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Chile - Mending the roof when the sun is shining

Monday, April 27, 2009
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I have Dani Rodrik’s weblog to my list of regularly visited sites and his most recent post provides a super example of how a country can accumulate a fiscal surplus when macroeconomic conditions are favourable giving the government scope for an appropriate and sustainable fiscal stimulus in the face of global economic uncertainty and a downturn in commodity markets.

Notice from the chart above just how dependent is Chile on exports of copper

“Until the current crisis hit, Chile’s economy was booming, fueled in part by high world prices for copper, its leading export.  The government’s coffers were flush with cash.  (Chile’s main copper company is state-owned, which may be a surprise to those who think Chile runs on a free-market model!)  Students demanded more money for education, civil servants higher salaries, and politicians clamored for more spending on all kinds of social programs. Being fully aware of Latin America’s commodity boom-and-bust-cycles and recognizing that high copper prices were temporary, Velasco stood his ground and decided to do what any good macroeconomist would do:  smooth intertemporal consumption by saving most of the copper surplus.  He ran up the largest fiscal surpluses Chile has seen in modern times.”

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