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Latin America’s Commodity Windfall

BUENOS AIRES – Latin America is experiencing an exceptional boom, owing to soaring income from exports of natural resources. But is the region making the most this opportunity? Have these funds been used as effectively as possible?

With the exception of Central America, rising commodity prices have improved the external accounts and fiscal positions of Latin American countries. Revenue from natural-resource exports represented 25% of total income in the public sector in 2008. In Venezuela, Bolivia, Ecuador, and Mexico, it exceeded 40%. This comes to around 7% of GDP in these countries (more than 11% in Venezuela and Bolivia, and 8% in Ecuador and Mexico).

To determine what should be done with this windfall, it is important to know whether the increase in commodity prices is likely to be permanent or transitory. If the latter, the best course of action would be to save the additional income or use it, as a second-best option, to reduce the national debt. If the increase were considered permanent, however, it would make sense to increase spending or reduce tax pressure.

The choice will depend on the characteristics of the country. There would be more reason to reduce taxes in Norway, for example, than in Latin America, where the general course would be to increase spending.