The present period could be called the best of times for Latin America. The China-commodity boom since 2003, the overall strength of global trade, and the reduced cost of foreign loans are a welcome respite from the late 1990s patterns of “sudden stops” and attendant turmoil.
Despite the external improvements, a feeling is widespread in Latin America that this bonanza is being wasted and that the economic growth performance (GDP growth averages about 4%) should be much better than it is. It seems as though no news is really good news for a region which coined the term “fracasomania” : as failure is the norm for Latin America, its eventual appearance is always anticipated.
The reasons for relative pessimism about Latin America today vary from country to country, but these include a dread of creeping Dutch disease (which will undermine competitiveness) and the reality of wasteful spending by governments flush with funds and anxious to bolster ratings. Even with the wind so clearly at their backs, Latin governments stand accused of being too timid to take on the really tough economic reforms (e.g., of taxes and foreign trade) that might actually improve growth in the long run.
Roberto Rigobon, in his insightful reflection on the blissful (naïve?) euphoria of foreign investors looking at Latin America, challenges us to think of a single Latin American economy that truly is “outperforming”. Isn’t it true, he asks, that all of Latin America (with the possible exception of Peru) is blowing a rare opportunity to grow and develop much faster?
While the case is not airtight by any means, and the data on which it is based fairly recent, copper-rich Chile could be just such a case. Let’s look at it.
Until recently, all was not well in Chile. The private sector and the political parties (including the President’s own) were grumbling about the new Bachelet government’s economic and social policies and the mediocre (by Chile standards) rate of economic growth. But things may be changing for the better in Chile, and that may be a harbinger of what may be happening with a lag in other Latin countries.
The Chilean economy in the last three or four months seems to have kicked into a higher gear. The April index of economic activity (see Chart 1) surged 6.7% (s.a., year-on-year), the third consecutive monthly acceleration in growth. Meanwhile, the accumulated trade surplus in the first five months of the year is above $13 billion amid signs of strong growth in exports in general, including copper and non-copper exports. (Chart 2) Imports are also surging with intermediate goods and capital goods increasing by 30-50% over year-ago levels, a sign that productive capacity in Chile is also on the rise, a good sign for future growth.
In recent years, the major rap on Chile has been its disappointing employment performance with unemployment levels stubbornly high, weak job creation, and a relatively high proportion of the population below the poverty line. The most recent three-month period suggests that the labor market is beginning at last to respond. The unemployment rate, for example, has fallen almost 2% from a year ago to 6.8% and job creation is up. Poverty levels are trending downward.
Chile is reaping these improvements without any weakening in its economic policies which have won worldwide admiration. Inflation is under control (less than 3%, though the Central Bank stands poised to raise rates) and fiscal spending has been kept under control by a vigilant Finance Ministry. The nominal Chilean exchange rate has strengthened somewhat against the dollar, true, but Chile has avoided any substantial real appreciation of the currency, partly through channeling fiscal savings abroad.
Finally, an important change in policy occurred recently, one that might help translate some of the growth momentum (assuming it is sustained) into real economic development that raises productivity and living standards as well as incomes. President Bachelet in her annual address in May announced a modification in Chile’s long-standing “structural budget surplus” target of 1%. The fund, which is now in excess of $7 billion, is fed in good times by a 1% “structural budget surplus” rule meaning, simply, that any net fiscal revenues in excess of 1% of GDP are put away into the fund. (Last year, the overall fiscal surplus reached almost 8% of GDP and this year another large surplus is expected. See Chart 3.) Bachelet announced that the structural surplus target in 2008 would be reduced from 1% to 0.5% of GDP which means, concretely, that Chile will spend an extra $750 million on education (and other priorities) next year over and above what had been budgeted. Education is one of the areas in which Chile has lagged badly behind the developed world; it may now have more resources with which to catch up.
It might be pointed out that President Bachelet has plenty of short-term political motivation to tap into the fund now, principally her falling approval ratings and pressures from her own political party to boost spending. At the same time, the Finance Ministry was able to argue convincingly that easing the fiscal structural surplus goal made a great deal of sense given Chile’s reduced financial vulnerabilities. In this case, political expedience and fiscal prudence are not in conflict.
This little Chile story may strike some readers as old hat: We all know that Chile has performed better than other Latin countries for a long time. Its success right now does not mean that Brazil, Colombia, Uruguay and all the others will likewise convert the present external bonanza into the basis for a long-term boost in growth.
But at least in this one case of Chile, we should not give in to fracasomania just yet.