domingo, 1 de marzo de 2009


Chile's economy
Feb 19th 2009 | SANTIAGO
From The Economist print edition

Cashing in the fruits of rigour
LONG held up as a model of policymaking that others in Latin America and beyond should follow, Chile’s economy has recently seemed oddly lacklustre, with growth below the regional average and inflation stubbornly high. As a small, open economy it is uncomfortably exposed to the world recession—the price of copper, its main export, has fallen by almost two-thirds since mid-2008. But virtue sometimes has its reward. More than any other government in the region, Chile’s is able to take action to stimulate the economy. Now it has done so.

Last month Andrés Velasco, the finance minister, unveiled fiscal measures worth $4 billion. Government spending will rise this year by 10.7%. On February 12th the independent Central Bank joined in, slashing its benchmark interest rate by a massive two-and-a-half percentage points, to 4.75%. These measures mean the economy may suffer only a mild downturn.

Mr Velasco’s package includes an extra $1 billion for Codelco, the state-owned copper company, to finance investment; $700m for infrastructure projects; extra benefits for poorer Chileans; and temporary tax cuts for small businesses. The measures are better designed than similar efforts in rich countries, says Eduardo Engel, a Chilean economist at Yale University. “There’s almost no pork.”

Mr Velasco himself says that the challenge is to get the bulldozers moving: “We looked for projects we can do quickly.” Much of the money will go on houses for the poor and road maintenance. He reckons these public works will create 70,000 new jobs directly. They follow an earlier, smaller fiscal stimulus last year.

The government forecasts this year’s fiscal deficit at 2.9% of GDP, but it can easily afford this. That is because it has stuck to a rigorous fiscal rule drawn up by its predecessor requiring it to save much of the revenue gained when the copper price rises. Not only is public debt minimal (4% of GDP in December), but the government has also piled up $20.3 billion (about 12% of GDP) in a sovereign wealth fund which it can now spend. That marks a contrast with neighbouring Argentina, whose government has financed an increase in spending by nationalising private pension funds, shredding investor confidence.

The fall in commodity prices has at least helped to cut Chile’s inflation rate, from 9.9% for the year to October to 7.1% in December. By the end of this year it should have fallen back within the Central Bank’s target range of 2-4%, reckons Rodrigo Valdés, the bank’s former chief economist who now works for Barclays Capital. He expects further substantial interest rate cuts in the course of the year.

Lower rates will not necessarily encourage Chile’s banks, some of which are foreign-owned, to lend. So officials are also trying to inject cash and confidence into the banking system. They have done this in two ways. The Central Bank, which has ample reserves, has auctioned dollars. And the government has given a $500m capital boost to BancoEstado, a state-owned entity which is the third-biggest commercial bank, to allow it to expand lending, especially for mortgages and small businesses.

The government’s decision to save so much of the copper windfall was not popular at the time. But “being a Keynesian means being one in both parts of the cycle,” Mr Velasco says. His approval ratings in opinion polls have leapt over the past few months, as have those of his boss, Michelle Bachelet, Chile’s president. The ruling centre-left Concertación coalition, which has been in power since 1990 and had been looking tired, now has a chance in a presidential election next December it had seemed certain to lose. Good policy can sometimes be good politics.