04/07/15(text9269w;total=11,462w)
CHILE SINCE 1999: FROM COUNTER-CYCLICAL TO
PRO-CYCLICAL MACROECONOMICS*
Ricardo Ffrench-Davis**
Abstract: In the 15 years from 1999 to 2013, Chilean GDP growth
averaged 3.9%. Although this was above the 3.2% Latin American average, it
represented a sharp drop from the country's sustained 7% annual growth
recorded in 1990-98, the first nine years after its return to democracy.
This article seeks to explain this significant outcome reversal. Given the
absence of deep backwards steps in the microeconomic approach, we focus on
macroeconomic policies. Two cycles are distinguished: a) 1999-2007, between
contagion from the Asian crisis and a peak in economic activity in 2007 before
the contagion from the global crisis, and b) 2008-2013, between the start of
recession in 2008 and a GDP peak in 2013, just before a significant new
deceleration.
We show that the adoption of inflation targeting combined with full
opening of the capital account and exchange-rate liberalisation successfully
kept inflation low and avoided balance of payments crises, but implied that the
economy was usually operating below potential output, while the exchange rate
and current account became extremely unstable. Pro-cyclical financial markets
and the price of copper again became active channels of transmission of
external instability to domestic macroeconomic markets. On the other hand,
fiscal policy moved from being rather neutral to effectively counter-cyclical in
2009-10, but it became pro-cyclical in 2011-13. Macroeconomic pro-cyclicality
discouraged capital formation and productivity.
Real macroeconomic instability was a determinant variable underlying
the worsened growth outcome. The paper concludes with some policy
proposals for speeding development convergence.
JEL E63, O11,O23,N16,F31,F62
macroeconomic policies, cycles, real stability, development, Chile
INTRODUCTION
During the late 1990s, macroeconomic policies in Chile underwent a deep
change with respect to the approach adopted immediately after the return to
democracy in 1990.1 In the early 1990s, the new authorities implemented a
quite comprehensive counter-cyclical macroeconomic approach that included
systematic prudential regulation of capital inflows, actively managed exchangerate flexibility and a monetary policy concerned with not only inflation but also
*
To be published in Comparative Economic Studies, September 2015, Palgrave Journals; online since
April 2. I appreciate the research support of Nicolás Fernández and Simón Ballesteros and the highly
useful comments of the editor Paul Wachtel and a referee.
**
Professor of Economics, University of Chile; PH.D. University of Chicago.
1
Economic reforms, policies and outcomes in Chile since the military coup of 1973 are covered in
Ffrench-Davis (2010c); an update in Spanish is in Ffrench-Davis (2014).
1
sustained growth, implying balances in the external and fiscal sectors and of
employment. This approach was highly successful, delivering a 7.1% average
GDP growth in 1990-98, with a sharp reduction in poverty, higher employment
and some improvement in income distribution.
That outcome was in marked contrast to the 2.9% average GDP growth
and rise in poverty and inequality seen during the previous 16 years under the
Pinochet dictatorship.2 A key feature of the neo-liberal experiment of those
years was high stability of consumer prices (CPI). However, during most of the
period, this was accompanied by great real economic disequilibria, severe
unemployment, external imbalances and unstable aggregate demand. In this
context, depressed capital formation was the main variable determining the
meagre 2.9% GDP growth achieved in 1974-89.3
The successful record of the 1990-98 period was broken by contagion
from the Asian crisis. In the fifteen years from 1999 to 2013, average growth
declined from the previous 7.1% to 3.9%. Although above the 3.2% average for
Latin America,4 this implied a sharp drop with respect to Chile's track record in
the 1990s.
In this chapter, I seek to explain this significant reversal. Given that there
were not important backwards steps as regards microeconomic policies, it
focuses on macroeconomic policies stressing the quite significant changes
between the two periods. We show that the adoption of inflation targeting
combined with full opening of the capital account and full liberalisation of the
exchange rate was successful in keeping inflation low and avoiding balance of
payments crises, but implied that the real economy --the production and use of
GDP-- usually operated below potential output and the exchange rate became
extremely unstable, both of which depressed the sources of economic growth.5
The causes of the significant change in policy approach are explored.
2
The economy experienced two deep recessions (in 1975 and 1982) and overheating in 1989, with GDP
growth fluctuating between plus 10% and minus 17%, with the 2.9% cumulative average for the 16 years
(Ffrench-Davis, 2010c, Chapter I).
3
Between 1973 and 1989, the development gap with respect to the G-7 increased. Per capita income
(PPP) in Chile fell from 29% of that of the G-7 in 1973 to 25% in 1989; in other words, development
divergence prevailed.
4
Interestingly, Latin America's GDP growth was similar in 1990-98 and in 1999-2013. In the first period,
Chile far outpaced the region while, in the latter, it tended to converge with the region's poor
performance.
5
There is a series of outstanding works by Latin Americans on an approach concerned with the real
economy, beyond the CPI. I cite three of them: ECLAC (2010) on economics and inequality; Ocampo
2
Four macroeconomic policies are analysed: the monetary, exchange-rate
and capital-account policies of the Central Bank and the fiscal policy of the
Finance Ministry, as well as the degree of coordination between both
institutions. After a brief description of the macroeconomic framework (Section
1), two cycles are distinguished in the evolution of policies and outcomes: i)
1999-2007, from the peak of economic activity before contagion from the Asian
crisis through the five-year recession that followed and the subsequent
recovery, led by rising commodity prices, up to a peak in 2007 before the start
of contagion from the global crisis (Section 2); and ii) 2008-13, from contagion
by the global crisis through the 2010-13 recovery process (Section 3). Section 4
concludes with some policy lessons for speeding development convergence.
1. The macroeconomic framework
When a democratically-elected government came to power in March 1990,
there was a new “independent” Central Bank, established in December 1989 by
General Pinochet, a week before the presidential election that was evidently
going to be won by the opposition to the dictatorship. Since then, the Bank has
been headed by a board with five members --one of whom is replaced each two
years-- nominated by the President with the approval of the Senate. In the initial
board, “negotiated” with the opposition, there were two representatives of the
dictatorship, two of the democratic opposition and one “independent”. The Bank
is responsible for the stability of the currency and the normal working of
domestic and foreign payments. While the first objective has been understood
as stability of the CPI, interpretation of the other two objectives has varied.
