Latin America

Latin America and the Return of Fiscal Discipline

With Abelardo de la Espriella, Colombia is also returning to fiscal discipline, private investment, and macroeconomic stability. After two decades of socialist experiments, a reform agenda is returning that recalls the Washington Consensus of the 1990s. Yet the experience of that period is a warning. Stability remains politically fragile when broad parts of the population perceive the rules of the game as unequal. The decisive question is therefore whether Latin America can this time combine macroeconomic stability with equality before the law.

From the Washington Consensus to the Commodity Boom

After the lost decade of the 1980s, marked by debt crises, recessions, and high inflation, large parts of Latin America again turned to reforms aimed at restoring macroeconomic stability. These reforms entered history as the Washington Consensus (Williamson 2000).

The result was a clear improvement in the region’s macroeconomic stability (Easterly 2019). Yet economic stabilisation did not automatically remove political discontent. Many people felt that their own situation had not improved enough. Toward the end of the 1990s, parties promising a stronger role for the state therefore gained support.

The election of Hugo Chávez in Venezuela in 1998 marked the start of a new political phase. On the one hand, moderate left-wing governments came to power and preserved much of the market oriented architecture of the 1990s, for example Lula in Brazil and Bachelet in Chile. On the other hand, politicians such as Chávez in Venezuela, Correa in Ecuador, and Morales in Bolivia chose a much more radical interventionist path.

Driven by China’s industrialisation, prices for commodities such as oil, copper, and coal rose sharply after the turn of the millennium. The commodity bonanza financed expansionary fiscal policy and concealed risks to the sustainability of public finances (Figure 1).

The End of the Bonanza

The year 2015 marked a turning point. After more than a decade of exceptionally high commodity prices, the oil price fell from more than 100 US dollars per barrel to around 50 US dollars. Copper, soybeans, and coal also fell. The favorable external environment that had made much of the fiscal expansion possible disappeared.

Falling revenues, fiscal deficits, rising public debt, and weak growth led to the first electoral defeats of left-wing governments. Yet this change of course proved short lived. The consequences of the commodity price decline were cushioned by a favorable international financial environment. After the global financial crisis of 2008, interest rates in advanced economies remained close to zero for years. This allowed governments to refinance themselves at low cost. The coronavirus crisis prolonged this phase and again strengthened politicians who argued for redistribution and state intervention.

Colombia was an exception during this period. While large parts of the region moved left, Colombia broadly adhered to the conservative principles established in the 1990s. The historical connection between left wing movements and guerrilla groups made it difficult for socialist forces to reach power for decades. In 2022, Gustavo Petro, a former guerrilla fighter, became the country’s first left wing president.

Washington Consensus 2.0

From 2022 onward, the international macroeconomic environment changed drastically. The strongest global inflationary surge in decades forced the major central banks to raise interest rates sharply. A long era of cheap financing conditions came to an end. High but volatile commodity prices cannot compensate for the overstretched public finances of these countries. Much as in the 1990s, high inflation rates are bringing back the desire for fiscal discipline, a smaller state, and more room for the market economy: a Washington Consensus 2.0.

The election of Javier Milei in Argentina in 2023 marked this new political phase. Milei came to power with a program aimed at fiscal discipline, a smaller state, and more freedom for private enterprise. Since then, several countries have moved in a similar direction. In 2025, Chile elected José Antonio Kast; in Peru, Keiko Fujimori won; and now Colombia has joined this trend with the victory of Abelardo de la Espriella.

Economic reforms are not enough

The Latin American experience shows, however, that macroeconomic stability alone does not guarantee political stability. In the 1990s, governments managed to control inflation, stabilize currencies, and regain the confidence of markets. But lasting political support did not emerge.

The conventional explanation is that the gains from growth were distributed unequally. This reading is incomplete. The deeper problem was that large parts of the population believed the rules of the game still favored only certain groups. Access to justice, the protection of property rights, and equality before the law differed according to income, political connections, or the ability to participate in the formal economy.

Historically, income inequality in various countries can indeed be explained partly by differences in the application of the principle of equality before the law (Duarte 2020). Income inequality is perceived as unfair when it arises under unequal rules of the game. People judge not only economic outcomes, but also the path by which those outcomes are reached.

As Hernando de Soto (2000) emphasized, large parts of the population remain partly excluded from the formal institutions of property, credit, and justice. In such an environment, economic reforms initially benefit those who already have access to the formal part of the economy.

The greatest risk to the new regional course is therefore not primarily economic, but institutional. If today’s governments restore fiscal stability without also extending equal rules to all, they may recreate the very political conditions that enabled the rise of the left.

Conclusion

One lesson of the past thirty years is that fiscal discipline is necessary, but not sufficient. The question, therefore, is not whether Latin America is returning to the market. The question is whether this time it can combine macroeconomic stability with equality before the law. The answer will determine whether the current change of course becomes the beginning of a new chapter in the region’s development, or merely another swing in Latin America’s political pendulum.

Literature

Duarte, P. (2020). How Much of Today’s Inequality is Unfair. IREF Working Paper 202003.

Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books.

Easterly, W. (2019). In Search of Reforms for Growth: New Stylized Facts on Policy and Growth Outcomes. NBER Working Paper No. 26318.

Williamson, J. (2000). What Should the World Bank Think About the Washington Consensus? The World Bank Research Observer, 15(2), 251 to 264.