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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