May 13, 2007

Can Chile Avoid Dutch Disease?

Link: Can Copper-Rich Chile Avoid Surplus-Cash Pitfalls? - WSJ.com.

With copper prices soaring, Chile is flush with cash. That may not sound like a problem, but for a commodity-rich country, it can be a big one.

Resource wealth has brought unstable nations in the Middle East and Africa to their knees by spawning war or corruption. Even wealthy nations have a tough time handling commodity booms, which can drive up their currencies, batter their exporters and produce unsustainable surges in imports.

In a case much studied by economists, the Dutch economy stagnated after rich natural-gas deposits were discovered offshore in the 1960s. These days, Venezuela and other oil producers riding oil-backed consumption booms are vulnerable to "Dutch disease," especially if oil prices decline.

Chile is trying to inoculate itself. In essence, the government is saving what it calculates as windfall profits from its state-owned copper company and windfall taxes from privately owned mines. It is investing the money abroad in bonds and is also considering buying foreign stock funds. The idea is that when Chile's economy inevitably falters, the government can tap this "economic and social stabilization fund" for revenue.

... Although Chile is considered a success story by Latin American standards -- its economy has grown an average of 5.5% a year since 1990 -- it has pressing domestic problems, including a wide gap between rich and poor, a substandard educational system and inadequate ports, roads and airports.

Setting aside so much money "is a crime," says Chilean Sen. Fernando Flores, who was once finance minister in the Marxist government of Salvador Allende and later made a fortune as a software entrepreneur in California. "We need a model of investment and education to create new industries."

But Chilean economic officials say it is critical to limit the effect of the copper boom so the country doesn't become too dependent on riches that can vanish quickly, resulting in budget shortfalls.

... One goal of the strict fiscal policy is to reduce the appreciation of Chile's currency, the peso, which over the decades has tended to rise in tandem with copper prices.

Posted by Anupam Chander on May 13, 2007 at 11:17 PM in Globalization | Permalink