Public Sector Deficits and Macroeconomic Stability in Developing Countries

This paper analyzes Latin America's experience with fiscal adjustment during the last decade. The paper discusses in detail how some countries -- most notably Argentina, Chile and Mexico -- were successfully able to eliminate their fiscal deficits in a relatively short period of time. Their experiences with tax reform and expenditure reduction are analyzed, and some political economy angles of the fiscal adjustment process are emphasized. The paper also discusses the interaction between privatization and fiscal adjustment. An analysis of the relationship between social security systems and fiscal imbalances is provided. In particular, the Chilean pension system reform -- which replaced an insolvent and inefficient pay-as- you-go system with a fully funded one administered by private companies -- is analyzed in some detail. The paper concludes with a discussion of the main lessons from the Latin American reforms for the transitional economies and other reforming countries.