Achieving Long-Term Fiscal Discipline: A Lesson from Chile

by Jeffrey Frankel, by Rubini Global Economics, January 1, 2010.

As Chile’s President Michelle Bachelet prepares to hand over power to her newly elected successor, she remains extraordinarily popular.  It is worth reflecting on the fiscal aspects of her term in office, as Chile has important lessons for other countries struggling with fundamental long-term budget questions, which includes a lot of countries right now.

As recently as June 2008, President Bachelet and her Finance Minister, Andres Velasco, had the lowest approval ratings of any President or Finance Minister, respectively, since the return of democracy to Chile. There were undoubtedly multiple reasons for this, but one was popular resentment that the two had resisted intense pressure to spend the receipts from copper exports, which at the time were soaring along with world copper prices.  One year later, in the summer of 2009, the pair had the highest approval ratings of any President and Finance Minister since the return of democracy to Chile.  Why the change?   Not an improvement in overall economic circumstances:  in the meantime the global recession had hit.  Copper prices had fallen abruptly.  But the government had increased spending sharply, using the assets that it had acquired during the copper boom, and thereby moderating the downturn.   Saving for a rainy day made the officials heroes, now that the rainy day had come.   Chile has achieved what few commodity-producing developing countries have achieved:  a truly countercyclical fiscal policy…(continue reading)