Monetary policy is implemented mostly through the monetary policy interest rate
which applies to Central Bank operations with commercial banks.
Until 1996, the Central Bank cooperated closely with the Finance Ministry
and together they implemented a set of counter-cyclical or prudential
macroeconomic policies. Subsequently, however, the Bank stressed its
“independence”.
(2011) on macro/micro links and Frenkel and Rapetti (2011) on exchange rate policy. An excellent
related book is Ocampo and Ros (2011). I summarise my views on macroeconomics for development in
Ffrench-Davis (2010b).
3
In 1990, in parallel to the return to democracy in Chile, capital inflows into
Latin America increased sharply. The Chilean authorities reacted with countercyclical measures consistent with their objective of developing exports with
value-added and maintaining equilibrium of the real economy with a non-outlier
real exchange rate and a level of aggregate demand consistent with potential
GDP. Counter-cyclical regulation dealt particularly with capital inflows. The
Central Bank imposed an un-remunerated reserve requirement (URR, encaje in
Spanish) on all capital inflows (except FDI capital), that fluctuated between 20%
and 30% of the incoming amount and had to be held at the Bank for 90-360
days. The intensity of the regulation (rate and time retained) was related to the
strength of the supply of inflows and the gap between aggregate demand and
potential GDP (Ffrench-Davis, 2014, Chapter VIII; Magud and Reinhart, 2007).
Given the Chilean economy's apparent immunity to the Mexican (Tequila) crisis
in 1995 and an international fashion in favour of open capital accounts, the URR
was gradually weakened and then suspended in 1999.
Since 1986, the banking sector has been strictly regulated and
supervised. This followed the severe banking crisis of 1982, associated with an
unregulated privatisation and liberalisation of the domestic financial sector in
1975. Notwithstanding strong pressures for relaxation of regulation in around
1990, after several Latin American countries adopted the Washington
Consensus, the Chilean authorities maintained a rather prudential stance.
The exchange rate was subject to a crawling-peg regime (Williamson,
2000; Edwards and Rigobón, 2009), with a band managed by the Central Bank
and was, in general, linked to the evolution of both domestic and trade partners'
inflation and the current account.
The fiscal budget showed an average surplus of 2% of GDP in 1990-98.
Increased social expenditure and public investment was financed with a tax
reform launched in the first months after the return to democracy. The private
pension administrators (AFPs) created in 1981--an increasingly important
institutional agent--, were gradually authorised by the Central Bank to invest
part of their assets abroad, with the percentage of total portfolio rising from 6%
to 12% by 1997. In practice, however, they invested less than 1% abroad,
principally because they considered the domestic market more profitable, with
expectations of exchange rate appreciation as a determinant variable.
4
Table 1 summarises several macroeconomic indicators. Figures are
presented for the successful 1990-98 period; the cycle that started in 1999 and
ended in 2007 before contagion from the global crisis; and the cycle that started
in 2008 and ended in 2013. Within these two cycles, the figures for the
recessive 1999-2003 and 2009 sub-periods are shown.
Table 1
2. In between the Asian and global crises
a) A recessive macro environment dominated by a procyclical capital account: 1999-2003
In the late 1990s, the Central Bank gradually weakened the successful countercyclical policies it had adopted at the start of the decade. In September 1999,
amidst contagion from the Asian crisis, it renounced to the managed flexibility of
the exchange rate (ER) and adopted a fully free floating rate.6 During the
previous couple of years, the exchange rate had appreciated significantly,
contributing to anchor inflation. Now, however, given the negative external
shocks, there was an evident need for a large devaluation which, announced as
a permanent commitment of the Bank to a fully flexible rate, was left to the
market. By that time, there was already an important relevant recessive gap
(the output gap between potential GDP and actual GDP, or recessive gap, RG)
which deterred the pass-through effect of the devaluation that took place. At
the same time, counter-inflation was taking predominance over other
macroeconomic targets, with a gradual move towards formal inflation targeting.
The adoption of this approach, now in agreement with the Finance Ministry,7
was announced in 1999, defining a 2-4% annual target as from 2001, with the
aim of permanent convergence to a 3% rate within a 12-24 month period
(Massad, 1999; Central Bank, 2007).
The 12-24 month period was intended to take account of the lags in the
effects of monetary policy and to allow inflation to gradually accommodate to
6
The managed flexibility implemented in 1990-95 gradually lost consistency in 1996-97, allowing an
appreciation led by pro-cyclical capital inflows (Ffrench-Davis, 2010c, Chapters VIII and IX). On the
effectiveness of managed flexibility see Edwards and Rigobón (2009).
7
After close coordination in 1990-95 in implementing a set of counter-cyclical policies, several
expressions of lack of coordination emerged in 1996-98, particularly with respect to exchange-rate policy,
with the government criticising its pro-cyclical bias. However, by 1999, the Finance Minister appeared to
have accepted the formal adoption of “inflation targeting”. See http://www.bcentral.cl/politicas/sesionesconsejo/pdf/Sesion794E.pdf.
5
deviations from the target, thus avoiding the costs to economic activity in cases
of fast convergence with the target (Corbo, 2004; de Gregorio, 2006). Finally,
among other monetary reforms, the policy interest rate used by the Bank was
changed from a real rate (linked to the CPI) to a nominal one.
The Bank declared that, with a freely floating exchange rate,8 it had
gained monetary policy independence, while ER fluctuations eased the
economy's adjustment to shocks and avoided misalignments of the rate. The
first was partly true; the latter was quite wrong as events later showed. One
determinant factor of misalignments was the full opening --for both foreign
inflows and residents' outflows-- of the capital account in 2001.9 The increasing
relaxation of the regulation of AFP outflows was of particular importance. In the
midst of contagion from the Asian crisis, --which naturally implied great scarcity
of foreign currency-- the ceiling on AFPs' investments abroad was raised from
12% to 16% of their total portfolio in January 1999 (Figure 1) when the domestic
economy was already suffering the recessive effects associated with the
binding external restriction (BER) generated by the contagion. Indeed, in 199899, there was a huge outflow of funds by the AFPs, as shown in Figure 1, in a
highly pro-cyclical behaviour, implicitly encouraged by the policy design.
