The news from Chile these days is dominated by the sagging popularity of conservative President Sebastian Piñera. But just four years ago, Chile was equally turned off by Piñera left-center predecessor, Michele Bachelet (above) -- though for completely different reasons.
Bachelet's low approval ratings in 2008 were largely due to her refusal to spend soaring government receipts from copper exports. The world price of copper -- Chile's largest export -- hit $800 per metric ton that year, an historic high in nominal terms and more than quadruple the level of 2001. Yet her government insisted on saving most of the proceeds for a rainy day.
What a difference a few years could make: By the time they completed their term in early 2010, Bachelet and her finance minister, Andrés Velasco, enjoyed the highest approval ratings of any president and cabinet minister since the return of democracy to Chile.
That reversal can't be attributed to the fortunes of the Chilean economy. Quite the contrary: At the time, Chile was bearing the brunt of the global recession. In 2009, the price of copper fell abruptly, growth turned negative, and unemployment topped 10 percent. But the government was able to respond with sharply increased spending to cushion the blow and speed the recovery, drawing down revenues that had accumulated while the world couldn't get enough Chilean copper. Now that the rainy day had come, Bachelet and Velasco were viewed as heroes.
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The significance of this episode is not that an especially wise or brave policy prescription can make a very big difference; it can, but the idea of saving in a boom in order to be able to spend in the bust is not new. And while action to this end is less common than the words, there are certainly examples of governments that have shown the courage to put away the fiscal punch bowl before the crowd had drunk its fill.
What the world needs -- and, ironically, what was delivered by Chile rather than by a mature industrialized economy -- is institutions designed to produce good policies even when the officials charged with carrying them out are vulnerable to wishful thinking or inclined toward expediency. Indeed, Chile's handling of the copper-price roller coaster could serve as a template for other countries in which the political pressures to follow "pro-cyclical" fiscal policies are very hard to resist.
The restraint on Chile's fiscal policy is codified in law. The government must announce a budget target -- originally set at a surplus of one percent of GDP, but softened to zero (i.e., budget balance) in 2009. That sounds a lot like the eurozone's Stability and Growth Pact, which was supposed to limit member-states' deficits to three percent of GDP. But unlike Chile's budget rule, the SGP was born to fail. As everyone knows by now, the fiscal limits were repeatedly violated by members large and small.