Fiscal Structures in Latin America

It is a pleasant surprise to notice the IADB piece explaining that Latin American governments allocate ‘a higher share of fiscal resources (6% more of the budget) to social spending (education and health) than other regions of the developing world’. In comparison with developed economies when they had the current levels of income as Latin American countries, social expenditure on both education and health in Latin America is again higher than expected. In 2003, average public social expenditure in Latin America, as a percentage of GDP, increased to 13% from 10% in 1990.

Since in Latin America social security membership rates are higher in the higher income groups, spending on pensions is the most regressive of all types of social spending. Although the retirement age population in Latin American countries represents a lower proportion than in developed countries when they were at our current level of development, and although pension coverage rates in Latin America are very low, pension systems are already overwhelmed by high current (or cash) and actuarial deficits.

The report stress that despite the recent debt buybacks, Latin America has a significant amount of dollar denominated debt:
“Finally, it is useful to debunk some myths on the debt situation in Latin America. Levels of indebtedness in the region are not systematically different from the rest of the developed or developing world. What is different is the composition of the debt. In Latin America, unlike other regions, borrowing is very concentrated in dollar securities and short-term local currency instruments. Contrary to what might be expected from simple principles of accounting, enormous fluctuations in the borrowing levels of Latin American countries are not mainly due to excessive fiscal deficits. Only 5% of changes in debt are explained by traditional fiscal results. The rest come from exchange rate devaluations (which raise the value of the debt in dollars), banking crises, and contingences and unforeseen or non-budgeted expenses, due to negligence or lack of transparency in fiscal accounts.”