Public Spending Policies in Latin America and the Caribbean: When Cyclicality Meets Rigidities

Table of Contents

• Front Cover 1
• Contents 13
• Acknowledgments 17
• About the Authors 19
• Executive Summary 21
• Abbreviations 25
• Chapter 1 Public Spending 101: Low- and Middle-Income Markets Are Different 27
• Size and Evolution of Public Spending 27
• Composition of Public Spending: Going beyond “Big G” 0
• Efficiency and Effectiveness of Public Spending 38
• Annex 1A: Categorization of Countries 45
• Notes 46
• References 47
• Chapter 2 In “Good Times,” a Procyclical, Downwardly Rigid, and Inefficient Public Spending 51
• Introduction 51
• Overall Public Spending Procyclicality in Low- and Middle-Income Markets and Economic Volatility 52
• How Does Procyclical Fiscal Policy Contribute to Output Volatility? 0
• Procyclicality of Public Consumption Meets Spending Rigidities 56
• In Good Times, Low Returns to Public Consumption: To Spend Poorly Is Like Not Spending 0
• Annex 2A: Categorization of Countries 63
• Notes 63
• References 64
• Chapter 3 In “Bad Times,” Lack of Automatic Stabilizers Leads to Good Intentions with “Too”-Rigid Outcomes 67
• Introduction 67
• Lack of Effective Unemployment Insurance Means No Automatic Stabilizers in Bad Times 68
• In “Bad Times,” Good Intentions with “Too”-Rigid Outcomes 0
• Countercyclical in Bad Times: Effective in the Short Run but Costly in the Long Run 78
• Notes 84
• References 85
• Chapter 4 Something Has to Give: Procyclical Pension Benefits and Public Investment in “Bad Times” 89
• Introduction 89
• Procyclical Social Security 90
• The Wrong Solution to an Unnecessary Problem 98
• Cutting Public Investment Is Especially Costly for Low- and Middle-Income Markets 99
• Annex 4A: Categorization of Countries 106
• Note 106
• References 107
• Chapter 5 Conclusion and Policy Prescriptions 109
• Dealing with Procyclical, Inefficient, and Downwardly Rigid Public Consumption: From a Butcher’s Knife to a Surgeon’s Scalpel 0
• Finding the Right Amount of Rigidity 111
• Expenditure Rules: The Surgeon’s Scalpel 0
• Fiscal Rules in Practice 112
• Toward Better-Designed Shock Absorbers: Finding Flexible Alternatives to Unemployment Insurance 114
• Better Automatic Stabilizers in Bad Times 116
• Protecting Public Investment and Pensions Is Key to Securing Long-Term Inclusive Growth 117
• Investment-Friendly Rules Supported by More Fiscal Space in Good Times 117
• Formula-Based Indexation to Protect Pensions 118
• Using the Cyclical Squeeze as an Impetus to Efficiency Savings 0
• Notes 120
• References 120
• Boxes 81
• Box 3.1: Two-Agent New Keynesian Models in Practice 81
• Box 5.1: Peru’s Recent Experience with Budget Balance Rules 113
• Figures 30
• Figure 1.1: Global Representation of Wagner’s Law 30
• Figure 1.2: Size of Government in a World Historical Perspective 30
• Figure 1.3: Augmented Wagner’s Law Residuals 31
• Figure 1.4: Relative Changes in Public Expenditure around Wagner’s Law 32
• Figure 1.5: Augmented Wagner’s Law Residuals: Large versus Small Latin American Economies 34
• Figure 1.6: Evolution of Components of Government Spending: Spending Decomposition in Low- and Middle-Income versus High-Income Economies 36
• Figure 1.7: Evolution of Components of Public Social Spending: Transfers in Latin America and the Caribbean versus High-Income Economies 37
• Figure 1.8: Evolution of Bias against Capital Spending 38
• Figure 1.9: LAC: Large Waste and Inefficiency Relative to Total Public Expenditure 40
• Figure 1.10: Targeted Spending and Leakages in Latin America and the Caribbean, 2015 41
