Published by EH.Net (June 2022).

Timothy Kehoe and Juan P. Nicolini, eds. *A Monetary and Fiscal History of
Latin America, 1960-2017*. Minneapolis: University of Minnesota Press,
2021. 586 pp. $80.00 (cloth), ISBN 978-1517911980.

Reviewed for EH.Net by Leonardo Weller, Associate Professor, São Paulo
School of Economics, and Research Fellow, University College London.



*A Monetary and Fiscal History of Latin America, 1960-2017* is a vast and
informative book edited by Timothy Kehoe and Juan Pablo Nicolini. In 586
pages, forty-six authors describe in detail the macroeconomic ups and downs
of 11 countries: Mexico plus the whole of Spanish- and Portuguese-speaking
South America. The book has the merit of analysing small economies, such as
Paraguay, as thoroughly as regional giants like Brazil, Colombia, and
Argentina: each country receives a main chapter and a couple of comments.
This *tour de force* is the result of a series of international workshops
carried out during the “The Monetary and Fiscal History of Latin America
Project.”

The book starts with a theoretical proposition, the “Framework for Studying
the Monetary and Fiscal History of Latin America,” which lays the ground
for the case studies that follow. The framework is a conceptual model
developed by the editors and Thomas Sargent along the lines of Milton
Friedman’s monetarist theory. It proposes that economies are either in
monetary or fiscal dominance. The former is virtuous: sound public accounts
and a central bank committed to low inflation maintain macroeconomic
stability and deliver growth. The opposite happens under fiscal dominance:
dovish central banks print money to finance large budget deficits.
According to the authors, this *framework* explains “all economic crises in
Latin America,” which have been the “result of poorly designed or poorly
implemented macrofiscal policies.”

The choice of focusing on bad policymaking is justifiable. In almost all
countries, governments committed to industrialisation pushed for fast
economic growth in the 1960s and 1970s. The costs of expansionism were high
inflation and an external debt boom that resulted in a regional crisis in
the early 1980s, after the Federal Reserve increased interest rates.
Hyperinflation and stagnation turned those years into a “lost decade.”
Countries that consolidated public finances and insulated central banks
from political pressure have fared better since the 1990s. Chile and – to a
smaller degree – Peru and Colombia are success stories. Those that
continued insisting on unsound policies fared worse. Argentina and
Venezuela are the most notorious examples, but they are not alone: the
governments of Bolivia, Brazil, and Ecuador have also compromised financial
stability in the recent past.

Poor policymaking has indeed condemned Latin America to a series of crises.
However, this framework does not explain *all *the unfortunate – and
numerous – financial events that have taken place in the region since the
1960s.

Several cases that fail to fit the framework appear conspicuously in the
chapters on small countries. Uruguay faced crises because of Argentina’s
1989 and 2001 debacles. It did not matter that the Uruguayan government had
improved its finances in the late 1980s and developed strong monetary
institutions in the 1990s; the economy was too exposed to its troubled
neighbour to be immune to the financial cataclysms coming from the other
side of the River Plate. Contagion also explains why Paraguay’s inflation
was in double digits in the 1980s despite negligible seigniorage. In his
comment, Roberto Chang correctly states that “the link between fiscal
imbalances and inflation is quite weak.” What is more, macroeconomic
prudence did not promote development. Paraguayans would be better off with
more and better public goods, perhaps even at the cost of a less balanced
budget.

The *framework* also fails to adequately explain many events in large
countries. A monetary reform that indexed the Brazilian economy in the
1960s kept inflation high no matter what happened to fiscal policy.
Inflation reached the hundreds in the early 1980s, when the government
reacted to the debt crisis with austerity. Inertial inflation only came to
an end when the 1994 Real Plan tackled the indexation issue. The authors
point out that the Franco administration conducted fiscal consolidation in
that year, but the policy was not persistent, and the subsequent Cardoso
administration ran a primary deficit. Nevertheless, the government still
managed to maintain inflation at single digits. While Brazil stabilised,
Mexico faced a perfect political storm that culminated in the Tequila
Crisis. The Mexican peso depreciated, the economy entered a recession,
inflation soared, and the sovereign debt almost went into default. However,
Felipe Meza’s chapter provides evidence that the economy was in monetary
dominance.

To understand Latin America’s recurrent crises one ought to study
macroeconomic mismanagement, and that is why this book is valuable. Yet two
other sources of financial instability are also important: external shocks
and politics. Several authors acknowledge that world markets played a role,
albeit subject to economic policy. Peru faced a harsh “lost decade” while
mineral prices were low. The terms of trade did not recover until the
2000s, but the economy stabilised and grew in the 1990s thanks to a new
policy orientation. Ecuador’s fiscal policy has been procyclical, expanding
when oil prices are high. That may explain why growth is so erratic and
finance is so unstable – the country has lacked a national currency since
2000.

However, few case studies take politics into account (the Bolivian and
Mexican chapters are exceptions). Without studying political economy, one
will not be able to answer a fundamental question: why is economic policy
so persistently unsound in Latin America? Income concentration may be an
answer. On one hand, populist leaders thrive with short-sighted pro-poor
policies that expand the budget and raise inflation. That is especially
likely when economic conditions are favourable, which may explain why
presidents like Ecuador’s Correa implemented policies that are procyclical
with movements in the terms of trade. On the other hand, small but strong
rent-seeking elites capture the state, resulting in low taxation and bad
policies designed to enrich a few well-connected players.

Inequality is almost unmentioned in the book (the well-balanced chapter on
Bolivia is again an exception). Yet it is hard to forget that Latin America
is among the world’s more unequal regions. The recent social unrest in
Chile is a reminder that even the regional champion in economic growth and
orthodox policymaking is not immune to problems derived from income
concentration. Without appraising how inequality fuels *peronismo*,
Francisco Buera and Nicolini finish their chapter by lamenting that
“Argentine society has not learned its lesson.” Why a country fails to
“learn” a lesson remains an open question.



Leonardo Weller is Associate Professor at the São Paulo School of Economics
and Research Fellow at UCL. He researches the history of state finance in
Latin America.

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