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 )

To achieve real financial recovery, Argentina, Korea and Russia sought to improve the institutional workings of their economies and restore the internal payment system through the central bank. In the case of Korea and Russia, for example, monetary liquidity was injected into the economy to overcome the collapse of the payment system, ensuring not to exceed the limits that might lead to further inflation and therefore further devaluation. Argentina chose to use the central bank to stabilize its currency, fixing a stable but competitive exchange rate, which combined with interventions in the foreign exchange market benefitting exports (through the sale of dollars and restrictions to the flow of pesos out of the banking system). These examples illustrate how recommendations to maintain rigorous control over the monetary supply were ignored and that there was resistance to severe blocking mechanisms to nominal parity.

Additionally, interest rates were raised short term in these economies to prevent the exchange rate from deteriorating further, but once stabilized, were gradually reduced.10 A series of measures were also established aimed at restricting the entry of foreign investment short term and directing capital towards investment long term, contributing to control of speculation (see Grabel, 2003).11 These measures also served to strengthen the financial system in these countries against the adverse effects of financial contagion. This led to currency stabilization, which coupled with better investment mechanisms, attracted important foreign capital flows. Likewise, in the commercial sector, government controls were tightened in these countries; the Korean government, for example, increased its collection of duty (which in 2000 came to represent 6.5% of total taxes) and implemented various support programs for small and medium exporters (see below).

Having prioritized the real over the financial sectors, through the moratorium and/or renegotiation of debt, these economies achieved the necessary autonomy to implement expansionist public spending programs. Korea, for example, registered a large fiscal deficit of 3.8% of gdp in 1998 (see Table 4). Russia's deficit rose to almost 4.2% of gdp in 2001 and 0.5% of gdp in 2002 (see Table 6).

In short, Argentina, Korea and Russia broke with the paradigms of the neoliberal model, achieving economic policy independence. This independence enabled alternative measures to be implemented, with a view to promoting economic recovery and growth. As we have highlighted, fiscal policy played a significant role in this.

However, in terms of the economic recovery process, evidence shows, as we shall see, that all the economies under study, except the Mexican one, pursued economic policy dissimilar to that promoted by neoliberal theory, including fiscal policy. Consequently, those economies that lifted economic policy restrictions after their respective crises have shown strong and sustained performance (although Brazil saw rapid and sustained growth from 2004). This was not the case for the Mexican economy.

As can be seen in Table 2, despite economic contraction in Mexico following the crisis, restrictive fiscal policy barely changes in 1996, and fiscal balance is maintained. In fact, fiscal revenue as a percentage of gdp increases marginally in this year compared to the previous one and although spending increases, it is insignificant. Furthermore, after 1996, when it became more urgent to recover gdp (and employment) lost during the crisis, public spending and revenue remains unchanged and fiscal deficits are low. Indeed, public spending never reached pre-crisis levels, which shows the government's priority of macroeconomic stability over real economy objectives. It is therefore no coincidence that the Mexican economy hardly grew at all immediately after the crisis and in subsequent years. It is important to note that the positive growth register the year after the crisis is largely due to the favorable external environment and the steady growth of the U.S economy, dragging the Mexican economy behind it through exports (these increased by 18.2% in 1996.)12

10 This increase was moderate and of short duration; for example, interest rates in Korea rose to 35% and stayed at this maximum level for only a few days and then dropped rapidly to levels lower than prior to the crisis (reaching 5% in December 1999). In Russia the interest rate of the main debt instrument (gko) dropped from 84.2% in 1998, to 16% in 1999 and 12.8% the following year (National Bank of Korea and National Bank of Russia, 2010)

11 To stabilize the exchange rate the government also decreed that all revenue in dollars, except exports over a million dollars, be turned over to the central bank and exchanged for pesos, thereby increasing the supply of dollars available.

12 To illustrate the extent of fiscal slackness on the part of the Mexican authorities, we carried out a simple exercise, which answered this question: how much should public spending have grown in 1996 to recover 1994's product level, if all other variables remained constant? The answer is simple if we know the Keynesian demand multiplier for 1996, which was 1.8 (the multiplier is calculated as 1/m+s, where m and s, expressed as percentages of gdp are the total imports and savings respectively). If gdp in real terms was $1312 billion pesos in 1994, then government spending in 1996 should have increased to the monumental sum of $590 billion pesos to reach the pre-crisis level. Although in practical terms it would be impossible to reach this figure, it serves to illustrate that a fiscal deficit of 0.01% of gdp or an increase of 1% of public spending in1996 (i.e. fiscal measures before and after the crisis) was clearly insufficient to drive and maintain real economic recovery.

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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,
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: Moritz Cruz. 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: August 29th, 2018.
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