Political and Economic consequences of Fiscal Rules in Brazil and Mexico

• In Event: Weak Institutions and Enforcement Politics

Abstract

In recent years, Latin American countries have implemented different rules in order to restrain the possibilities of governments, central and regional, to expend excessively. These restrictions, however, have a variety of enforcing mechanisms which can depend on the explicit authorization from congress as in the Mexican case, or predefined thresholds of relevant economic variables as has been the case in Brazil. These distinct arrangements should have different political and economic consequences. The hypothesis is that these consequences depend on the political latitude a given government enjoys in setting its expenditure levels. If limits are open to recurrent political negotiation, it can potentially prevent open conflict in the conduction of economic policy since there is the possibility of accommodation. On the opposite side, legal thresholds would tend to be more contentious since they are set through a one-time political conflict in their definition phase but also during their implementation phase since there will be competition to access scarce resources. In turn, when accommodation is possible the economic consequences would be milder, which could even imply ineffectiveness. This means that legal thresholds are more likely to produce the intended effects of fiscal restrictions.

Author

• Alejandro Angel Tapias, Universidade Federal de Santa Catarina