The impact of adjustment and stabilization policies on infrastructure spending in Central America

Abstract

During the 1980s and 1990s the countries of Central America experienced protracted fiscal crises and debt repayment problems which resulted in the implementation of structural adjustment agreements. Apart from attempting to reestablish fiscal balance and to control inflation, the proponents of adjustment policies sought to enhance growth by de-emphasizing the wasteful aspects of state spending while maintaining public expenditures on physical and human capital, which were believed to promote private sector productivity. By comparing a pre-debt crisis period with the period given by debt crisis and adjustment, the study reveals that the shares of government spending on human and, particularly, physical infrastructure dropped precipitously during the adjustment period. At the same time, the shares devoted to defense and subsidy categories—as well as interest payments on external debt—generally registered notable gains. The experience of adjustment policies in Central America indicated that substantial discrepancies existed between the idea and the reality.