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Cuadernos de Economía

versión impresa ISSN 0121-4772
versión On-line ISSN 2248-4337

Cuad. Econ. vol.39 no.spe80 Bogotá jun. 2020 



Hacia la coordinación fiscal en Sudamérica: una propuesta basada en multiplicadores fiscales multipaís

Rumo à coordenação fiscal na América do Sul: uma proposta baseada em multiplicadores fiscais multipaís

Matias Tordiinsky Landaua 

a Kingston University London and Université Paris 13, Buenos Aires, Argentina. Email:


Based on the methodology developed by Cingolani, Garbellini, and Wirkierman (2013) and the inter-country input-output (ICIO) tables published by the OECD, we estimate a matrix of multi-country income multipliers for five South American countries for the 2005-2015 period. We then devise a linear program to calculate the requirements of a coordinated fiscal expansion (where each country participates, although not in the same proportion) in order to achieve a target rate of growth for all countries in the region. This policy outperforms the implementation of isolated actions by each government, considering both their fiscal and external costs.

JEL: C61; C67; F14; F15; O41.

Key words: Fiscal multipliers; South America; regional integration; input output


De acuerdo con la metodología desarrollada por Cingolani, Garbellini y Wirkierman (2013) y las matrices insumo-producto multipaís elaboradas por la OCDE, se estima una matriz de multiplicadores fiscales multipaís para cinco naciones sudamericanas en el período 2005-2015. Luego, utilizando programación lineal, se calculan los requisitos de una política fiscal coordinada (donde cada país participa, aunque no en la misma proporción) que permita alcanzar una tasa de crecimiento especificada para todos los países de la región. Las estimaciones muestran que esta política da lugar a mejores resultados que la implementación de acciones independientes por parte de cada gobierno, tanto en el plano fiscal como en el externo.

JEL: C61; C67; F14; F15; O41.

Palabras-clave: multiplicadores fiscales; sudamérica; integración regional; insumo producto


De acordo à metodologia desenvolvida por Cingolani, Garbellini e Wirkierman (2013) e as matrizes insumo-produto multipaís elaboradas pela OCDE, estimase uma matriz de multiplicadores fiscais multipaís para cinco nações sul-americanas no período 2005-2015. Depois, utilizando programação linear, se calculam os requisitos de uma política fiscal coordenada (onde cada país participa, ainda que não na mesma proporção) que permita alcançar um índice de crescimento especificado para todos os países da região. As estimativas mostram que esta política conduz a melhores resultados que a implementação de ações independentes por parte de cada governo, tanto no plano fiscal como no externo.

JEL: C61; C67; F14; F15; O41.

Palavras-Chave: multiplicadores fiscais; América do Sul; integração regional; insumo produto


The first decades of the 21st century have been full of contrasts for South America. After a process of sustained economic growth until 2012, fostered by the global rise in commodity prices, most of the economies in the region entered a phase of low or even negative growth, in a global context of low aggregate demand, the end of the "commodities supercycle", and a general worsening of global financial conditions, particularly for emerging countries.

In this context, the recommended economic policy from a Keynesian point of view would have been an increase in fiscal expenditures, accompanied by lower interest rates, in order to expand aggregate demand via the multiplier, which would lead to a boost in economic activity (Kalecki, 1954; Keynes, 1937).

However, South American countries' productive structure is characterized by combining a few highly competitive sectors, most of them based on natural resources, with a much less developed manufacturing industry -according to Diamand (1972), an "unbalanced" productive structure- which leads to a structurally high import elasticity. This hampers the implementation of expansionary policies in two ways: on the one hand, a stronger domestic market, with higher wages, would reduce competitivity and therefore curtail exports and increase imports, reducing income (Blecker, 2011; Hein & Vogel, 2008) and, on the other hand, the balance of trade deterioration would lead to an external constraint to growth, given the need of foreign currency in order to finance imports required for the productive process (Prebisch, 1950; Thirlwall, 1979). This characteristic of Latin American economies strengthened during the last decades after the abandonment of industrialization strategies that were prevalent until the 70s and the "reprimarization" of these economies during the recent commodity prices boom. Consequently, during recent years, many South American countries engaged in a "race to the bottom" by implementing austerity policies to reduce fiscal deficits, a fact that is illustrated by the recent return of IMF programs to the region in Argentina and Ecuador.

Conversely, it has been argued that the opposite approach (that is, a simultaneous and coordinated increase of fiscal expenditures) could be an alternative, more efficient strategy. This suggestion is based on the fact that, while one country's expansion would increase its imports, the simultaneous increase of its trade partners' economic activity would boost its exports, since they will require, at the same time, imported inputs. In this way, the total impact on the balance of trade would be lower.

Devising such a policy requires moving further away from the mainstream understanding of the relation between growth and trade, based on the calculation of trade elasticities (Houthakker & Magee, 1969), which focuses on exchange rates as the main adjustment mechanism, and, in more recent times, on DSGE models, which consider multiple countries that only differ in size (Corsetti, Meier, & Muller, 2010). Conversely, a Post-Keynesian approach, where the focus is put on production by considering income elasticities rather than on the exchange rate, allows a model to be developed that coherently integrates multiple heterogeneous countries.