Figure 1
In those days the belief that opening the capital account implied
importing macro stability was fashionable internationally. In line with that
“conventional wisdom”, the Central Bank completed the liberalisation of the
capital account in April 2001, restating its commitment to a fully free exchange
rate. In contrast to the expectation of “importing stability”, actually a recessive
environment prevailed until 2003, led by a BER that was reinforced by a net
outflow of domestic portfolio equivalent to 3% of GDP in 2002-03. Chilean
investors, in fact, joined international markets in their pro-cyclical behaviour.
The binding external restriction generated a sharp depreciation trend,
which led the Bank to intervene twice in the foreign exchange market, in 2001
The Bank usually used the expression “flexible”, implicitly implying “fully flexible” with only
exceptional interventions and no explicit exchange-rate or current account “targeting”.
9
It should be noted that the policy tool of the reserve requirement on capital inflows, systematically used
in 1991-95, is still available to the Bank (though with some bounds), if it decides to make use of this
counter-cyclical regulation in the case of future capital surges.
8
6
and 2002. Before the second intervention in October 2002, the price of the
dollar had increased 61% (to $742 per USD) 10 since the liberalisation of the
exchange rate and the subsequent opening of the capital account. Arguing that
there was too much volatility,11 the Bank intervened through programmes of
auctions of foreign currency and paper indexed to the price of the dollar and
payable in pesos, that were announced for several months ahead. This was the
opposite of a discretionary intervention seeking to guide the exchange rate.
In the meantime, the recessive gap persisted, with actual GDP growing
less than the periodic official estimate of the increase in potential GDP. The
foreign exchange market started to change in the second quarter of 2003, when
the price of copper began to show an upward trend. By December, it had
jumped 40% and the exchange rate again retook a significant appreciation
trend. The gap started falling under the pull of the income and expectations
effects of commodity prices on domestic demand.
Monetary policy was active but highly gradual, notwithstanding the
recession's abrupt arrival in 1999. The Central Bank's behaviour reflected its
inflation-targeting priority. Figure 2 shows that, during the recessive years, the
CPI was usually below the centre of its target band. After sharply increasing the
monetary policy rate (MPR) to 14% (over the CPI) in 1998, in a bid to deter
capital outflows in the face of Asian crisis contagion, the Bank started to reduce
the rate gradually. In July 2001, in a significant policy shift, the real MPR was
replaced by a nominal rate, fixed at 6.5%.12 Gradual reductions continued until
early 2004 when the rate reached 1.75%. Figure 3 compares the Chilean MPR
and that of the United States.
Figures 2 and 3
10
Note that we mention the nominal price of the dollar but the relevant figure is that of the real exchange
rate of a basket of currencies of Chile's main trade partners, as calculated by the Bank monthly. This is
the data used in the curve in Figure 6, below. The peaks and minimums of the basket and the dollar
coincide when the stronger force is the position of the peso and not that of the dollar with respect to the
euro or other currencies.
11
See press release of October 10, 2002 at http://www.bcentral.cl/prensa/comunicados-consejo/otrostemas/.
12
The MPR was indexed to the CPI (actually, to the Unidad de Fomento, UF, linked to the CPI with one
month lag), which was replaced by a nominal interest rate in a quest for further reductions in inflation. A
discussion in favour of the change can be found in Morandé (2002). See Shiller (2008) for a strong
argument in support of the UF in Chile as an effective tool for generating segments of long-term savings
and lending.
7
In order to address the mismatch in recessive situations between the
public resources required for social programmes and temporarily depressed tax
revenue, a structural fiscal policy was implemented in 2001(Ffrench-Davis,
2010a). This implied maintaining an expenditure level consistent with
sustainable medium-term fiscal revenue as calculated using estimates of future
GDP and copper price trends. This instrument allowed the authorities to avoid
public expenditure curtailments in depressed periods and avoid increases when
the economy is overheated and tax revenue exceed their structural level.
This innovative fiscal rule was accompanied by three features that are
not intrinsic to this policy tool. One was the definition of a target of a structural
surplus of 1% of GDP which, after some time, would inevitably lead to a net
creditor position, probably a non-desirable situation for a developing economy.13
Second, it defined Chile's trend GDP including the intense recessions it has
suffered, assuming that upward deviations are equal to downward deviations.
Consequently, average trend GDP tends to move below potential GDP or the
productive frontier.14 Thirdly, the features of the Chilean rule implied a neutral
fiscal policy with respect to the economic cycle by maintaining a stable path of
expenditure. This represented progress on the traditional pro-cyclical norm of
balancing the actual fiscal budget on an annual basis, but stopped at neutrality
without reaching counter-cyclicality. In fact, up to late 2008, the new rule did not
move
decidedly
towards
including
counter-cyclical
changes
in
public
expenditure and taxes when the economy was in recession or overheated.
An existing Copper Stabilisation Fund (CSF) represented an outstanding
factor of macroeconomic stabilisation. It contributed to the implementation of the
structural budget, thus allowing a move from pro-cyclical to neutral fiscal
policies during the recessive years. This valuable “credibility asset” was,
however, underutilised in 1999-2003 because, as discussed below, the
authority refused to move to a comprehensive counter-cyclical macroeconomic
policy. Nonetheless, it contributed to stabilise fiscal expenditure, improving its
13
By 2008, the Treasury was a heavy creditor, particularly in foreign currency. It had accumulated US$22.7
billion in funds equivalent to 13% of GDP (Table 3). Correspondingly, in a belated decision, the structural
surplus target was reduced to 0.5% of GDP in 2008 and to 0% in 2009.
14
Conventional measurements use a sort of Hodrick-Prescott filter, assuming symmetrical deviations of
actual GDP above and below trend GDP. In the real world --particularly under the globalization of
financial volatility--, actual GDP tends to fluctuate mostly below potential GDP. See Ffrench-Davis
(2014, Annex I) where estimates are presented of a production function excluding time series
observations in which actual GDP is evidently out of equilibrium.
8
quality and moving fiscal policy from pro-cyclical to neutral.15 The evidence
provided by the 1999-2003 recession shows that there was a need to move
further towards effective counter-cyclical policies in order to contribute to faster
recovery of economic activity in recessive situations.
