Latin America in the New Millennium: A Region of Macroeconomic Forking Paths

By the mid-2000s, Latin American countries had achieved macroeconomic stability: inflation was low, fiscal results were balanced, and external accounts were on a sustainable path, far from the frequent threat of currency crises. Although the trajectories that had brought them there had broadly been similar, from that point onwards they began to diverge. Brazil, Chile, Colombia, Mexico, Paraguay, Peru, and Uruguay managed to maintain macroeconomic stability by gradually adopting macroeconomic schemes of “good practices” based on four pillars: 1) monetary policy frameworks based on inflation targeting, managed by independent and largely technocratic Central Banks; 2) exchange rate policies of managed floating and foreign exchange reserves accumulation; 3) institutional fiscal policies that seek to maintain a countercyclical bias and the sustainability of public debt; and 4) full integration with the international capital markets. On the other hand, Argentina, Bolivia, Ecuador, and Venezuela followed a different path, with more erratic macroeconomic policy strategies that favored short-term goals and relegated macroeconomic stability to the background. The evidence presented in this article suggests that countries that did not adopt the “good practices” framework experienced higher macroeconomic instability, lower growth, and less poverty reduction.