narrow the gap that exists in current publications by examining the type of policies implemented in Argentina, Korea, Brazil, Mexico and Russia during their respective crises and throughout the process of economic recovery. The study highlights the role of fiscal policy for two reasons. Firstly the advantages and disadvantages of any expansive fiscal policy are subject to intense debate, both theoretically and empirically, during any phase of the economic cycle. The conventional view maintains that it is not a matter of whether there are output or employment benefits, or whether the economy is in expansion or recession. It is fundamental from a Keynesian perspective to manage demand through fiscal policy in order to maintain the stability of the economic cycle. In this sense fiscal policy is essential to economic recovery or crisis. We hope, through this analysis, to contribute to the debate on the role of expansive fiscal policy, which we believe has resurfaced since the global economic crisis of 2008.

Secondly, we wish to focus on fiscal policy because if, as heterodox theory suggests, the surge of crises in developing economies was associated with the adoption of policies of rapid financial opening, then the governments in question were restricted by economic policy, including fiscal policy ex ante and ex post. By examining how economic policy responds to crisis in the economies under study, we can ascertain if this restriction was maintained, and so explain the development of the economy after the crisis, during the recovery process.

This study is structured as follows. The second section describes how economic policy is restricted ex ante and ex post as a consequence of the strategy of rapid financial opening. In this section we highlight the theoretical arguments behind Keynesian theory that justify the relevance of expansionist fiscal policy for economic growth, particularly at times of crisis or recession. Section 3 describes the economic policy of each of the economies under study, during and after crisis, with emphasis on fiscal policy. The last section presents the conclusions of the study.

* Researcher at the Institute of Economic Research at the unam. Email: aleph3_98@yahoo.com

** Professor at the School of Advanced Studies, Acatlán, unam. Email: javierlapaguzman@hotmail.com
The authors wish to thank project unam-papiit in-306809 for their financial support with this research.

1 Among those that stand out are the Mexican crisis of 1994-5, the South Asian crisis of 1997-8, the Russian crisis of 1998, the Brazilian crisis of 1998-9 and the Argentine crisis of 2001. The following crises can also be included, among others: the Ecuadorian crisis of 1999, the Turkish crisis of 2001 and the Dominican crisis of 2003.

2 The orthodox view, for its parts, pointed out that the crises were part of a new generation of crises, characterized by the absence of fiscal imbalances but in the presence of speculative attacks (see, for example, Obsfeld, 1996, and Calvo and Mendoza, 1996).

3 There is abundant literature related to the role of fiscal policy in overcoming the global crisis of 2008, including Auerbach et al, 2010, Bénetrix and Lane, 2010, Farmer and Plotnikov, 2010, Leeper, 2010 and Pérez and Vernengo, 2010.

4 Although this study focuses on the role of fiscal policy, it is recognised that governments have a wide range of policies open to them to assist in facing and overcoming economic crisis (monetary policy, exchange rate policy, trade policy etc. etc.)

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Published in Mexico, 2012-2018 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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