After 1999 it became increasingly evident that the macroeconomic pull
from abroad anticipated by the authorities, had been delayed, increasing the
social and economic costs of the RG. In this context, gradual monetary policy
and the neutral fiscal policy were unable to provide a strong boost to domestic
demand. It can be argued that a domestic shock should have then been
implemented, taking advantage of the accumulated strength of the Chilean
economy: (i) a government with minimal debt, an actual fiscal surplus of 1.8% of
GDP (average 1990-98) and a significant sovereign fund; (ii) a moderate total
external debt, with a low share of short-term liabilities; (iii) a Central Bank
without external liabilities and with high net international reserves; (iv) a low
actual and underlying inflation rate, persistently below the centre of the inflation
target;16 (v) real exchange rate appreciation that, along with the excessive
external deficit of 1998, had already been corrected in 1999, and (vi) a private
sector able to produce some 5-7% more than it was contributing to GDP in
those years.17
However, as indicated, the economic authorities rejected the proposal of
a positive public domestic shock, arguing that “markets would evaluate such an
action negatively” (by “markets”, of course, meaning financial markets). The
negative impact of downgraded risk ratings and higher spreads for Chilean
borrowers would, they asserted, outweigh the positive reactivating effect. Most
business media and the opposition supported and praised this official stance.
Moreover, some criticised the actual fiscal deficit resulting from implementation
of the structural 1% surplus. Fortunately, the government was able to sustain
the structural principle adopted formally in 2001, thus progressing from a pro15
There were some counter-cyclical components, such as emergency job programmes when
unemployment rose and, in 2002, an unemployment insurance scheme was launched. This is financed by
contributions by both private-sector workers and employers to the worker's individual account and
government contributions to a "solidarity fund". In September 2009, some 85% of private-sector payroll
employees were contributing to the scheme. This high coverage was accompanied by modest benefits and
a minimal use of the solidarity fund (see Ffrench-Davis, 2010c, Chapter VII).
16
Annual CPI inflation averaged 2.2% in 2001-04, below the 3% centre of the target band.
17
Actual GDP growth averaged 2.6% in 1999-2003, while most estimates of the rise in capacity were
around 4% or somewhat above. Note that potential GDP had grown about 7% per year in 1990-98.
9
cyclical to a neutral fiscal policy by maintaining the trend of expenditure
notwithstanding the drop in revenue seen during that recessive situation. As
indicated above, it did not, however, moved towards a strong counter-cyclical
increase in expenditure. Actual GDP rose just 2.6% in 1999-2003 (Table 1,
above), a poor performance but better than the 1.3% recorded by Latin America
as a whole under contagion from the Asian crisis.
It is revealing of the failure in the macroeconomic approach adopted
since 1999, that over 85% of the drop in GDP growth between1990-98 and
1999-2003 was located in the domestic market which depends directly on
domestic macroeconomic policies (3.9 points out of 4.5 points; Table 1).
The effect of the recessive gap on capital formation was a determining
variable of the much weaker growth performance. A significant gap between
actual GDP and the production frontier is usually followed by a drop in
productive investment. In fact, the gross investment ratio diminished
substantially and, in 2003, was still three points below the 23% ratio recorded in
1998.18 That was a consequence of an economy that had a high output gap that
averaged some 6% of GDP in those years (Figure 5.A, below and FfrenchDavis, 2010c, Table IX.1). That gap reflects a real imbalance because the
economy was underutilising a significant share of the available productive
resources. As shown repeatedly, the larger the recessive gap the larger tends
to be the drop experienced by investment ratios. As well as depressing the
future growth of potential GDP, lowered capital formation tends to reduce the
quality of the labour market.
It should be stressed that RG remained high for a whole quinquenium, in
an economy with a minor public debt, fiscal responsibility and a stabilisation
fund linked to the copper price.
b) Recovery led by a positive terms-of-trade shock, 2004-07
The international commodity boom that started in 2003 implied a large positive
shock for the Chilean economy. Its terms of trade, led by the copper price,
18
These figures for gross fixed investment ratios are from the National Accounts calculated by the Central
Bank with base year 2003. The depreciation of the capital stock represented around 13% of GDP. Thus,
these three points implied a 30% fall in net capital formation. It should be remembered that the estimate
of trend GDP fell from 7% to a 4% plateau.
10
improved by the equivalent of 6% of GDP between the recessed year of 2003
and 2004. A significant share of this improvement leaked into greater transfers
of profits abroad but a surplus equivalent to around three points of GDP
remained. This surplus eliminated the BER and fuelled recovery of depressed
domestic demand, permitting an increase in the utilisation rate of productive
capacity.
The boom in export prices intensified further in the years through to
2008. In 2007, the net positive effect of improvement in the terms of trade, after
discounting a higher outflow of profits, jumped to 9% of GDP, supporting the
rise in domestic demand.
Given the large output gap prior to this positive external shock, domestic
supply was able to respond with rising GDP and low inflation pressures
(inflation remained below the centre of the 2-4% target band set by the
autonomous Central Bank). Thus, the exogenous shock contributed to a major
jump in actual GDP growth from its 2.6% average in the recessive quinquenium
of 1999-2003 to 5.6% in 2004-07,19 without any significant reform of domestic
macroeconomic or microeconomic policies. The generalised improvement in the
terms of trade directly enhanced the spending capacity of the private sector,
reduced the output gap and improved the fiscal budget, with expectations once
again showing broad optimism. After the usual lag, productive investment also
began to rise.
Recovery continued gradually so that, by the beginning of 2008 before
contagion from the global crisis began, the recessive gap had been reduced,
albeit not fully eliminated. It had been present since 1998, in sharp contrast with
1991-97 when it was practically absent.
In the meantime, the Central Bank once again allowed the real exchange
rate to appreciate. Between early 2003 and 2008, the nominal price of the US
dollar fell by almost 40%, contributing to anchor inflation and further increase
(distorting) domestic purchasing power with a fast rising imports share (Table 1,
row 6, above).
Consequently, the macroeconomic disequilibrium implied by the output
gap was also associated with that of the exchange rate. Given some import
19
It is noteworthy that actual GDP growth also climbed in Latin America from 1.3% in 1999-2003 to
5.7% in 2004-07.
11
liberalisation and large exchange rate appreciation, the increase in domestic
demand was strongly biased toward imports. In fact, imports doubled the speed
of export volume in 2004-08 (Figure 4), but the trade imbalance was hidden by
the high copper price (Table 2). Indeed, the foreign currency market was
operating with a highly short-termist bias, behaving as if the current copper
price were sustainable; the consequence was a mal-adjustment of the free
exchange rate.
