Chile’s Uncertain Future

CAMBRIDGE – When I was in Chile earlier this month, I was impressed by the contrast between the palpable success of its long-standing free-market policies and the current agenda of its leftist president, Michelle Bachelet. How this contrast is resolved will be important not only to the country’s more than 17 million people, but also to everyone who regards Chile as a model of what sound economic policies have been able to achieve.

Chile’s economic performance has been the strongest in South America. Its per capita GDP exceeds $22,000 in purchasing-power-parity terms, making its income higher than that of Argentina, Brazil, and Mexico. It’s no surprise that Chile is considered a developed country – the only South American member of the OECD.

Copper is Chile’s major product and accounts for half of its exports. Although the government owns Codelco, the world’s largest copper producer, it is Chile’s only publicly owned company. The company’s revenue varies with the global price of copper, yielding higher government revenues in some years and declines – for example, this year – when the global price is down. The government follows a wise fiscal strategy that involves budget surpluses in years when copper revenue is high, with the additional funds channeled to a national stabilization fund.

But even with the currently depressed copper price, Chile’s budget deficit is only 2% of GDP. As a result of Chile’s cautious fiscal strategy, the country has a national debt that amounts to only 16% of GDP – and a sovereign debt rating that is the highest in South America.