Fiscal discipline is nothing new in Chile: since 2000, it has been the hallmark of one of Latin America’s most successful economies, but it could easily have gone by the board in recent years as record prices for copper, its main export, swelled the government’s coffers.
But there was Andres Velasco, Chile’s finance minister since president Michelle Bachelet took office in March 2006. Arguably her most powerful minister, he is widely identified as an ardent guardian of fiscal discipline. On leave from a professorship at Harvard University’s Kennedy School of Government, he has used Chile’s fiscal abundance – “more difficult to manage than scarcity,” he says – to create two sovereign wealth funds and turn the country into a net creditor for the first time in its history.
The story of Latin America is, he points out, one of mismanaged commodity booms. “We’re out to show that a Latin American country can manage a commodity boom soundly and come out strengthened,” he says. Over the last three years, Chile has posted budget surpluses of around or above 7% of GDP. “We’ve repaid almost all Chile’s public debt and made it a net creditor; now we can devote every penny that went on interest to paying pensions and building schools and hospitals,” observes Velasco.
Chile has also successfully reduced the fluctuations in economic growth that have historically plagued Latin America. “In the last few years, we’ve had the spike in the copper price, the spike in the price of oil, the subprime crisis in the US, the slowdown in the US, Europe and Asia, and dramatic changes in the energy supply available to Chile, but fluctuations in growth around trend have been minimal,” notes Velasco, “and that’s a dramatic break with our past.”
Challenges, of course, remain and, over its last 18 months in office, the present administration plans to focus on building the foundations for continued growth and stronger institutions. In the first category, its objectives are to secure and diversify energy supply – by the time this government is over, Chile will have increased its generating capacity by 50%, notes Velasco – to deepen its capital markets and take advantage of an investment boom that meant a 22.9% increase in gross capital formation between the second quarter of last year and this year.
Inflation, which is currently running at 9.3%, is a key concern as in other countries around the world. “But we’ve said very clearly that this means, among other things, a rate of growth of public expenditure next year below the 6.8% we’re projecting this year,” says Velasco.
On a more personal level, he says that implementing the policies he previously taught as a university professor has been easier than it might appear. Indeed, he says he has welcomed the political negotiation it implies.
“What’s tragic for a country is not to have that type of democratic give-and-take; that’s what Chile did not have for 17 years under its military government,” he says. “What Chile has shown in the last 18 years is that, with democratic institutions and a lively democratic give-and-take, you can have disciplined fiscal policies and a strong growth record.”