Volume 43, Number 168,
January-March 2012
Crisis and Economy Recovery: The Role of Fiscal Policy
Moritz Cruz and Javier Lapa
CRISIS, ECONOMIC RECOVERY AND FICAL POLICY:
EMPIRICAL EVIDENCE FOR ARGENTINA, BRAZIL, KOREA, MEXICO AND RUSSIA ( ...continuation )

The economic policy programs adopted by the five countries under analysis in immediate response to the economic crisis can be classified in the following way: in the first group, Mexico and Brazil, who strengthened neoliberal strategy as a response mechanism to the crisis, further restricting economic policy; and in the second group, Argentina, Korea and Russia, who chose a series of measures contrary to conventional thinking, breaking with economic policy restriction, including fiscal policy.

For Brazil and Mexico, the main aim of economic policy in the face of crisis was to regain the confidence of foreign investors, so it was necessary to turn to foreign debt. The numerous loans that these countries received from international organizations were subject to a series of conditions: that the fiscal balance be improved, that international reserves be rebuilt, and that there be a substantial reduction in the inflation rate (to a maximum of 5% annually.) In addition, it was also recommended that both countries keep their interest rates relatively high, especially in comparison to other emerging markets and that they pay off their short term debt quickly (for which most of the loans received were destined). This is reflected in the contractionary nature of monetary and fiscal policy implemented immediately in the face of the crisis. In this respect, Mexico, for example, registered a meager debt of just 0.3% of gdp. Although public spending increased marginally in this year, public revenue increased much more (see Table 2). Brazil registered a significant tax surplus of 1.8% of gdp as a consequence of measures to reduce public spending and boost revenues (see Table 3). In this respect, as can be seen, Brazil's fiscal policy proved much more radical than Mexico's.

It is important to note that although the different measures implemented to regain the confidence of investors in both economies were backed by numerous loans granted by international organizations8, the flow of foreign capital never reached pre-crisis levels. So the loans received served exclusively to stabilize the exchange rate (amidst strong currency devaluation) and to reduce inflation. However, the autonomy of economic policy was restricted even further because economic stability was dependent on the flow of foreign capital.

In summary, for Brazil and Mexico, the policy response to the crisis was to strengthen restrictive fiscal and monetary policy, as well as to open trade up further, to promote financial liberalization and to reduce the level of State participation in the country's economic affairs. These measures restricted ex post the autonomy of economic policy. In particular, without expansive fiscal policy, aggregate demand was not reactivated, at least not in a way that directly included the government. This can be attributed to the fact that in both countries the economic recovery program was incapable of rapidly reinstating pre-crisis levels of economic activity.

We will now revise the economic policy implemented in the face of crisis by the economies that broke with the limitations imposed by neoliberal strategy. The first stage in breaking with policy limitations ex post involved not prioritizing debt obligations, that is not satisfying investors or market sentiment. Argentina thereby declared the biggest permanent debt moratorium in the history of capitalism. Russia, for its part, negotiated the amount of its external debt, substituting its organization and political power;9 Korea finally managed to restructure the amount of its foreign debt. These decisions, as well as those concerning fiscal and monetary matters, which opposed Neoliberal strategy, were typical of the economic recovery programs of these three countries, as we shall see. In summary, the recovery of real economic activity over financial was made the priority (gdp and employment for example).

8 For example, Mexico received nearly $50 billion dollars from multilateral institutions (particularly the imf) and from foreign governments (mainly the U.S. government). The same situation was repeated in Brazil, where the amount of debt reached $41 billion dollars.

9 For example, in the case of short term -bonds, it managed to extend the expiry date by several years, and reduce the real value from 12% to 1% of gdp. The amount of external debt to pay was also restructured. (National Bank of Russia, 2010)

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 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: Nov 13th, 2017.
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