comments on braun-di gresia

Comments on Braun-Di Gresia

• Basic conclusion: "simplistic applications of general principles are no panacea" for procyclical fiscal policy. Need to take into account country-specific political ontraints.

• Basic problem: a "bad" policymaker can undo any rule. I would go farther than the paper. Examples:

• Fiscal rules on deficits or spending (GRH, SGP)......

• ........ even if in cyclically adjusted terms (how to do cyclical adjustment in a LA country?).

• Fiscal rules on social spending. What is social spending? (case of Colombia's Constitution).

• Stabilization funds: (i) what is a temporary terms of trade shock? (ii) tremendous incentives to raid the fund.

• Budget process rules. Can invite budget gimmicks.

A few observations.

1) Ideally, important to distinguish between discretionary and cyclical components of fiscal policy. – Is the problem that automatic stabilizers are not working well,

or that policymakers cannot resist the temptation to spend windfall revenues in good times?

– Probably both in LA, but solutions are different for the two cases.

– HP filter is not the right thing to do to get at the cyclical/discretionry decomposition.

2) Fiscal rules are a red herring: usually not meant to reduce procycicality, but to reduce deficits or spending. In fact, by their nature they usually exacerbate procyclicality.

Main problems:

1) What is social spending? I could not find any definition of variables in the paper.

In Colombia, depending on the institution or the researcher, could get a range of social spending from 10% to 25% of GDP. => need large investment in the data.

2) What does social spending really do? Paper seems to assume that social spending is always "good" and always benefits the poor. Far from obvious.

Social security: almost never reaches the very poor. Paper cites finding by Castaneda that social spending has increased substantially in 90s, mostly because of social security: this is bad news.

Health spending: often only for government employees, and in any case people in formal sector.

Education expenditure: often wages of teachers.

Key problem: idenifying politically sustainable programs that really beenfit the poor.