The Economic Moment: Chile and the World

Nearly four years on from the financial crisis triggered by the collapse of Lehmann Brothers in 2008, the world economy still hasn’t got its confidence back. The economy rebounded in 2010, but modest growth of 2.3% in the second quarter of this year raises the question: is the world on the brink of recession or is it on the road to recovery?

For Hernán Büchi, the glass is half full. At an AmCham breakfast at the Grand Hyatt Santiago Hotel on July 13, the Chilean economist told members and their guests that the world has not lost its capacity to generate wealth, but that restoring confidence is key to recovery.

Büchi’s own faith in the free market has a solid foundation. Although he did his MBA at Columbia University in New York, he is considered one of the original Chicago Boys, a group of Chilean economists most of whom trained at the University of Chicago in the 1970s.

Buchi served as Finance Minister under General Augusto Pinochet in the 1980s and, after Chile’s return to democracy in 1990, he founded the think tank Libertad y Desarrollo. He is currently chairman of the board at the Universidad del Desarrollo and sits on the boards of several other companies.

According to Büchi, the fundamental trust in the free market system espoused by Adam Smith was shaken by the 2008/09 crisis and, while it has basically recovered in the United States, this is not the case in Europe.

The United States’ national debt remains out of control and there are still some other “loose ends”, but the intervention of the Federal Reserve and a return to the economic dynamism of the 1990s has got the economy back on track, though not yet to pre-crisis levels, noted Büchi.

But Europe is a different story. The contagion from the debt problems in peripheral countries such as Italy, Greece and Portugal is affecting growth in countries like France and Germany, which is reflected in higher bond yields.

The question is not whether eurozone countries should introduce austerity measures, which Büchi says are a necessity, but rather whether this will be done in such a way as to promote growth or if it will result in a “permanent downward spiral”.

Restrained by the eurozone “strait jacket”, France and Germany don’t have the institutional flexibility of the United States to restore confidence, and the European Central Bank is still considering if it will intervene.

“There will be a prolonged recession in Europe, which has the risk of getting out of control,” warned Büchi.

As for China, the giant elephant in the room, it has not been immune from the global uncertainty. The economy grew 7.6% in the second quarter compared to the same period last year, which is a three-year low. Another concern is the generational change in leadership of the Communist Party expected later this year, said Büchi.

“There will be important political changes this year and we don’t know how this will change things,” he said.

Meanwhile, China’s economy is transitioning from dependence on the external market to growth based on the internal market. The difficulty of this transition is demonstrated by Japan’s recent economic struggles, Büchi pointed out.

But even a moderately performing China, with projected annual growth of 6%, is good for Chilean exports. “In the medium term we will continue to see strong growth, but probably not at the level we would have liked to see,” he said.

Chile’s economic situation

For its part, Chile has been relatively unaffected by the world economic uncertainty and it continues to ride its luck in the form of high prices for copper, its main export, said Büchi.

Although the copper price has fallen recently, it has averaged around US$3.60 a pound during the government of President Sebasti­án Piñera, up from US$3.00 during the previous administration.

The macroeconomic figures are also good. Chile’s GDP is projected to grow a solid 4.9% in 2012, the Central Bank’s benchmark rate is stable at 5%, 24-month projected inflation is 3%, and the country is near to full employment.

Chile could rest on its laurels, but that would be a mistake insists the former Finance Minister. “If we want to live better and keep increasing our salaries we have to increase our productivity, but this is not happening yet.”

Between 1986 and 1997, Chile’s total productivity rose an average 2.3% annually, which helped to drive annual economic growth of around 7%, but between 1998 and 2008 there was no increase in productivity at all. It edged up 0.3% in 2010/11, but achieving President Piñera’s goal of 1.5% annual growth will be a challenge.

Part of the problem, says Büchi, is that Chileans expect to earn more without working harder. “We want higher salaries for the same amount of effort.”

Another problem is energy prices. With higher marginal costs and new projects delayed due to regulatory uncertainty, negotiating electricity contracts is complicated for new industries, Büchi pointed out.

It doesn’t help that there is strong social opposition to virtually all types of generation in Chile except non-conventional renewables, which will not solve the problem on their own. And energy is not the only area where Chileans are demanding solutions but are unwilling to pay for them. For example, access to credit has been expanded but consumers complain when asked to pay their debts.

“There is the sensation that we have rights but no obligations, and this has to change,” said Büchi.

Finally, he stressed that Chile has done things right in the past, but that doesn’t mean it should be content to reap the fruits of past efforts. “If we want to earn more, we have to produce more with the same amount of work. This is our challenge,” he concluded.

Julian Dowling is Editor of bUSiness CHILE