Fiscal policy and trade flows, examined in Latin America policy roundtable (October 2011)

Rethinking Bretton Woods | Sun, Oct 30, 2011


At a recently-held Latin American Roundtable “Fiscal policy, growth and inequality” addresses the link between fiscal policy and trade flows. 

The link between ‘Fiscal policy and trade flows’ was addressed at the recently-held Latin American Roundtable “Fiscal policy, growth and inequality.” The event was co-organized by Tax Justice Network, LATINDADD, the Hemispheric Working Group on Trade –Finance Linkages,  Christian Aid, Poder Ciudadano and Instituto Centroamericano de Estudios Fiscales, and held last September in Lima, Peru.


The seminar brought together civil society organizations, officials from Latin American country governments and intergovernmental organizations and academics for a dialogue to promote progressive fiscal reforms in the region.


With the reforms of the 1980s and 90s, several countries in the region have dramatically increased exports. Yet, the growth in exports failed to translate into increased capital formation and its equitable distribution while, in some cases, actually leading to a more regressive distribution. A session devoted to the issue of Fiscal policy and trade flows debated the role that fiscal policies were called to play in re-establishing a nexus between trade and its contributions to the national economy, as well as strategies for developing a productive profile with greater value added, biased to industrial and more diversified production.


“Fiscal policy has a direct role to play in achieving a more progressive distribution by taxing at highest rates those with the highest incomes. But we should also think strategically about its indirect role. Fiscal policy can be conceived as a tool to develop a productive structure that, in itself, distributes its gains in a more progressive way,” said Aldo Caliari, of Center of Concern.


In a world of mobile capital flows, financial factors have become a much more determinant factor for the direction and composition of trade, a fact that could be witnessed in the growing relevance of the net factor payments item for the size of the current account. But leaving capital flows to their own device is not going to lead investment to the sectors more prone to reduce inequality or with more progressive productive profiles.


“History teaches us that the countries that were able to improve distribution and the standards of living of their people on a sustained basis were not those that stayed on commodity production, but those that moved into products with more processing and greater knowledge and technology content,” stated

Martin Abeles, of the Economic Commission for Latin America and the Caribbean. “In this context,” he said, “tools to counteract the impacts that extreme price fluctuations in the international commodity markets have, when channeled into the economies in the region, become crucial.” He gave examples of fiscal policy utilization to stabilize the prices of import or exports in a number of Latin American countries with important shares of commodities in their exports.


Mr Medina Bermejo, from the tax administration in Guatemala, spoke of another great challenge in ensuring trade benefited the national economy: the underdeveloped legislation on transfer pricing, which limits the fiscal pressure on the foreign companies exporting from countries in the region. He said that, in addition, companies were exporting more than 10 per cent of GDP out of the region under regimes of export promotion. “This means such companies pay no taxes on such exports,” he said.


Fiscal policy has an important role to play in ensuring that trade contributes to development and the reduction of inequality. In this regard, it was proposed that an agenda to explore should include the use of fiscal and tax policies to:


-- achieve a more progressive productive profile, including influencing the relative profitability of exports.


--perceive a fair share of the segment of transnational activities performed in the country (avoiding transfer mispricing)


--capture a fair share of natural resource extraction


--influencing companies skills, knowledge and local purchasing practices (through a well-thought incentives policy)


--achieve a progressive distribution of export income.