With a per-capita income of $2,020, well below the region's average of $8,574, according to World Bank figures, Bolivia is one of Latin America's poorest countries. However, an equivalent of 25 percent of the country's Gross Domestic Product (GDP) remains frozen in fiscal reserves in the municipal governments' coffers because the nation lacks the capacity to effectively spend the funds.
Though a bit extreme, this case showcases the challenges many Latin American countries face when it comes to using public funds, says Rodrigo Chaves, director for the reduction of poverty and economic management at the World Bank.
According to Chaves, governments in the region have historically focused more on cutting budgets than on public spending. With the economic crises of the 1980s and 90s, finance ministries in the region became quite smiled at cuts due to the need to reduce deficits.
"Since 2003, macroeconomic conditions have improved and the countries have begun to focus more on improving the government's spending capacity," Chaves says. With the global economic meltdown of 2008, many countries around the world--including those in Latin America--realized that they needed to use public spending to boost their economies. This is known as the counter cyclical policy, in which governments save money during economic good times, and spend more during the bad times.
Latin America is not a homogeneous region when it comes to the topic of public spending. According to Guillermo Perry, former chief economist at the World Bank, there are countries that are very efficient in spending, such as Chile, Uruguay and Costa Rica. Others do so at an intermediate level, such as Mexico. Still others are not as efficient, such as Colombia, Brazil or Venezuela.
Perry adds that the Chileans have developed a very effective government, with low corruption levels and a project-evaluation model that works well at elevating the quality of publicly-financed projects.
Meanwhile, Brazil is a symbol of inefficiency. Still, Perry warns against making an across-the-board generalization about the country, pointing the high efficiency of state-owned oil company Petrobras. There are isolated cases of efficient public spending in almost every country.
Those that have savings models outperform in the discussion about the efficiency in spending public money. This has been particularly important in recent years with the boom in commodity prices, which...