Volume 43, Number 168,
January-March 2012
Crisis and Economy Recovery: The Role of Fiscal Policy
Moritz Cruz and Javier Lapa
FINANCIAL OPENNESS, ECONOMIC POLICY RESTRICTIONS,
FISCAL POLICY AND ECONOMIC GROWTH: THEORETICAL CONSIDERATIONS ( ...continuation )

It is also important to stress that generally there is a clear imbalance in developing economies between productive capacity and labor, which is in greater supply, generating a serious unemployment problem. With little employment for laborers, consumption proves insufficient to encourage entrepreneurs to expand installed capacity, perpetuating the cycle of insufficient aggregate demand-high unemployment-low growth. For this reason public investment is essential to initiate and sustain a cycle of economic growth, both short and long term. Its effect is indisputably positive: not only does investment increase effective demand, stimulate growth today (and reduce unemployment) it also reduces future unemployment by increasing installed capacity.

At the same time, it is important to highlight that the benefits of public spending are not limited merely to increasing aggregate demand. Productive public spending, such as infrastructure, machinery and equipment and support to science and technology, also contributes to boosting supply in the economy. In this way, sustained expansion of public spending lays the foundation for long term economic growth.

As a result, to achieve the growth objective, Keynesian theory suggests permanent reactivation and control of aggregate demand via government intervention, through economic policy, particularly expansive fiscal policy. Thus large public spending, not necessarily reflected in the fiscal deficit, should be normal for any capitalist economy. According to this theory, therefore, the question is not whether there should or should not be expansive public spending, but the amount and financing of this spending. Evidently, public spending, and not public revenue should be increased when the economy is in recession or crisis.

In summary, according to Keynesian theory, fiscal policy cannot and should not remain stagnant throughout the economic cycle and less so during recession or economic crisis. When restrictions are imposed in an effort to find automatic mechanisms for economic growth, the long and short term negative consequences are without doubt considerable.

CRISIS, ECONOMIC RECOVERY AND FISCAL POLICY:
EMPIRICAL EVIDENCE FOR ARGENTINA, BRAZIL, KOREA, MEXICO AND RUSSIA

Argentina, Brazil, Korea, Mexico and Russia have recently experienced economic collapse, and among them Argentina and Brazil stand out in particular. Argentina's collapse was the strongest, -10.9% in 2002, while Brazil was the least effected given that her gdp in 1998, the year of the crisis, remained at 0%. Korea follows Argentina, then Mexico and Russia with contractions of -6.8% in 1998, -6.1% in 1995 and 5.3% in 1998 respectively. The immediate question raised in the light of these economic collapses is how each economy responded in terms of economic policy. In particular it is interesting to know if effective demand, and with it economic growth, was stimulated through a policy of fiscal expansion.

Each country's performance in the economic recovery period is different. Argentina registered the highest growth rate during the post-crisis period with an average rate of 8.5%, followed by Russia, 6.9%, Korea, 5.3% and Brazil and Mexico with practically the same rate, 3.7% (see Table 1). The question raised amidst such disparity in post-crisis economic development, is how economic policy evolved, especially fiscal policy, in the post-crisis period of each economy.

To answer both questions and understand if the economic policy restrictions were maintained or not, we will analysis and compare the economic policies of each country, emphasizing the development of fiscal policy for each.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March 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,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Feb 23th, 2018.
The opinions expressed by authors do not necessarily reflect those of the editor of the publication.
Permission to reproduce all or part of the published texts is granted provided the source is cited in full including the web address.
Credits | Contact

The online journal Problemas del Desarrollo. Revista Latinoamericana de Economía corresponds to the printed edition of the same title with ISSN 0301-7036