Figure 4 and Table 2
Notwithstanding the Bank´s bias for a free exchange rate, it intervened in
April 2008, buying dollars in public auctions in the face of strong pressure from
some analysts and exporters. The reason it gave for this intervention was not
an excessive appreciation of the exchange rate but the need to increase
international reserves during the rest of the year (again a programme, but now
to purchase an amount of foreign currency equivalent to 5% of GDP), given the
worsening of the international environment that was becoming apparent. In
parallel, the Bank was raising the MPR (Figure 3, above). The auctions were
suspended in September with the bankruptcy of Lehman Brothers.20
The international scenario played a relevant role, naturally enhanced by
the openness of the Chilean economy. There were positive features for Chile
such as the spectacular price of copper and other key exports which, as
indicated above, allowed the Treasury to accumulate sizable savings against
possible future bad years. In addition, world trade volume was dynamic up to
the arrival of the international financial crisis. On the other hand, international
food prices were climbing and, from mid-2007 to mid-2008, the price of food in
the Chilean CPI increased by 22%, generating significant inflationary pressures
and explaining about half of the nearly 10% annual inflation recorded at the
peak of the commodities boom (by the third quarter of 2008; see Ramos, 2008).
This was mainly imported inflation but, by late 2008, when monthly inflation in
Chile was already negative, the monetary policy interest rate (8.25%) exceeded
that of the United States by over seven points. The Central Bank's measures
consistently revealed that its priority was the inflation target at the expense of
growth and employment.
20
The nominal exchange rate depreciated 17% between the first auction in April and the last one in
September 2008. Depreciation then accelerated as a result of contagion from the global financial crisis.
12
Chile's leadership within Latin America on economic growth was lost in
2004-07 when its average GDP growth was similar to that of the region as a
whole.
c) The 1999-2007 cycle in brief
In all, growth in this cycle was low compared with the potential of the domestic
economy and highly positive external shocks. Average growth in this cycle was
a modest 3.9%, with the recovery as from 2003 offset by the economy's meagre
performance between 1999 and 2003.
There prevailed a combination of the excessive priority given to inflation -supported by a distorting unstable real exchange rate, a sliding of the
economic policy approach towards a more neutral stance and the belief that
actual GDP was already too close to potential GDP. This was an approach that
received frequent support from the neo-liberal specialists. In particular, Chile
received strong praise from the IMF for implementing plain "inflation targeting"
and a free exchange-rate policy. In 2010, the IMF authorities were to recognise
that they "were wrong" in much of their previous economic focus to which,
unfortunately, Chile had adhered since 1999.21
Chile experienced a large and long-lasting recessive gap arising from a
binding external constraint that predominated over the domestic macroeconomy
for five years. If one believes in the working of markets, it is hard to deny that
those five years must have weakened “animal spirits”. The recessive gap (RG)
only started to diminish in late 2003 under the pull of commodity prices. The
important recovery that followed, without significant microeconomic or political
changes, confirms the previous macroeconomic weakness since, as indicated
above, the merits of the Chilean economy were already present in 1999-2003.
Thus, the conditions for a domestic reactivating shock had been at hand since
the previous excessive external deficit and over-appreciated exchange rate of
1998 --usually obstacles to a recovery of economic activity-- had been corrected
in 1999.
As from 2003, an opportunity was, therefore, again, lost to implement an
abrupt positive domestic shock, now in an over-optimistic international
21
See Blanchard et al. (2010), for a highly relevant “regret” from the IMF.
13
environment and with notable fiscal surpluses --5.4% of GDP in 2004-07 (Table
2, below). In fact, it took four more years for the economy to approach its
production frontier. A mix of factors directly explains that weak recovery process
as from 2004. One ingredient is located in the Central Bank which overshot the
rise of the interest rate and allowed the exchange rate to revalue quickly, further
discouraging production of tradables. In addition, the Finance Ministry sterilised
“too much” of the positive impact of the copper price jump whilst allowing most
of the negative impact of increasing oil prices to penetrate the domestic
economy. A great virtue --the existence of the stabilisation scheme-- overshot,
sterilising in excess. When contagion from the global crisis reached Chile in
2008, actual GDP had not yet touched potential GDP.22 Public expenditure rose
faster than GDP, but was insufficient for an abrupt recovery.
Over and above that lost potential GDP, the fact that the drop in
economic activity was abrupt and recovery was quite gradual implied significant
forgone output during the downward and recovery stages (Figure 5.A). The
persistent RG during the whole period meant that both labour and capital were
underutilised. That fact, moreover, deterred productive investment and
productive spirits, with an impact on both future potential and actual GDP.
Figures 5.A and 5.B
Clearly, the exchange rate remained an outlier, with high mid-term
instability and a strong tendency towards overshooting (towards sharp
depreciation in the downturn and sharp appreciation in the boom). Over the
course of the cycle, the nominal price of the dollar moved between $476
(1/1999), $743 (2/2003), $514 (12/2005) and $443 (03/2008). These wide
fluctuations illustrate the exchange rate's considerable instability, with a
predominant trend towards excessive appreciation as from 2003 as shown by
the evolution of trade volume (Figure 4, above on trade, and Figure 6, below on
evolution of the real exchange rate).
22
The sharp rise in the CPI in 2007-08 could be interpreted as an overheating generated by the rise in
domestic demand. However, as discussed above, it was mostly related to the jump in international food
prices.
14
3. The approach since the global crisis
a) Contagion from the global crisis and early recovery,
September 2008-2009
When contagion from the global crisis reached Chile in 2008, the main
domestic
macroeconomic
variables
experienced
significant
recessive
adjustments.23
The capital account reverted abruptly and the price of copper dropped
from US$4 per pound in early 2008 to US$1.40 in December. The international
financial turbulence of the last quarter of 2008 and acute deterioration of the
volume and value of exports had a direct impact on economic activity. After
growing at an average 8% in 2004-08, domestic demand fell by 8% in the first
semester of 2009 over the same period in 2008, while GDP contracted by 3%.
In response, the government implemented an outstanding policy shift. In
2008, it had already progressively implemented an active counter-cyclical fiscal
policy. During 2009, the effects of the strong negative external shock produced
by the financial and trade ramifications of the international crisis were gradually
displaced by the positive pull of domestic policies focused on mitigating the
adverse effects of the crisis on economic activity and social indicators. In fact,
although fiscal income fell by 10% in 2008 and 20% in 2009, reflecting
depressed domestic demand and reduced revenue from copper, spending was
increased by a vigorous 17% in 2009 (and 9% in 2008). The public sector
managed an actual (as opposed to structural) deficit of 4.4% of GDP, thanks to
the policy space created by the solid budgetary position built up in previous
years (Table 2).
