IEA: Can you tell us what made you pursue a career in economics?

Laura: A well-known Brazilian expression states that we are a nation of 200 million football managers, as we all have a strong opinion on how to better pick and organize our favorite football team. Analogously, some have argued that we are a nation of Finance Ministers, as we all seem to have ideas on the causes and solutions to our economic misadventures.
As I was growing up in Rio de Janeiro in the 1990s, my parents used to rush to the grocery store to avoid losing the entire purchasing power of their monthly salary to hyperinflation. As in every other household at the time, they had to quickly react to a sequence of highly complex stabilization plans that we would listen carefully to during national television broadcasts. At the age of 10, I had lived through five different national currencies and had already started to ask the type of questions that unfortunately still intrigue Brazilian kids these days: “why are all these people sleeping in the streets?”.
Since I started studying economics, I have continued to search for an answer through different approaches. After an undergraduate thesis in Brazilian economic history and a master’s in comparative development, I have moved into Macroeconomics during the PhD in the United States that I began pursuing right before the start of the 2008-09 Global Financial Crisis. Since then, I have focused my empirical and theoretical research on the links between economic growth and income distribution and the role of fiscal policy. Even if my career in economics coincided with a period of deep economic crisis, increasing inequality and deterioration of democratic institutions in my home country, I was lucky enough to find excellent professors, colleagues and students along the way who have renewed my interest in moving forward.

IEA: In your recent work, you have explored how more active fiscal policy has mitigated the negative economic effects of the pandemic. A counterargument is that most developing countries do not have the capacity to expand public debt. How constraining are current debt levels on the possibilities of expansionary fiscal policy in countries such as Brazil in your view?

Laura: Indeed countries with a poor credit history were much less able to deploy fiscal policy tools during the pandemic, which helps explain why advanced economies had a fiscal response to Covid-19 of 27% of GDP versus 6.7% of GDP in emerging markets based on data from the IMF Fiscal Monitor. Since our study suggests that fiscal policy has substantially attenuated the fall in GDP around the world, this heterogeneity will act as an additional driver of global inequalities in the post-pandemic world. But there is also a significant heterogeneity within the Global South, as developing countries entered the crisis with different levels – and, even more importantly, different profiles – of public debt.
In Latin America, for instance, Peru had a relatively low initial debt-to-GDP ratio (below 30%), while Argentina and Brazil had more than 80% of GDP in public debt in 2019. This may help explain why Peru spent almost 12% of GDP in fiscal measures to fight the pandemic – the double than the World average.
But whereas Argentina has a large share of dollar-denominated debt, Brazil has negative levels of net external public debt (our volume of international reserves is much higher than the dollar-denominated sovereign debt). As a result, Brazil was able to spend more than 6% of GDP in response to Covid-19 without facing external or fiscal constraints while Argentina’s response stayed around 2% of GDP. The emergency cash relief program that Brazil has launched in 2020 temporarily neutralized the increase in inequality and, according to previously estimated social benefit multipliers, has prevented GDP from falling between 8%-14% in 2020 (as opposed to the observed 4.1% contraction). While the compatibility of an additional fiscal stimulus with the stabilization of the debt-to-GDP ratio in the medium-run depends on specific fiscal multipliers and the corresponding responses of GDP, tax receipts and interest rates, it is clear that Latin American countries still have a large space to raise revenues through progressive taxation so as to allow for a fiscally sustainable expansion in social protection and infrastructure investment.