Latin America and the Return of fiscal discipline

COMMENT. Latin America is returning to fiscal discipline. To remain investable beyond one election cycle, it needs institutional reforms that ensure fair rules of the game for all.

Introduction

With the election of Abelardo de la Espriella as Colombia’s next president, another South American country is turning toward fiscal discipline, private investment, and macroeconomic stability. After two decades of socialist experiments, several South American countries are again focusing on the ideas that formed the core of the Washington Consensus in the 1990s: sound public finances, a more efficient public sector, and greater scope for private enterprise. For investors, this change of direction could make Latin America more attractive relative to other emerging and developing economies, at least over the next few years.

Yet the experience of the 1990s calls for caution. Governments then failed to build lasting political support for market-oriented reforms. History could repeat itself. If large parts of the population believe that reforms benefit only privileged groups, political demand for state control and redistribution will rise again. The central question for investors is therefore whether Latin America will offer an attractive investment case for only one electoral cycle, before the pendulum swings back to the left. Or whether this time macroeconomic stability will be accompanied by the institutional changes needed to make long-term investment more attractive.

Latin America’s Pendulum: From the Washington Consensus to the Commodity Boom, 1990 to 2015

After the lost decade of the 1980s, marked by debt crises, recessions, and high inflation, most Latin American countries adopted reforms aimed at restoring macroeconomic stability. These reforms became known as the Washington Consensus.

The term “Washington Consensus” was coined in 1989 by the American economist John Williamson. It described ten economic reforms that Washington-based institutions such as the International Monetary Fund and the World Bank broadly regarded as necessary to stabilize Latin American economies and return them to growth.¹ The ten measures were fiscal discipline, a redirection of public spending toward health, education, and infrastructure, tax reform, interest-rate liberalization, competitive exchange rates, trade liberalization, the liberalization of foreign direct investment, privatization, deregulation, and the protection of property rights. Countries implemented these reforms with varying degrees of consistency.

The result was a marked improvement in macroeconomic stability across the region (Easterly 2019). Inflation fell sharply. By the beginning of the 2000s, most of the continent’s large economies had reached single-digit inflation rates.

Economic stabilization did not, however, remove political dissatisfaction. Many people felt that their own situation had not improved enough. By the end of the 1990s, political parties promising a stronger role for the state and a “fairer” distribution of wealth were gaining support.

The election of Hugo Chávez in Venezuela in 1998 marked the beginning of a new political phase in the region. On the one hand, moderate left-wing governments came to power, including those led by Luiz Inácio Lula da Silva in Brazil and Michelle Bachelet in Chile. They preserved much of the reform framework of the 1990s. On the other hand, politicians such as Hugo Chávez in Venezuela, Rafael Correa in Ecuador, and Evo Morales in Bolivia pursued a much more interventionist course.

The spread of left-wing governments after the turn of the century coincided with a period of very high commodity prices. Low interest rates in advanced economies and China’s industrialization drove up the prices of major export commodities such as oil, copper, and soybeans (see Figure 2). Crude oil, which had rarely traded above USD 25 per barrel during the 1990s, remained above USD 100 for long periods between 2010 and 2014. In many countries, the commodity bonanza helped finance rapidly rising public spending and concealed risks to fiscal sustainability.

The End of the Bonanza

The commodity bonanza ended in mid-2014. After more than a decade of exceptionally high commodity prices, oil fell from more than USD 100 per barrel to around USD 50. Copper, soybeans, and other commodity prices also declined. The favorable external environment that had enabled much of the region’s fiscal expansion disappeared.

Falling commodity export revenues and weaker global growth put the region’s economies under pressure. Faced with large budget deficits, rising public debt, and weak growth, left-wing governments increasingly lost elections. Mauricio Macri was elected in Argentina in 2015, followed by Jair Bolsonaro in Brazil in 2018.

This first change of direction was short-lived. A favorable international financing environment softened the effects of falling commodity prices. After the global financial crisis of 2008, interest rates in advanced economies remained close to zero for years. Governments in both advanced and emerging economies could therefore refinance themselves at comparatively low cost.

The coronavirus crisis prolonged this phase. A new round of fiscal and monetary expansion stabilized demand and strengthened parties that favored redistribution and government intervention. The result was a second wave of left-wing governments. Chile elected Gabriel Boric, and Brazil returned Luiz Inácio Lula da Silva to the presidency. Even Colombia elected its first left-wing president, Gustavo Petro.