In the stimulus measures adopted, there was an emphasis on lowincome housing and massive investment in public works. In addition,
CODELCO, the state copper producer, was capitalised with a government
contribution equivalent to 0.6% of GDP, designed to finance its investment
projects, while the capital of Banco Estado, the state bank, was augmented by
50%, allowing it to increase lending to small and mid-sized firms (SMEs).
23
The impact on the domestic economy and the policy response are discussed in Ffrench-Davis and
Heresi (2015).
15
A number of taxes in key sectors, including on fuel, borrowing and SMEs,
were temporarily reduced. Families in the lowest 40% income bracket received
two vouchers, each for the equivalent of 30% of the minimum monthly wage per
non-working family member. In addition, the solidarity pillar of the pension
system, which had been created prior to the crisis under a reform implemented
in 2008, was strengthened in 2009, expanding coverage of solidarity pensions
to 50% of the population (Arenas, 2010). While this was a structural distributive
measure, it also contributed to economic recovery.
A subsidy was introduced for the hiring of low-income young people,
providing an incentive for employment of this highly vulnerable group. In 2009,
the extent of the unemployment insurance scheme and access to its solidarity
fund were enhanced, including workers with short-term contracts, while countercyclical features were introduced in its benefits.
The capital account saw a significant repatriation of the savings held in
sovereign funds to finance the fiscal deficit of 4.4% of GDP, reducing the over
US$20 billion accumulated by 2008 to US$11 billion in late 2009 (Table 3). This
counter-cyclical behaviour on the part of the Treasury was accompanied by
spectacular outflows on the part of residents, principally the AFPs.24 This again
confirmed that the liberalisation of residents´ capital flows played a negative
pro-cyclical role as had also been the case in 1998-99.
Table 3
The autonomous Central Bank embarked on a gradual reduction of the
MPR only in January 2009 (Figure 3, above). After a series of cuts, it reached
0.50% in July 2009. However, the cost of credit remained high for several
months before the cuts in the MPR were slowly transferred to credit users,
particularly SMEs. There is an asymmetry in the speed of increases in the cost
of loans during the boom and of decreases during the recessions, with an antiSMEs bias.25 Meanwhile, commercial banks reported annual rates of return of
over 20%, while GDP and employment had fallen.
24
The AFPs recorded net outflows equivalent to 10% of annual GDP in 2009. See Ffrench-Davis (2014,
Table X.1).
25
For instance, for small loans (up to the equivalent of around US$7,500), the spread over the annual
MPR rose from an already huge 27 percentage points in 2007 to 33 points in 2009, while for larger loans
(over US$190,000), it increased from 2.6 to 4 percentage points (SBIF, 2014).
16
It is important to note that a 1% drop in GDP in 2009 was determined by
the decrease of the quantum of exports, while the domestic economy, which
only contracted slightly in late 2008 and during the first semester of 2009,
experienced a smaller impact. This was in contrast to the previous recession
when the external shocks had stronger recessive multiplying effects on the nonexport economy (Table 1, rows 3 and 4). These external negative shocks were
given data but the government was able to sustain production for the domestic
market, halting the negative multiplier effect of the imported recessive forces in
the third quarter. During the last couple of months of 2009, GDP exhibited an
increase of 3.9% (change over 12 months).26 It was domestic market activity,
supported by the counter-cyclical fiscal policy that led the recovery of economic
activity in the final months of the Bachelet administration.
Undoubtedly, the copper price boom, which had restarted by mid-2009
(with a jump to a high US$3.35 per pound in January 2010), contributed to the
recovery of private expectations and fiscal income, driving up domestic
demand. In addition, once the greatest uncertainties on international financial
markets dissipated in 2009, large firms gradually regained access to bond
markets. In all, the rather neutral structural fiscal balance (SFB) became
effectively counter-cyclical, with the financial support of the sovereign fund, and
the government was able to execute the budget in a rather timely and efficient
way.
b) Continued recovery with external and fiscal imbalances, 2010-13
The recovery of economic activity and actual GDP was interrupted temporarily
by an earthquake and tsunami on 27 February 2010 (27F). Following this
severe interruption --which, according to the Bank, destroyed an estimated 1.01.5% of potential GDP-- there was, however, still a wide recessive gap or policy
space for substantial recovery of economic activity during several further
quarters.
A few weeks after 27F, now at the beginning of the administration of
President Piñera, recovery restarted. The already higher domestic demand that
had resulted from the counter-cyclical policies of 2009 increased further due to
26
Monthly Central Bank estimate of economic activity (IMACEC). For more details, see Ffrench-Davis
(2014, Table X.4).
17
Treasury spending on post-earthquake reconstruction. Given that there was still
significant underutilised installed capacity, accelerated public spending, pulling
up domestic demand, was consistent with a movement towards macroeconomic
balance as long as this recessive gap remained.
Recovery continued through to 2012, giving a 5.7% average growth of
actual GDP in 2010-12. In order to understand what happened, it is important
to distinguish between reuse of available productive capacity and the creation of
new capacity and to look at what occurred with the sustainability of the recovery
process. This involves diverse macroeconomic variables such as external
balance and fiscal budget trends and their link to productive development.
In 2010-12, domestic demand expanded faster than output, boosting
actual GDP without creating inflationary pressures. This implied moving
towards a fundamental real macroeconomic balance; that is, using available
potential GDP. Naturally, the gap decreased during the adjustment process,
raising employment and stimulating capital formation. As the gap narrowed,
with actual and potential growth converging, the speed diminished and actual
GDP growth weakened to 4.1% in 2013. A new cycle started then.
It is evident that the 5.7% increase in actual GDP between 2010 and
2012 included a significant recovery of capacity that was underutilised at the
peak of the recession. In order to avoid the common mistake of disregarding
what happened before recovery, it is necessary to measure performance
between comparable GDP peaks, given their proximity to installed capacity. If
the 2007 peak is taken as a base, actual GDP growth to the peak of 2013
averages 3.9%;27 and if we correct for the destruction caused by the
earthquake, the average growth in 2008-13 appears to be 4.1%.28 This is
identical to 2013, slightly above the rate achieved in the previous decade
(1999-2007) but much lower than the 7.1% recorded in 1990-1998.
