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Wednesday, December 13, 2006

Chile Blazes the Trail

Something I agree with from Martin Wolfe for a change (behind the firewall unfortunately). As I have been noting here on Bonobo Land Chile certainly seems on the up and up these days. As I suggest in this post (and also here) Chile's demographics are pretty favourable these days (which is something which can't be said for say Bolivia or Ecuador), and if you add to that the very positive political dynamics then they certainly seem set to carve their place as Latin America's first tiger. I also like the way Bachelet has handled the Pinochet death issue, to ashes he has gone, and as ashes he shall remain. There is quite a good cartoon in one Spanish newspaper which has him trapped in a kind of netherland, he tries the door to heaven (the judges are away sick), same problem with hell, and then with pergatory. It seems he now wants at trial, but has difficulty getting one.

The deaths of Augusto Pinochet and the failing health of Fidel Castro mark the end of an era for Latin America. We should look back at the bearded revolutionaries and military despots, ideological fervour and utopian dreams, without any regret. Despite the recrudescent populism of Hugo Chávez in Venezuela and Evo Morales in Bolivia, a more sober style of democratic politics is cementing its hold across the region.

This is the theme of a fascinating book by Javier Santiso, deputy director of the development centre of the Organisation for Economic Co-operation and Development.* “Since its independence,” he argues, “one of Latin America’s core dependencies has been its belief in miracles: the miracles forged by the Marxist or free-market magicians, revolutionaries and counter-revolutionaries, on the basis of a few grand theories and paradigms.” There is, instead, “a dual movement of economic reforms and a transition to democracy”, a move to “the political economy of the possible”.

There does however seem to be room for improvement. Chile's growth has slowed somewhat recently and this has produced a heated debate inside the country as this article in the FT explains:

Andrés Velasco, the current economics minister, shows little sign of being a man under fire, patiently defending his government’s plans to smooth the rate of expansion and reduce the volatility resulting from highs and lows in the price of copper, which accounts for almost 60 per cent of exports.

Critics say the government’s rigid adherence to macro-economic orthodoxy has undermined its ability to take advantage of copper prices, which have tripled in the past three years. Mr Velasco rejects this. “They get short-term macro-economic performance and longer-term growth trends mixed up,” he says.

In an interview with the Financial Times, Mr Velasco blamed the slowdown in growth this year on short-term supply shocks, among them strikes and accidents in Chile’s largest copper mines and rising international oil prices.

On top of that, Argentina unexpectedly almost doubled the price of the natural gas it exports to Chile and cut volumes. Chile depends on Argentina’s gas for more than a third of its electricity generation, though industry was most affected by the cuts, being forced to use diesel fuel at up to five times the cost.

Although he has come under pressure to take advantage of increasing revenues from the copper boom to pump up spending in needy areas, Mr Velasco is sticking firmly to the counter-cyclical fiscal rule introduced in 2000. It requires a structural budget surplus of 1 per cent of gross domestic product, with spending targeted to revenues based on long-term copper prices, which for 2006 were calculated at $0.99 per pound – less than a third of the highs reached this year.

Mr Velasco says that because of this rule, Chile has had “dramatic success” in stabilising growth and he rejects criticisms that Chile should be growing more because of high copper prices: “The very purpose of macro-economic policy in Chile is to insulate economic activity at home from commodity prices abroad.”

Volatile growth caused by copper prices “was precisely Chile’s problem for decades and to have overcome that is the biggest achievement of macro-economic policy in Chile”.

However, in spite of success in stabilising the economy, the sagging growth has prompted a chorus of criticism, notably from the so-called “group of 20” of Chile’s leading economists, who are calling for the phasing out of the 1 per cent surplus rule to allow greater spending on education and to promote competition through tax breaks for businesses.

“We have to pay more attention to micro-economic problems but the government lacks ambition to carry out serious reforms in this area,” says Harald Beyer, of the centre-right CEP think-tank in Santiago and one of the group.

Felipe Larraín of the University of Chile, another of the 20 economists, highlights four main problems that must be tackled to stimulate growth: low education standards, a lack of innovation, rigidity in labour markets and over-regulation in areas such as the environment.

Whatever the ins and outs of immediate policy issues (it is hard from this distance to judge) I am sure Chile is now firmly set on the right path. So let's hope Argentina and Brazil now continue to follow suit.

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