Economic Problems of Latin America

By Seymour E. Harris | Go to book overview

Chapter V Fiscal Policy and the Budget

by HENRY C. WALLICH

CONSIDERABLE progress has been made by many of the Latin American republics in the use of fiscal policy as a means of moderating economic fluctuations. Under the impact, first of the depression, which cut off foreign loans, and later of the war, which curtailed foreign supplies, the republics have developed new fiscal techniques to finance their budgets and to stabilize their economies. Chief among these is the growing use of corporate and personal income and excess-profits taxes and the improvement of domestic facilities for government borrowing. In spite of these advances, however, an independent fiscal policy still encounters severe limitations in most of Latin America, and it is perhaps not unfair to say that for a long time to come many of the republics will be more dependent upon the fiscal policies of their great trade partners than upon their own.

The main obstacle to a successful policy of stabilizing the economy by fiscal means lies in this heavy dependence upon foreign trade. What investment and savings are to the United States as determinants of national income, exports and imports are to the Latin American republics.1 Exports rather than investment are the chief stimulus to income, while imports, rather than savings, constitute the main

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1
Exports and investment both give rise to additional income, in the form of wages, profits, etc., without causing an equivalent volume of consumable goods to appear on the market to absorb this purchasing power. The secondary repercussions of this excess purchasing power cause income to rise beyond the amount due to the original export or investment. Imports, on the other hand, like savings, unless they lead to additional real investment, cause purchasing power to be diverted from the domestic market and bring about a shrinkage of income.

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