Recovery and reaching the production frontier had positive impacts on
employment and capital formation. Despite the persistence of multiple
expressions of precariousness, there is no doubt that unemployment dropped
27
Over the course of 2008, there was evidence of the effects of the crisis; GDP only grew 3.3%, below
estimates of the increase in potential GDP. Consequently, 2007 is used here as the previous annual peak.
28
Given that this destruction was not due to economic policy, an estimate of the negative impact of the
earthquake --1.0-1.5% of potential GDP, according to the Central Bank-- must be added to the increase in
actual GDP in order to measure the effectiveness of economic policy.
18
and formalisation of employment improved. For instance, up-to-date payments
into the social security system (the private AFPs) increased from 54.5% of the
labour force in 2008 to 59.6% in 2013, returning to their pace of formalization in
the years before contagion from the global crisis.29
The investment ratio experienced a recovery with respect to its
depressed level in 2009. However, in current pesos, it was running at 23.6% of
GDP in 2013, down from a peak of 24.7% in 2008. In constant pesos, on the
other hand, there was an increase from 24.7% in 2008 to 25.8% in 2013,
explained by the Central Bank's calculation that the average relative prices of
investment had decreased such that a given monetary expenditure permitted
the acquisition of 9% more in equipment, machinery and construction.30
The volume of exports remained depressed, reflecting the effect of
slowing international trade, the burden of the exchange-rate policy failure and
the persistence of an absence of productive development policies. In this cycle
the annual increase in volume of exports reached just 1.3% (Table 4). In
addition, diversification into higher value-added activities and linkages with the
rest of the domestic economy weakened. As such, the weight of recovery of
economic activity continued to be carried by the domestic market. In fact,
around 5/6 of the increase in output recorded in 2010-12 were demanded by
the domestic market.31 Naturally, given that effective demand was reaching the
level of potential output in 2012, completing the recovery of domestic output, it
sharply lost speed in 2013.
Table 4
In the transition towards the elimination of the recessive gap, an outlier
exchange rate appreciation soon reappeared and some new permanent fiscal
expenditure were created without a corresponding increase in permanent fiscal
income.
After the exchange rate experienced a strong appreciation to $443 per
dollar in March 2008 (when over-optimism still predominated), there was a
sharp devaluation to $649 in late 2008 (Figure 6, below). A period of
fluctuations then ensued, reflecting prevailing uncertainty but with the
29
There had been an increase of 9 percentage points between 2002 and 2008.
Calculations based on the new 2008 chain mobile base of national accounts.
31
See Ffrench-Davis (2014, Table X.4).
30
19
expectation that Chile was emerging from the crisis. As a result, the rate
appreciated to $463 in 2011. Naturally, the free market rate was equilibrating
the balance of payments but des-equilibrating the current account, resulting in
great uncertainty and misleading information to the producers of tradables.
Figure 4, above, and Table 4 show that imports grew much faster than
exports as they had done in 2004-2007. While the quantum of imports climbed
by 46% between the peak of 2007 and 2013, the quantum of exports rose by a
meagre 8%. Part of the difference was covered by the notably high price of
copper while the remainder appeared as a current account deficit of 3.4% of
GDP in both 2012 and 2013. As regards fiscal policy, a 7% health insurance
tax on pensions was partially eliminated, taxes on lending and on personal
income were reduced and a maternity leave subsidy was increased while the
tax on companies' profits rose from 17% to 20%.The net effect was that the
SFB exhibited a 1.2% deficit, despite benefiting from a fast-rising estimate of
the trend copper price (Table 2, row 4).
As a result, when the recessive gap was disappearing in 2012 and early
2013, two macroeconomic imbalances prevailed: an outlier appreciated
exchange rate and a fiscal budget based on an excessively high copper price.
This is reflected in the real trade disequilibrium. At the same time, in 2012, the
government used revenue from mining firms that were equivalent to a current
copper price of US$3.30 per pound as compared to less than US$1 used by
the Finance Ministry in 2004-07 (Table 2).32
c) The 2008-13 cycle in brief
In contrast to the approach in force since the late 1990s, the government
adopted a set of strong counter-cyclical policies at the start of this new cycle,
taking advantage of the assets and credibility that the Chilean economy had
accumulated, including the sovereign stabilisation funds. Notwithstanding the
drop in tax revenue, fiscal expenditure was increased and some taxes were
temporarily reduced. This strong counter-cyclical fiscal policy was the main
force compensating for the negative external shocks and did so quite quickly.
By the last quarter of 2009, economic activity was exhibiting a significant
32
The SFB, measured with a nominal trend copper price of US$1.00 per pound, exhibited a surplus of
1.2% of GDP in 2004-07.
20
recovery. Subsequently, there was also a faster recovery of economic activity
in comparison with the previous cycle. By late 2012, the RG had disappeared,
implying a smaller cost in foregone output as shown in Figure 5.B in contrast
with Figure 5.A above.
Beyond this initial counter-cyclical progress, fiscal responsibility
deteriorated as the economy recovered. The government raised some
permanent expenditure without a matching increase in permanent fiscal
income. Even, although the copper price was quite high, there was an actual
deficit in 2013. Also, the SFB moved from a surplus in the first cycle to a deficit
in the second one, despite the positive impact of a fast-rising estimate of the
trend copper price (Table 2, row 4).33
In the case of trade and growth, there was a striking weakening of export
performance. After several years in which Chile's real exports had risen faster
than world trade,34 exports expanded by a weak annual 1.3% in this cycle, while
world trade grew by 2.5%. More worryingly, exports other than copper rose by
even less (0.9%, see Table 1), implying a step-back in diversification, a sign of
“Dutch disease”.
Evidently, world trade was depressed, but Chile's exports were even
more depressed. One explanatory variable is exchange-rate policy, with the
rate's instability and tendency to appreciate whenever a recovery stage
appears. Exchange-rate policy, of course, also underlies the fast rise of imports
(and their negative impact on SMEs).35
The Central Bank generally has argued that the actual real exchange
rate was close to “the historical average”; the data it offers uses to disregard
significant changes in import tariffs and export subsidies. Figure 6 presents the
evolution of the real exchange rate since its liberalisation in 1999, the reduction
of import tariffs from 11% to an average 1% and the elimination of a 10%
33
This is the main, albeit, simplified outcome. The relevant copper price is that in real terms (deflated by
the international inflation relevant for Chile, measured monthly by the Central Bank and estimated at 71%
in 1999-2013). In addition, climbing copper production costs, mostly related to falling ore grades, must be
considered. Nonetheless, in all, the real proceeds for Chile from copper have been more favourable in
recent years than in the 1990s.
