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PS Say More


Andrés Velasco
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This week, Project Syndicate catches up with Andrés Velasco, a former finance minister of Chile who is now Dean of the School of Public Policy at the London School of Economics and Political Science.

Project Syndicate: As Chile’s former finance minister, what do you think of the government’s economic-recovery strategy, which includes plans to issue up to $8.7 billion of bonds next year – $3.3 billion in foreign currencies – to fund higher government spending? Are there lessons that other emerging economies can learn from the fact that Chile is able to pursue such a strategy at a time of social upheaval?

Andrés Velasco: Since 2000, Chile has maintained rigorous fiscal discipline. By saving in good times, the government has made it possible to spend in times of crisis, such as after the 2008 global financial crisis and during today’s mass – often violent – protests. Indeed, with today’s social upheaval and political uncertainty undermining growth, providing some fiscal stimulus is the right thing to do.

But two caveats are in order. First, if consumption and investment – and, thus, economic growth – are to recover, violence and looting must end. Second, accumulated savings can be used only to cover temporary fiscal shortfalls. If the government is planning to increase fiscal outlays permanently (as I believe it should), it will have to raise taxes.

PS: In examining Chile’s upheaval, you highlighted the link between mass street protests and increased access to higher education following prolonged periods of peace and prosperity. “Education attunes you to injustice,” you wrote, “and prosperity means that protesting does not jeopardize your livelihood.” Education also raises people’s expectations, which, as Alexis de Tocqueville famously argued, is precisely when revolutions happen. How might developing economies manage education and expectations to avoid this outcome?

AV: There is no easy solution to this conundrum. Expanded access to higher education is a wonderful thing, for both students and society. But unless the economy and demand for higher-level skills are growing quickly, the relative wages of university graduates will decline, and the generation that experiences the transition will be left disappointed and angry.

Governments’ best chance is thus to focus on providing good jobs, with good wages, that will allow graduates (and the broader society) to make the most of all those newly acquired skills. In emerging economies, this means combining education policy with a healthy dose of modern, light-touch industrial policy.

PS: Shifting focus to another Latin American country in crisis, a month before Argentina’s presidential election, you lamented that its liberal reformist president, Mauricio Macri, would lose, owing to “the same types of mistakes made by his Peronist predecessors.” He did lose – to the Peronist candidate Alberto Fernández. What are the most urgent reforms Fernández’s government should pursue to end Argentina’s seemingly interminable cycle of overborrowing and debt restructuring, and what would it take to get it to do so?

AV: Sadly, the issues Argentina faces today are the same issues it faced ten, 20, 50, and 100 years ago. Again and again, the interminable boom-and-bust cycle has dashed Argentines' hopes of a more stable, prosperous future, as it has sapped the economy’s capacity for growth and investment.

The new government confronts three key challenges. It must restructure its debt without driving investors away. It must put its fiscal house in order without deepening the recession. And it must rein in inflation without overvaluing the exchange rate and setting the stage for another balance-of-payments crisis. Nice work if you can get it.

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Velasco recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Velasco's picks:

From the PS Archive

From 2017
Velasco defends political centrism as a coherent philosophy emphasizing liberty, patriotism, and openness. Read the commentary.

From 2018
Velasco calls for reforms that would permit developing countries to borrow from abroad without risking disaster. Read the commentary.

Around the web

In a 2019 interview, Velasco explores the state of democracy, immigration, trade wars, and the Indian economy. Read the discussion.

In a Spanish-language interview on CNN Chile, Velasco discusses populism in Chile and the world and affirms that the only group with the conceptual tools to defeat populism is the center. Watch the video.;

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