• Figure 1.11: Comparison of PISA Reading, Mathematics, and Science Scores for Students in Latin America and the Caribbean and in Organisation for Economic Co-operation and Development Countries 43
• Figure 1.12: Regressive Patterns in Education Quality 43
• Figure 1.13: Frontier Analysis of Secondary Education Efficiency 44
• Figure 2.1: Low- and Middle-Income Markets Are Procyclical: Correlations between the Cyclical Components of Public Spending and Output 53
• Figure 2.2: Average Growth in the Main Components of Primary Government Consumption over the Business Cycle 59
• Figure 2.3: Output Elasticities of Public Consumption Expenditures over the Business Cycle 60
• Figure 2.4: Returns on Public Spending under Different Levels of Efficiency 62
• Figure 3.1: Unemployment Insurance Is a Key Automatic Stabilizer 69
• Figure 3.2: Effective Coverage of Unemployment Insurance Programs 70
• Figure 3.3: Coverage versus Replacement Rate in Unemployment Insurance 72
• Figure 3.4: Effective Unemployment Insurance versus Informality 74
• Figure 3.5: Social Transfers in Latin America and the Caribbean during COVID-19 76
• Figure 3.6: Downwardly Rigid Increases in Conditional Cash Transfers and Public Employment 77
• Figure 3.7: Social Transfer Multipliers: Empirical Estimation for Latin American and High-Income Countries 80
• Figure 3.8: Country Share of Hand-to-Mouth Individuals 81
• Figure 3.9: Country Share of Social Transfers Reaching Hand-to-Mouth Individuals 82
• Figure 3.10: Share of Hand-to-Mouth and Social Transfer Targeting 82
• Figure 3.11: Social Transfer Multipliers: Empirical Estimation versus Model Quantitative Results 83
• Figure 4.1: Country Correlations between the Cyclical Components of Real GDP and Real Social Security Spending 91
• Figure 4.2: Country Correlations between the Cyclical Components of Real GDP and Real Social Security Spending, by Number of Beneficiaries and Spending per Beneficiary 92
• Figure 4.3: Percentage of Countries with Automatic Price-Based Formula Indexation Mechanisms 93
• Figure 4.4: Public Investment Is Procyclical 95
• Figure 4.5: Typical Adjustment Spending Composition in Latin America and the Caribbean 96
• Figure 4.6: Evolution of Public Spending Composition in Low- and Middle-Income Countries as a Percentage of Total Primary Spending 97
• Figure 4.7: Infrastructure Investment for Selected Latin American and the Caribbean Countries 98
• Figure 4.8: Ratio of the Initial Stock of Public Capital to GDP in European Countries 100
• Figure 4.9: Public Investment Multiplier: Evidence from European Countries 101
• Figure 4.10: Public Investment Multiplier after Two Years of the Spending Shock, Evaluated at Different Ratios of the Initial Stock of Public Capital to GDP: Evidence from European Countries 102
• Figure 4.11: Primary Spending and Public Investment Multipliers: Evidence from Argentine Provinces 105
• Maps 70
• Map 3.1: Unemployment Insurance Is Absent in Many Low- and Middle-Income Countries 70
• Map 4.1: Existence of Automatic Price-Based Formula Indexation Mechanisms in the World, circa 2019 94
• Map 4.2: Evolution of Public Investment Multipliers in Europe 103
• Map 4.3: Evolution of the Investment Multipliers for Argentine Provinces 105
• Map 4.4: Global Extrapolation of Public Investment Multipliers Based on Initial Stock 106
• Tables 45
• Table 1A.1: Categorization of Countries in Chapter 1 Figures 45
• Table 2.1: Procyclicality Leads to More Volatility, and Low- and Middle-Income Markets Are More Volatile 54
• Table 2.2: Variance Decomposition of GDP Growth Volatility 56
• Table 2A.1: Categorization of Countries in Chapter 2 Figures 63
• Table 4A.1: Categorization of Countries in Chapter 4 Figures 106