ABSTRACT
Introduction At the beginning of the twenty-first century, Latin American countries are confronted with the development failure of the Washington Consensus and intensified competition in home and third markets. An expansion of knowledge-based assets has to be at the core of a new development strategy, with policies aimed at moving production up the value chain on a broad basis. Structural change towards higher value added activities is the only viable basis for a sustained increase in the standard of living for all. That is the high road to development. Inaction will put Latin America on the low road to development, with countries competing on the basis of falling wages, not rising productivity. Time is running short, as the rise of China and India is increasing competitive pressures dramatically in third markets and domestically. The adoption of such a capability-focused strategy has to be coupled with the pursuit of the Millennium Development Goals (MDGs). Equating social development with economic development obliterates the necessary focus on structural change, as highlighted by Chang in this volume. But relegating social development to the back burner of development policies is equally unacceptable, as we cannot wait for the benefits of the new development strategy to trickle down to the poor in undue time. In addition to the pursuit of knowledge-based assets and pro-poor policies, the new development strategy has to be based on development friendly macroeconomic management and an environmentally sensitive approach that does not seek short-term gain at the expense of long-term sustainability (Abugattas and Paus 2008). Here we focus on one aspect of the new strategy: developmentoriented fiscal policies. The government plays an activist role in the new developmentalist strategy, and it will need to increase public resources considerably to implement the requisite policies. However, governments in Latin America (and elsewhere) are caught in a fiscal space dilemma: their ability to raise resources (the actual fiscal space) stands in stark contrast to the resources needed for a new developmentalist strategy or with the potential policy space.