Colombia had long been an exception during this period. While most countries in the region moved to the left after the beginning of the 2000s, Colombia broadly maintained a market-oriented economic policy. The historical links between left-wing movements and guerrilla groups made it difficult for socialist forces to win national power. In 2022, however, 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 dramatically. The strongest global inflationary wave in decades forced major central banks to raise interest rates sharply. The long period of cheap financing came to an end. Commodity prices rose again but remained highly volatile and could not fully offset the countries’ large spending commitments. As after the crises of the 1980s, high inflation and falling purchasing power have again created demand for economic reform. Fiscal discipline, a leaner state, and greater scope for markets form the core of a Washington Consensus 2.0.

Javier Milei’s election in Argentina in 2023 marked the beginning of a new political phase in the region. Milei came to power on a program explicitly aimed at fiscal discipline, a smaller state, and greater freedom for private enterprise (Kleinheyer and Schnabl 2025). His clear electoral victory showed that, after years of high inflation, economic stagnation, and unchecked public spending, a large share of voters was willing to support adjustment programs that would have seemed politically unthinkable only a decade earlier.

Several countries have since moved in the same direction. In 2025, Chile elected José Antonio Kast, who combined a hard line on security with promises to reduce the size of the state and restore sound public finances. In Peru, Keiko Fujimori, the daughter of former president Alberto Fujimori and a firm opponent of left-wing policies, won by a razor-thin margin. Colombia has now joined this trend with Abelardo de la Espriella’s similarly narrow victory. He intends to follow the course set by Milei and reverse the economic policies of his socialist predecessor.

The Limits of a Washington Consensus 2.0

For financial markets, this shift matters. After years in which political debate was dominated by public spending, redistribution, and the expansion of state powers, fiscal balance, inflation, debt sustainability, and competitiveness have returned to the center of the discussion. The open question is whether the region will remain attractive for only one electoral cycle, before the pendulum swings back to the left, or whether it will offer long-term investment potential this time.

Latin America’s experience shows that macroeconomic stability alone does not guarantee lasting political stability. The governments now promising fiscal discipline, less state intervention, and a greater role for the private sector face challenges similar to those confronting governments in the 1990s. At that time, they managed to bring down inflation, stabilize currencies, and restore market confidence. They did not, however, create lasting political support for these reforms.

The conventional explanation is that the gains from growth were distributed unevenly. The deeper problem was that large parts of the population believed that certain groups continued to receive preferential treatment. Access to justice, the protection of property rights, and equality before the law varied with income, political connections, and access to the formal economy. Demand for redistribution rises when the rules of the game are perceived as unfair (Duarte 2020).

The large informal sectors in many Latin American economies reflect this problem. As Hernando de Soto (2000) argues, many people possess assets such as land or housing in practice, but cannot use them fully as capital because they lack formal and legally secure property titles. Limited access to credit, investment, and legal protection restricts their opportunities for economic advancement. In such an environment, economic reforms initially benefit mainly those who are already integrated into the formal economy. Fiscal discipline alone cannot solve this institutional problem.

The greatest risk to Latin America’s new economic course is therefore not primarily economic, but institutional. If the newly elected governments repair public finances without creating equal rules for everyone, left-wing candidates could soon return to power. Voters respond not only to their material circumstances, but also to whether they regard the rules of the game as fair. The very narrow victories in Peru and Colombia, together with a volatile international macroeconomic environment, show how fragile political support for the new course remains.

Conclusion

Abelardo de la Espriella’s election in Colombia is part of a broader political shift in Latin America. Yet the experience of the 1990s calls for caution. If large parts of the population believe that the rules still do not apply equally despite the reforms, political support for market-oriented policies will erode. The political pendulum could then swing back to the left. The region’s attractiveness for investors would prove temporary.

_____________________________

¹ “Let me emphasize that the Washington Consensus as I conceived it was in principle geographically and historically specific, a lowest common denominator of the reforms that I judged "Washington" could agree were needed in Latin America as of 1989” (Williamson 2000, 254).

_____________________________

Literature

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

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

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

Kleinheyer, Marius, and Gunther Schnabl (2025). Argentina under the reforms of Javier Milei: Taking stock. Flossbach von Storch Research Institute.

Williamson, J. (2000). “What Should the World Bank Think about the Washington Consensus?” The World Bank Research Observer, 15(2), 251–264.