I return to the blog with a guest post from Svenja Flechtner and Martin Middelanis based on their interesting paper on the commodity boom and social policy expansion in Latin America:
Contrary to global trends, the early 21st century witnessed a remarkable decline in income inequality across Latin America. Because the region's commodity exporters simultaneously experienced a boom in the prices of their commodity exports, the commodity price boom is often seen as a key factor in enabling this decline. One of the main channels through which this effect could have materialized is that governments received higher revenues from commodity exports, which they could have used to increase public social spending, thereby contributing to the reduction of inequality. However, the supposed positive impact of rising commodity prices on public social spending has often been assumed rather than rigorously analyzed. In our recent paper "The role of the commodity price boom in shaping public social spending: Evidence from Latin America", published in World Development, we examine whether commodity prices have indeed boosted social spending across the region.
We study the impact of commodity prices on the three main categories of public social spending – education, health, and social protection-- separately for 16 Latin American countries over the period 1990-2019. The use of structural vector autoregressions (SVARs) and local projections allows us to capture the dynamic effects of commodity price shocks on the different categories of social spending while taking into account potential interdependencies among these spending categories. By focusing on country-specific estimations, we acknowledge substantial heterogeneities across countries in the region, where different countries may have responded differently to the same external shocks due to their own political, economic, and social contexts.
Key Findings
We find that the impact of the commodity price boom on public social spending varied significantly across countries, with no universal patterns emerging. Specifically:
• Argentina and Ecuador experienced lasting increases in public social spending as a direct response to the commodity boom. In these countries, social spending on all three categories—health, education, and social protection—increased and remained elevated for several years after the initial commodity price shock.
• Brazil and Mexico observed temporary increases in social spending. In Brazil, per-capita spending on education and health increased briefly but did not lead to a proportional rise in the share of GDP allocated to social spending. Mexico saw more sustained increases in health and social protection spending, though the effects were less pronounced compared to Argentina and Ecuador.
• Chile presented a unique case where initial declines in social spending were followed by a recovery, particularly in per-capita spending on health and education. However, this recovery did not extend to social protection, where spending remained at lower levels.
• Bolivia, Colombia, and Peru, as well as the other Latin American countries that did not experience a commodity boom, showed no significant responses in social spending to the commodity boom. In these countries, the boom did not translate into social policy expansion in the categories that we consider.
The results challenge the common narrative that the commodity price boom was a primary driver of social policy expansion in Latin America. While it certainly provided an opportunity for some countries to increase spending, it was neither a necessary nor a sufficient condition for rises in public social spending across the board.
Explanatory Factors
The heterogeneity in responses suggests that other factors, beyond commodity prices, played crucial roles in determining social spending outcomes. We explore several potential explanations:
1. Political Ideology: The presence of left-wing governments has often been linked to greater emphasis on redistributive policies. The study finds some support for this, as Argentina, Ecuador, and Brazil—all governed by left-wing parties during significant parts of the boom—showed increases in social spending. However, left-wing governance alone does not fully account for the observed patterns, as not all left-governed countries increased spending, while some right-governed countries did.
2. Fiscal Rules: Many Latin American countries implemented fiscal rules designed to limit government spending, particularly during economic booms. These rules, intended to avoid procyclical spending patterns, might have constrained the ability of governments to translate commodity windfalls into sustained social spending increases. As nearly all countries of the sample applied fiscal rules at least during a large part of the commodity price boom, it could be that these rules reduced to some extent the response of social spending to commodity price increases. Overall, the existence of these rules cannot explain the heterogeneous reactions of social spending across countries.
3. Natural Resource Funds: Countries like Chile and Mexico established natural resource funds to manage the volatility of commodity revenues. While these funds can stabilize government budgets, they also limit the direct use of windfall revenues for social spending. In the case of Chile, the existence of a well-functioning Natural Resource Fund might provide an explanation for the initial drop in spending as share of GDP when commodity prices rise.
4. Economic Diversification: In countries where commodities account for a relatively high share of national economic activity, an increase in commodity prices should have a particularly strong effect on fiscal revenues and thereby provide more opportunities to increase social spending. For our country sample, however, no clear tendency can be established that social spending responded more strongly to commodity price increases in more commodity-dependent countries. Another potential explanation could turn this idea around and depart from an economy’s degree of diversification instead. Theoretically, it might be easier for richer and more diversified economies to use windfall gains from commodity booms to get increases of public social spending going, especially with longer-lasting increases in mind. Indeed, it is found that the more diversified and richer countries Argentina, Brazil and Mexico showed lasting increases in social spending.
Implications and Conclusion
In conclusion, while the commodity price boom of the early 21st century created opportunities for increased social spending in Latin America, its impact was far from uniform. The results question the important role attributed to the commodity price boom in reducing inequality in Latin America, at least for the social spending channel. Understanding the diverse responses in different countries requires a careful consideration of the interplay between external economic forces and domestic political and economic conditions. The findings highlight the importance of country-specific analyses in development economics. Broad regional trends can obscure the diverse experiences of individual countries, each shaped by its unique context and political dynamics. As such, the study calls for more nuanced approaches in both academic research and policy-making, recognizing that one-size-fits-all solutions are unlikely to be effective in complex and heterogeneous regions like Latin America.
