The first challenge lies under the purview of the fiscal authorities. The progress made in fiscal consolidation undertaken has weakened somewhat over the past twelve to eighteen months not only because of lower oil prices, but because expenditures have risen faster than revenues. The broadening of the tax base in the non-oil sector has been vital to the economy, but the central government also needs to improve the productivity of public expenditure. Data for the LAC region indicate a 24 per cent fall in per capita social expenditure throughout the 1980's. However while there has been some recovery, expenditure on health and education are well below the pre 1980's levels.
Social expenditure has a long gestation period, and contributes to human capital development.
The weakening in the fiscal accounts may retard the restoration of social investment. A second challenge is to ensure that the economic expansion continues to be accompanied by relatively low rates of inflation so as to ensure internal price stability. This means that domestic sources of inflation must be kept at a minimum - that is wage increases must not grow faster than productivity since this contributes towards making the economy less competitive and may support inflationary pressures. It threatens both the social and economic progress achieved in the last decade and the political consensus for greater economic and financial openness and integration that underpinned that progress. Notwithstanding individual problem countries, no one still believes that financial turmoil is mainly the consequence of poor domestic policies.