The 2024 Nobel Prize in Economics was for studies of the critical role institutions play in development to achieve wealth and prosperity. It was awarded to Daron Acemoglu, Simon Johnson, and James A. Robinson. These studies provide more evidence that one of the decisive ways for a country to find the path of progress is to improve its institutions. Capital and labor alone are not enough to ensure prosperity and development.
Institutional evolution refers to the process by which formal and informal rules, norms, and organizations that structure human interactions develop, adapt, and transform over time. In the context of public finance and governance in LAC, institutional evolution encompasses changes in policies, structures, processes and systems that have shaped the way governments manage public resources, implement fiscal policies, and achieve development outcomes.
Since the public debt crises and the beginning of structural reforms in the 1980s, until the post COVID-19 pandemic recovery and the escalation on climate change challenges, there were significant transformations aimed at improving fiscal sustainability, transparency, efficiency, and accountability in LAC countries. During these decades many governments modernized and strengthened the roles of finance ministries, public management institutions, and governance frameworks.
The LAC debt crisis in the early 1980s led many countries into serious fiscal deficits, hyperinflation, and ascending public debt. This crisis triggered the first wave of fiscal reforms with structural adjustment programs to reduce fiscal deficits, downsize the public sector, and liberalize markets, including privatizations and budget cuts. At the same time began an increase in tax revenues and social public spending. It was very important to revive fiscal discipline, with more centralized, transparent and institutionalized fiscal controls.
During the 1990s, continuing to implement these fiscal adjustments, many LAC countries introduced fiscal rules to institutionalize discipline on government spending and deficits. Brazil, Chile, Colombia, and Mexico, for instance, adopted fiscal responsibility laws to enhance transparency and promote sustainable debt management. It was the age of wide-ranging public management reforms, including the introduction of results-based budgeting, modernization of tax administrations, and the implementation of Public Financial Management (PFM) systems, which included integrated financial management information systems (IFMIS).
These institutional evolutions continue during the 2000s with the institutional strengthening of finance ministries, additional budgetary reforms, and other important reforms such as public procurement, payroll, public investment, asset management, internal and external controls.
Public procurement systems, for example, used to have organizational units or agencies mainly to control the processes of procurement, now mostly LAC countries have centralized systems to support acquisitions and contracts, maintaining decentralized purchases but with central databases for inversed auctions and other instruments to assist ministries and agencies. A similar reform of government payroll aggregated all information in a central database.
All these systems contributed to the institutionalization of good public management improvements and fiscal sustainability. Before a IFMIS was implemented in Brazil in 1986, the system was essentially manual, involving the filling of a form with five copies, using carbon paper, and distributing this information to several locations.
At the same time, the governments of LAC countries modernized their tax agencies to grow revenues. This contributed to increased social spending and inclusion, using conditional cash transfers, and enlarged the coverage and quality of public education and health.
Then, during the early 2010s, digital transformation began to support fiscal sustainability, with e-government and new digital finance platforms, which streamlined tax collection, improved public service delivery, and enhanced fiscal transparency. Brazil, with the modernization of the revenues of the subnational states, supported by IDB, was a remarkable example.
This was also the time of emerging medium-term fiscal frameworks and public debt management strategies. Additionally, climate change also led to some experimentation with green budgeting initiatives and began integrating environmental considerations into public finance.
Finally, in the 2020s the COVID-19 pandemic placed unprecedented strain on fiscal resources across LAC, forcing governments to increase spending on healthcare, social safety nets, and economic stimulus. This crisis not only exposed weaknesses in public finance systems, but created incentives for more innovative and flexible fiscal responses. The pandemic also intensified the need to address social inequalities and led to greater demand for reforms in public expenditure targeting, especially to protect the most vulnerable populations.
The role of public finance in addressing climate change has continued to grow. Fiscal institutions are increasingly tasked with aligning national budgets and climate-related goals, as seen in Chile's Climate Change Framework Law and Costa Rica’s progress toward carbon neutrality, and with the LAC Climate Change Platform of Economy and Finance Ministries.
Despite progress, many countries still face challenges related to weak institutional capacities, at all levels of government. While anti-corruption frameworks have improved, many LAC countries still struggle with enforcement. Balancing fiscal stimulus and debt sustainability remains a critical issue, particularly considering the post-pandemic recovery. And maintaining continued investment in digital public finance systems and technological integration is crucial for transparency, efficiency, and accountability in fiscal and public management.
The institutional evolution in fiscal and public management in LAC over the last four decades shows significant progress, but ongoing challenges remain. Countries in the region have implemented important reforms that modernize their fiscal frameworks, improve public sector efficiency, and enhance accountability. Future reforms will need to focus on further integration of digital tools, sustainable development goals (SDGs), and climate resilience in public finance systems to ensure LAC countries’ long-term stability and growth.
