Austerity and the Global Crisis: Lessons from Latin America

One of the most surprising realities of the past four years of the global economic crisis has been the strong performance of many Latin American countries—in many cases exceeding the growth of the United States and Europe. The experiences of Latin American economies with austerity is described by declining performance followed by a decade of experimentation and increasing awareness and confidence about the role of national economic policies in managing crises and shielding national economies from global volatility. Record-level growth was interrupted by the effects of the global financial crisis after the collapse of Lehman Brothers in October 2008. The effects of the global economic crisis on the region led to the explicit decision by most Latin American governments not to follow austerity policies in order to sustain growth. This decision has largely been successful, although sound fiscal performance has been affected by monetary pressures that appreciated Latin American currencies. Latin American experience of more than 60 years strongly suggests that policies restricting spending can have major negative impacts on national economic growth and social welfare. Those promoting spending, on the other hand, have a greater likelihood of maintaining aggregate demand at the macroeconomic level while providing key services and infrastructure needed for minimal levels of well-being.