A study by the IDB reveals that the inoperability in public purchases, services and transfers cost the region $ 220,000 million a year; that would have served to eliminate extreme poverty. The global financial crisis unleashed in 2008 increased the prices of raw materials and with it the incomes of several countries in Latin America and the Caribbean (LAC) were catapulted.
At the same time their expenses grew, but it was inefficient, leading to a complicated situation. The Inter-American Development Bank (IDB) today publishes an unpublished study on how the different economies of the region managed public spending and how they now face adjustment scenarios and seek alternatives to reduce current levels.
The report argues that the ineffectiveness of governments in managing their resources resulted in inefficiencies in government purchases, public services and targeted transfers that could cost up to $ 220,000 million a year, equivalent to 4.4% of regional GDP (the 16% of total expenditure).
“That amount would be enough to eliminate extreme poverty in the region,” the report said. Since 2000, the consolidated public spending of LAC increased by around 6 percentage points. To date it has an average of 29.7%, compared to 43.5% of the member countries of the Organization for Economic Cooperation and Development (OECD). Ecuador, Argentina, Brazil, Trinidad and Tobago, and Uruguay spend more than 35% of the Gross Domestic Product (GDP).
The least spend are the Dominican Republic and Guatemala (with less than 20%). The two countries that spend the most in LAC do even more than the average OECD country. The irony of the situation is that GDP per capita (average spending per person) is less than half of a medium-sized OECD country.
The industrialized economies, between 2010 and 2015, recorded a per capita current expenditure of $ 18,281; while developing economies reach $ 2,971. The same dynamic is maintained when evaluating capital expenditure per capita.
The IDB defends the thesis that more can be done, improve the provision of public services and other powers of central governments, without the need to increase spending. The boom period, mainly oil, triggered spending on public sector wages and transfers, which are difficult to reverse, warns the IDB.
The salaries of public employees represent 29% of spending in the region, acquisitions 29.8% and transfers (subsidies, grants and pensions) 29.4%. In 2016, LAC governments spent nearly $ 450,000 million on public purchases. This, and public investment, is one of the most susceptible areas of inefficiency and corruption. It is estimated that between 10% and 30% of the investment in construction projects financed with public money can be lost due to mismanagement and corruption.
In the OECD, it ranges between 20% and 30%, and in the European Union (EU) it is between 7% and 25%. The boom in raw materials expanded the size of public participation by 25% in Latin America and the Caribbean. The agency notes that the growth of public spending does not necessarily threaten fiscal sustainability.
But the history of LAC shows that these increases, especially during the boom, “have often forced countries to adjust drastically in difficult times.” In this regard, the analysis concludes that some countries fall into adjustments because they spend more than their level of development indicates without having fiscal institutions that make this spending sustainable.
Adjusting public spending can be a painful process, cautions the bank. However, understanding their composition and identifying inefficiencies can be very useful. That’s what he calls “smart spending.” It is common that in complicated moments the tendency is to adjust by means of public investment.
But doing it drastically and without order could compromise the participation of private investment as the main economic driver. On this path, public investment, fundamental for future growth, fell more than eight percentage points with respect to current expenses. It fears that governments neglect development for the next generations, while privileging short-term actions.
One of the recommendations of the multilateral body is to adopt fiscal rules that not only guarantee fiscal sustainability. For example, in Peru the growth of current expenditures is limited in order to control that it consumes resources that correspond to capital expenditures. (I)