The first step towards the development of such a framework was taken by Goodwin (1983) through the estimation of a "world matrix multiplier", which allowed the devising of, in Keynes' words (1936, p. 349), a "national investment program directed to an optimal level of domestic employment which is twice blessed in the sense that it helps ourselves and our neighbours at the same time". A particularly interesting feature of this methodology is that, while it takes a Keynesian standpoint by attributing a key role to aggregate demand, at the same time, it considers specific features for each country through their different import propensities, in line with a Harrodian (but also a structuralist) approach (Harrod, 1933; Prebisch, 1950).

Not much attention has been paid to this seminal paper, particularly due to the lack of consistent multinational data regarding growth and particularly trade. However, during recent years, multi-country databases (particularly inter-country input-output matrices) provided the required data for the implementation of these type of methodologies. This led to the Cingolani et al. (2013) work, which extended Goodwin's methodology by considering gross instead of net output and applied it to the countries in the Western Balkans, demonstrating that a coordinated expansionary fiscal policy is feasible for this region and displays better results for all dimensions (growth, trade, and fiscal costs) than an independent expansionary policy in each country. Portella-Carbo and Dejuan (2018) apply a similar methodology to the Eurozone to test if a Keynesian policy can promote not only growth but also income convergence, finding a trade-off between these two dimensions.

The South American region could also benefit from this approach in order to return to a growth path. This depends on a number of variables including: the multiplier effect of fiscal policies, the degree of productive integration among countries, and the dependence on extra-regional imported goods and services. A coordinated regional policy is viable not only because the involved countries display similar productive structures and face common challenges, but also because intra-regional trade displays, as opposed to extra-regional exchange (based on primary goods exports), a much more developed basket of goods and services, including a considerable percentage of manufactured goods and an important role for high and medium technology industries (CEPAL, 2018; Duran Lima & Lo Turco, 2010).

There is, however, a major challenge posed by the fact that South America shows much lower levels of productive integration than other regions such as the EU, North America, and Asia: it is divided between two major trade blocs (the MERCOSUR, composed by Argentina, Brazil, Paraguay, and Uruguay, and the Pacific Alliance, formed by Chile, Colombia, and Peru, plus Mexico from outside the region), and its main trade flows are not intra-regional but with external trade partners such as China, the EU, and the US. This implies that an expansionary fiscal policy, even if it is coordinated, might still have a considerable negative impact on the balance of trade.

The goal of this article is to implement the methodology developed by Cingolani et al. (2013) for South America, estimating inter-country matrix multipliers and then developing a linear program, which allows the necessary fiscal injection in each country to be calculated to allow for a positive rate of growth in all of them. This is done while maximizing "net gains", defined as the difference between GDP expansion and the increase in fiscal and external deficits.

The article is organised into five sections. After this introduction, the second section describes the current growth dynamics in the region and depicts regional trade. The third section of the paper presents the methodology to be implemented, and the fourth displays the main results. Finally, section five concludes.


Dynamics and Fiscal Policy

The first decade of the 21st century was a period of extraordinary economic success for all countries in South America;1 they reached the highest rates of growth since the 70s. Between 2000 and 2011, the average GDP growth rate for the region was 3.9%, even taking into account the impact of the global financial crisis in 2009 (if this year is excluded, the average reaches 4.3%).

The expansion of economic activity was also accompanied by improvements in the labour market-generally not only limited to low unemployment rates but also leading to a reduction of informality rates (Bertranou, Casanova, & Sarabia, 2013; Saboia & Neto, 2018)-a more egalitarian income distribution and a strong aggregate demand, both domestic and external.

This period of solid growth was driven, schematically, by two main factors. On the one hand, the simultaneous election of progressist leaderships in most countries (known as the "pink tide") led to the implementation of policies that improved income distribution, such as increases in the minimum wage and social programs, and abandoned fiscal austerity, increasing domestic demand and (through the "accelerator") fixed investment (Kalecki, 1954; Samuelson, 1939).

On the other hand, the rapid increase in commodity prices, driven by a low but stable growth in developed countries, the emergence of new developing players such as China and, according to some authors, the use of commodities as financial assets (Belke, Bordon, & Volz, 2013; Carrera, 2018; Cheng & Xiong, 2014) had a twofold effect, increasing aggregate demand through higher exports but also relaxing the external constraint to growth by providing foreign currency in order to finance the increase in imports associated with a higher growth rate (Prebisch, 1950; Thirlwall, 1979). The external constraint to growth became even less binding during this period due to the low global interest rates and the consequent capital inflows into developing countries.2

Figure 1 South America, GDP Growth and Terms of Trade (2000-2017) 

Conversely, changes in the external conditions after the financial crisis, often accompanied by the development of internal tensions, interrupted this virtuous growth dynamic: even though the region recovered quickly from the direct impact of the crisis in 2009, with a solid economic expansion in 2010 and 2011, growth rates have been low since 2012 and even negative for 2015 and 2016. A number of factors played a role in this drastic change in the regional dynamics.

