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On Lessons from Chile for the Americas during the Crisis (2)
By Kaufmann | February 5, 2009 No Comments »
In my previous blog entry, I made the case that both the antecedents of the financial crisis faced by Chile in 1982, as well as the approach taken to resolve it, provide insights for countries such as the US today -suitably adapted by circumstances, size and complexity, of course. Nonetheless, focusing on the fundamental pillars to approach the crisis comprehensively (including fiscal and monetary policies, institutional revamp, financial workouts, regulatory reforms) always ought to be a priority, rather than endless debates about whether one initiative such as a ‘bad bank’, will be the solution.
From its more recent experience, there are further insights from Chile for the Americas. One is Chile’s consistently effective macro-economic management over the past two decades, where fiscal surpluses (a term that appears to have been excised from the US lexicon) have been the order of the day. In fact, ‘best practice’ stabilization funds have permitted a sizeable accumulation of public funds during the ‘fat cow’ years, for judicious use during leaner times.
With a currently healthy financial sector that appears devoid of bubbles, Chile may not need to have a major financial bailout rescue plan nowadays. But Chile has a very open economy and the global recession is already affecting its own real economy (and also the overall global loss of confidence is affecting the propensity of banks to lend).
To respond to the economic slowdown, the government has put together a counter-cyclical stimulus plan of about US$ 4 BN, being in a comfortable position to use the vast reserves (amounting to about US$21 BNs) accumulated in its stabilization fund during the surplus years. Thus, there is a solid macro-economic basis for this stimulus plan. Contrast this with what Argentina has done, for instance, where the government has raided the private pension funds!
The micro-economics of the stimulus package of Chile is also sound and worth looking into, since its composition is rather effective. It balances the needs of infrastructure, small enterprise development, and low income households. A notable absence in the package, which is worth emphasizing in the US today, are footprints from corporate (and lobby) capture by vested interests or pork barrel politics (and obviously there is no ‘Buy Chilean’ provision!).
Finally, innovations in infrastructure in Chile provide lessons for other countries, and in particular for the US nowadays. Chile has been a pioneer in public-private partnership initiatives, such as in the development of concessions in highways for instance, an area where the US is a novice, which is highly relevant since the US is about to embark on a major expansion in public infrastructure investments. And some of this highway concessions have been carried out utilizing innovative new methods that lower the likelihood of excess rents extracted by privates from the taxpayer, reduce the likelihood of contract renegotiation, and by so doing, lower the chances of corruption and capture. At the moment a new concession law is before Chile’s Parliament in order to generalize such new approach to concessions. If the law is adopted, it would serve as a model throughout the world.
These accolades do not mean that all is well in Chile. The country is likely to face a difficult year, given its small internal market and open dependence on exports. And it still has long-standing structural bottlenecks requiring reforms in order to jump aboard a sustained higher growth path in the future. Key areas requiring deep-seated reforms include the educational system, making the labor market much more flexible, modernizing the state (and including government-induced transparency reforms), as well as reforms of the political party system. These reforms may take time for them to be fully carried out, but Chile’s track record over the past two decades suggests that they may be tackled, sooner or later.
Topics: capture, Corruption, financial crisis, G-20, Public Financial Management, Public-Private Linkages, Regulation & Security | | Read and Submit Comments