Copper Prices & Chilean Fiscal Discipline

The Chilean government is supported by copper sales to the extent that 20% of the government's revenues come from copper exportation.

Before the crisis copper prices were high and the Chilean government under the presidency of Michelle Bachelet built up its international reserves to US$ 21 billion.

Here we see a graph of the price of copper and the government surplus/deficit.

The blue line is the price of copper. The bars are government surplus/deficit. When the government ran a surplus, they built up reserves. When the crisis hit in 2008, the Chilean government used the reserves to stimulate small business initiatives throughout the country. There were many grants available for people with business ideas.

Unemployment was controlled because people were able to find work through starting their own businesses and through small business investment. I was there and saw this first hand. The government of Bachelet was proactive in not letting many people become marginalized from the economy.

As we see in the graph, since 2009 the price of copper has risen again, but the new president, Sebastian Piñera, has only produced one year of a budget surplus.

The Chilean economy is doing well. (see AP news article) Inflation is 1.5%. Unemployment is 6.1%. GDP has been growing at 5% for 3 years. The central bank interest rate is up to 5%. Domestic demand is growing. And copper prices have been high. The economy is expanding up a business cycle.

Many ask why the government of Chile has not been running a surplus, now that copper prices are falling.

The fact is that the international reserves of Chile have grown since the crisis to US$ 39 billion, in spite of budget deficits. (source)

So even though the government of Chile is not running surpluses, they have increased their international reserves, which can protect their economy from inflation or a currency crisis.

Comments

[Steve Roth]

Further to Leijonhufvud paper, see Ashwin's great post here on Bagehot's rule:

http://www.macroresilience.com/2011/09/12/bagehots-rule-central-bank-incentives-and-macroeconomic-resilience/

Right up your alley...