First, the end of the commodity prices boom in 2014 led to an increase in the region's vulnerability (Abeles & Valdecantos, 2016): it implied not only a fall in aggregate demand but also a deterioration of trade balances, reducing the availability of foreign currency in order to finance the imported goods and services required to maintain high levels of economic activity. This has been particularly critical for the region since many countries "reprimarized" their productive structure (and, to even a higher degree, their exports basket) during the commodity boom (CEPAL, 2012). In some cases, the tighter economic conditions and the "defensive" reactions of firms and workers to currency depreciations in order to maintain their real income, led to an upsurge in distributional struggle, triggering inflationary processes.3

Second, the sudden reduction in availability of foreign currency could not be compensated for easily with higher indebtedness since capital lows were not as available as in the previous period due to a "fly to quality" process after the financial crisis of 2007/08. Therefore, the external constraint to growth expressed itself as a twofold effect, both real and financial. The accumulation of foreign reserves during the previous period and a widespread regulation of foreign financial flows provided some cushioning, which was more relevant in some countries than others (Ocampo, 2009).

Finally, a generalized political shift, particularly from 2015 onwards, implied the replacement of progressist governments by more conservative ones, which brought back the paradigm of "sound finance" for public accounts. Although fiscal deficits generally increased due to the fall in tax income, there were no strong fiscal expansions in order to countervail the lower activity in the private sector, both domestic and foreign; on the contrary, fiscal expenditure (especially investment) often reacted procyclically due to the application of austerity programs in order to recover fiscal balance.

The policy discussed in this paper, based on an expansionary fiscal policy, strongly contrasts with the ones implemented in the region in recent years. However, the success of such a strategy relies on the potential spillovers among countries. Therefore, an analysis of the structure of regional trade becomes necessary in order to discuss the potentialities and challenges of such a strategy. That is the goal of the next subsection.

Regional Trade

The simultaneous deterioration of trade balances after the end of the commodity prices boom was possible due to the fact that most of the trade for these countries is extra-regional: the main partners are the U.S., the EU, and China. Table 1 shows the trade flows of goods and services between the five considered countries, their main trade partners, and the rest of the world.

Table 1 Regional and Extra-regional Trade (2015) Billions of dollars 

Source: Own calculation based on ICIO-OECD.

Indeed, the reliance on extra-regional trade partners is a feature of both exports and imports for the five considered countries. As shown in the last column of the table, the region is the destination for around 10% of total exports, the exception being Argentina, for which the region represents 21% of its external markets.

The analysis of imports depicts a similar situation although with higher divergences: countries such as Argentina, Chile, and Peru are more reliant on imports from the region (presented in the last row of the table), while Brazil and Colombia acquire foreign goods mainly outside the area. This feature is particularly manifest for final goods and services, while intermediate products are more frequently sourced in the region (particularly in the case of Argentina and Chile).

Regarding intra-regional trade, there are substantial asymmetries. Brazil is, by far, the most relevant regional player: it is the origin of 44% of the regional imports and the destination of 32% of the regional exports of the other four countries. Argentina is the second biggest player in the area, providing 27% of the regional exports and importing 28% of the regionally traded goods. Chile, Peru, and Colombia (in that order) explain the remaining trade lows.

In this regard, two main trade areas of the region can be identified, both structured around Brazil: one with Argentina and Chile and another with Colombia and Peru, which is considerably smaller than the previous one. In addition to these trade lows, Peru is also an important export destination for Chile.

These two features-dependence on extra-regional trade and internal asymmetries-have historically characterized the South American region. The (limited) regional trade has been fostered by the creation of two trade blocs: the MERCOSUR in 1991, which includes Argentina, Brazil, Paraguay, and Uruguay (Venezuela was a member, but it was suspended in 2016) and the Pacific Alliance (AP) in 2012, composed by Chile, Colombia, Mexico, and Peru. A boom in regional trade took place between 2004 and 2011, when trade lows grew at a yearly average rate of 20%, as shown in Figure 2. This strengthened regional integration, but without reverting the structural dependence on extra-regional markets: by 2011, when regional trade reached its historical record (84 billion dollars), trade with the rest of the world was 11 times higher.

Source: Own calculation based on ICIO-OECD.

Figure 2 Regional Trade of Goods and Services (1995-2015) 

Moreover, this trade pattern has strengthened during recent years: the slowdown in economic activity since 2011 came with a severe reduction of regional trade lows, which, after peaking at 83 billion dollars, fell to 53 billion in 2015, a 36% reduction in only four years. Although trade with the rest of the world also declined, the decrease was only by 17%, which reduced the importance of regional trade for the five considered countries.

This trade structure poses a