The Impact of Counter-Cyclical Fiscal Policies on Employment Rates in South American Countries

Abstract

The paper presents the impact of counter-cyclical fiscal policy implemented during economic crunch in the economies of South America as far as short-term and long-term rates of employment are concerned. The reason behind this is that South America relies on the export of commodities and this aspect combined with political and fiscal instability provide the outcomes of such interventions challenging. The fiscal stimulus in the short term in terms of increased state spending and employment generation has been successful because it has led to the reduction of unemployment since it increases the demand and serves as a cushion to any decrease in the private sector. The employment multipliers in non-tradable are greatest and are bound to rise when prices of good commodities rise to augment the fiscal space. However, the long-term implications can be seen to have structural risks. Sustained reliance on government employment would choke in the investment in the private sector, labor markets and would cause inflationary pressure. Further, the debt accumulation, ineffective institutional capacity, and limited the sustainability of the employment undermine fiscal sustainability. This fact suggests that counter-cyclical policies can reduce unemployment in the short run, but is not likely to produce long-term benefits in terms of increased employment, unless it is accompanied by both structural reform and institutional reinforcement. Lastly, the paper brings out the trade-offs between the short-term stabilization and the long-term economic resilience in the counter-cyclical policies of South America.