Latin America in figures: The problem of public spending inefficiency

The region has suffered due to mismanagement of national budgets, costing around US $ 220,000 million annually, according to the Inter-American Development Bank

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Latin America and the Caribbean is a region that has struggled to cover ever tighter budgetsAccording to a recent report by the Inter-American Development Bank (IDB), the inefficiency in Latin American public spending has resulted in 4.4% of the regional GDP in waste, that is, almost USD $ 220,000 million.

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This is a figure higher than the same GDP of Peru, which is USD $ 190,000 million. According to the same report, this figure would be enough to eliminate extreme poverty in several areas of the region.

What does inefficiency mean?

These inefficiencies refer to the waste and misuse of national spending in each country, as well as in government purchases, public services, transfers, among others. The weakly analyzed decisions, such as the lack of sufficiently specialized agencies and regional corruption have led to this great waste of public spending.

Thus, the report makes several recommendations such as greater use of cost-benefit to determine better budget options, or create specific agencies to plan strategies. "Improving the efficiency and equity of public spending go hand in hand: strong public investment, increasing transparency and investing in teachers seem to be the key to success."

It also suggests increasing spending on education per student, as well as increasing anti-corruption controls to prevent resources from being diverted. In Latin America and the Caribbean (LAC), public spending is almost 29.7% of the region's GDP, almost 6 percentage points more than at the beginning of 2000.

A public expenditure corresponding to another era

After the global financial crisis, several countries saw their income grow due to the sale of raw materials. They also decided to raise their expenses in these areas, such as public sector salaries and pensions. Now it has been difficult for them to get the most out of their tax revenues.

Part of the problem has been seen in the scarce public investment that has been made, and this is key to ensure economic growth. This has lost more than 8 percentage points in the budget of current expenditures, when in all other regions of the world it has grown on average more than 50%.

The IDB explains how this is due in part to people's distrust of their governments. This implies that voters prefer public policies that offer immediate benefits and transfers before investing in education and infrastructure, because these benefits are only notable in the long term.

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A necessary adjustment to reduce inequality

On the other hand, if inefficiencies in distribution are not corrected, the increase in government spending would not help to improve the inequality gap in the region. In 16 LAC countries, direct taxes and cash transfers only manage to reduce this inequality by an average of 4.7%, when in developed countries it is 38%.

In Latin America, only with the Odebrecht scandal, USD $ 737 million was recognized in bribes between 2011 and 2016. The waste of public funds in bribes reaches almost 26% of project costs. To establish a point of comparison, and according to a study by RAND, corruption costs Europe an annual average of 990,000 million euros, that is to say, approximately 3.5% of the GDP of the European Union.

On the other hand, salaries of public employees represent 29% of the region's expenditure, more than 24.2% of the OECD countries. That is, 8.4% of Latin America's GDP. El Salvador, Costa Rica, Paraguay, Guatemala, Bolivia and Argentina spend the most on wages.

The countries with the highest and lowest inefficiency

Chile and Peru have proven to be the countries with the best quality of public spending, since the former only uses 1.8% of its GDP, while the other 2.5% of its own. On the contrary, the countries that spend the most are Argentina, Brazil, Ecuador, Trinidad and Tobago, and Uruguay, with more than 35% of their GDP. In Argentina, for example, inefficiency costs them more than 7% of their GDP.


LatinAmerican Post | Valentina Moya

Translated from "El problema de la ineficiencia en el gasto público de la región"