Stimulus Packages: How Much Can the Region Afford?

By Claudio Loser

Latin America Advisor, January 29, 2009

Originally published in Claudio Loser’s monthly “By the Numbers” column for the Dialogue's daily Latin American Advisor

WASHINGTON—John Maynard Keynes, long relegated to history books describing his fundamental contributions to macroeconomics, has returned with a vengeance. Everybody has become a Keynesian, even some of us recalcitrant Friedmaniacs. Fortunately, we now know that in times of crisis, large countries can stick both to government spending stimuli (as Keynes proposed) and an adequately ample supply of money in times of financial implosion (as Friedman discovered).

Latin America has been a fertile ground for Keynesian demand-enhancing measures, Chicago Boys notwithstanding, even if it frequently misunderstood the master. Now at a time of widespread economic crisis, and with large countries seeking to avoid falling into a depression, authorities in the region have been announcing fiscal and credit packages aimed at softening the impact of lower commodity prices and reduced external demand. These measures are being taken on top of significant currency devaluations in many larger countries, with the exception of Ecuador, Venezuela, and to a lesser extent, Argentina.

Several questions arise in this regard: Are the packages large enough to shore up demand? How do they compare to the efforts of other countries? Can Latin Americans afford to do it? The attached table may help elucidate these questions. It lists the recently announced stimulus packages for some Latin American countries, as well as for China, India, the US, Germany and the UK. The numbers are adjusted to reflect what can be expected to be the annual spending in 2009. For example, in the case of China the program will extend for two years, and in the US, the numbers include the unspent portion of the package of October. The table includes numbers for public debt, both total and net of international reserves, to reflect the ability of the countries to finance the increased spending. It does not include, however, the requirements arising from reduced government revenues on account of lower export earnings, which will decline by more than 2 percent of GDP in virtually all of Latin America.

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