Latin American fiscal stimuli: necessary in times of pandemic?

What role can or should fiscal policies have?

The world economy appears to be in crisis due to the pandemic. However, the situation in Latin America is even more delicate. For example, from France 24 they mention that the economic recession "settles in Latin America", something that can be seen with the fall of the Gross Domestic Product of several countries, as is the case of Peru.

Another country that is also seriously suffering the political consequences of confinement is Argentina . According to Clarín, it was the "worst fall in history", since, due to the pandemic and the recession, the GDP collapsed by 19.1% in the second semester, with economic losses everywhere.

However, the situation may have been even more dire than it is. The medium El País reports that, according to the International Monetary Fund, the Latin American economy would have fallen almost double without the fiscal stimulus of the governments. In other words, thanks to the eight points of GDP spent, the region avoided a collapse of between 14% and 15%. Let's see, then, what role Latin American fiscal policy plays in the face of the coronavirus.

Also read: What is the "cepo al dólar"?

Fiscal policy and the economic downturn in Latin America

The economic injection, despite the problems that it can generate in the long term in the region, seems to be one of the political tools against the coronavirus. This can be seen, for example, in Argentina, where the Plan M medium clarifies that public spending grows at 70%, while collection only remains at 35%.

This economic decompensation was due to the efforts of the Argentine government to meet the most urgent needs of the population. In an X-ray of the expenditure proposed by the Cronista medium, it was revealed that the social assistance programs involved almost 600 million, equivalent to 1.7% of the total GDP.

However, it is not the only country that has this trend . According to El Economista de América, Chile decided that public spending will grow by 9.5% by 2021. That is a situation that implies a structural deficit of 4.7% of the Gross Domestic Product, demonstrating the economic problems that affect the region.

At the same time, the outlook appears to be quite grim. From the BBC they warn that there are countries that will have a later economic recovery. Mainly, emphasis is placed on Argentina, Ecuador, Mexico, and Venezuela, which have some economic problems related to debt and the fiscal deficit.

The specialized media Statista reflects that the state aid packages involved a fairly high percentage for some Latin American countries. Peru is mainly mentioned, which spent 9.0% of GDP, followed by Brazil, with 8.0% and Chile, with 5.5%.

The issue then seems to be an extreme need, which is an immediate problem. The idea of injecting money through public policies would allow some families, who have been adrift due to economic inconveniences, to have a break, through various government aid, even at the cost of future deficits.

However, it also appears to be important in mitigating the negative effects of the pandemic. For the Economic Commission for Latin America and the Caribbean, the fiscal policy "must play a central role in mitigating the social and economic impact" derived from the COVID-19 pandemic.

In other words, in the face of the human and economic crisis that weakened the Latin American economy, the impulse of an economic reactivation could help to improve the delicate situation of many people. The problem seems to be, then, what is the cost that will be paid in the future and how the economic recovery of Latin America could begin.