34
For instance, the quantum of exports rose by 9.9% annually in 1990-98 while world trade increased
6%.
35
Due to the many free trade agreements signed by Chile in the past decade, SMEs face imports with a
practically zero tariff, minor non-tariff restrictions and an unstable RER. At the same time, the net effect
of the set of policies appears to be negative for export diversification, notwithstanding the preferences
received in the free trade agreements.
21
subsidy for non-traditional exports.36 After taking into account both policy
changes, Figure 6 shows that the RER was usually below the adjusted curve. In
addition, the RER has experienced mid-term instability, with deep appreciation
during the two recovery stages. For investors in the production of tradables, this
has tended to offset the favourable investment and credit mood of recovery
periods.37 One evident proof of the outlier evolution of the RER is the gap
between the evolution of the volume of imports and that of exports as seen in
Figure 4, above.
Figure 6
Finally, average growth of actual GDP was rather similar in both cycles -close to 4%-- and the RER and the current account behaved pro-cyclically in
both cases. Factor productivity and product diversification also stagnated, in
marked contrast to the 1990s. This backwards step in economic development
dynamism is common to the two episodes.
4. Final remarks
After a promising start in the early 1990s when the Chilean economy
experienced nine years of 7.1% average GDP growth, it departed from what
can be termed macroeconomics for development.38 During the 15 years
between 1999 and 2013, effective demand exhibited ups-and-downs that had a
significant impact on the real macroeconomy in terms of both the rate at which
potential GDP was utilised and its actual growth rate. Those pro-cyclical failures
were reinforced by pro-cyclical instability of the exchange rate and the current
account.
It can be argued, and correctly so to a degree, that, since the late 1990s,
there have been two severe negative external shocks. The fact is that they
36
The fact that --after a significant increase in the 1990s when GDP grew by 7.1%--, total factor
productivity slowed sharply as from 1999 was also disregarded. This change affects the sustainable level
of the “equilibrium” RER.
37It is fashionable to repeat that, with the adoption of a floating exchange rate, the domestic economy
became immune to external shocks. The fact is that foreign exchange crises are eliminated but at the
expense of transferring great instability to the real economy, particularly the allocation of resources
between tradables and non-tradables, and to the level and composition of aggregate demand, deterring
development. On convergent views on the link exchange rate/development see Frenkel and Rapetti
(2011); Rodrik (2008), Williamson (2000) and (2008).
38
Also used in the Latin American literature are the expressions “financierism” or “nominal stability” for
the neo-liberal approach and “productivism” or “real economy” for a “neo-structuralist” or macro for
development approach. See ECLAC (2010, Chapter II), Ffrench-Davis (2010b) and Ocampo (2011).
22
implied macroeconomic instability that made the implementation of countercyclical policies more, rather than less, necessary. Chile, however, dismantled
most of what it had created in the 1990s, instead of improving it. In addition,
Chile benefited from notably high copper prices that were far more favourable
for the Treasury and private exporters than in the 1990s. We have, therefore, to
explain why the excellent performance of 1990-98 was followed by two cycles in
which GDP growth averaged less than 4%. Obviously negative external shocks
have some negative effects on growth; but it is unsustainable to assert that all
of over three points of GDP, in 15 years, are fully explained by negative external
shocks. That would coincide with the most extreme “dependentism” of the
1960s.
The focus of this paper --the issue of macroeconomics for development-reveals that the domestic macroeconomic environment worsened as from 1999.
For instance, a rather close balance of aggregate demand and potential GDP
was achieved only in 1989, 1991-98, 2007 and 2012-13, with a relevant
recessive gap prevailing for the rest of the time, while the current account in
constant prices and the ER were extremely unstable.
Notwithstanding significant domestic “policy assets”, the macroeconomic
situation was driven by a volatile capital account and volatile copper prices.
Both these macroeconomic evils had been avoided in the early 1990s but, as
from 1999, the authorities adopted both, paying the price in terms of two costly
cycles with significant instability of the real economy.
The persistent RG during the two cycles meant that both labour and
capital were underutilised, with a drop in actual total factor productivity. The RG
also deterred productive investment to the detriment of future GDP.
The Chilean economy is quite open policy-wise. Nonetheless, valueadded by exports accounts only for close to 30% of GDP and 70% of GDP is
consumed or invested in the domestic economy. This is the part of GDP where
the output gap is mostly located; the performance of this major share of GDP is
directly affected by domestic macroeconomic policies. This implies that, for a
good performance of actual GDP, there must be an active macroeconomic
policy, involving an economy working near the productive frontier and with right
or sustainable macro-prices, particularly the exchange rate which determines
the main relative price between tradables and non-tradables. The longer the
23
recessive gaps, the deeper the structural damage for job creation, capital
formation, fiscal revenue, and worsened balance sheets of firms, throwing some
of them into unfair and inefficient stagnation or even bankruptcy.
The RER is a crucial allocating variable. Following the adoption of the
free exchange rate in 1999, a severe inconsistency has prevailed between
exchange-rate policy and the apparent consensus of fostering exports with
higher value-added, while SMEs have faced external competition under
reduced import tariffs and an appreciated exchange rate.
There is a need to rebalance the targets of macroeconomic policy, taking
into account four inputs beyond the priority for CPI inflation: first, consider the
evolution of the composition of the CPI, without ignoring the incidence of an
appreciated exchange rate on the price of tradables; second, taking note of the
sustainability of the evolution of the exchange rate (does it respond to the
evolution of relative productivities à la Balassa-Samuelson or rather to the
short-term balance of payments?); third, concern for the evolution of the output
gap, seeking to achieve “low inflation” with “high” employment, a sustainable
exchange rate and sustained GDP growth; and, last, the need for deep
coordination between the monetary and fiscal authorities.
In order to avoid the usual conflict between a counter-cyclical monetary
policy and a pro-cyclical exchange rate produced by an open capital account
with a free exchange rate, an additional policy tool is required and countercyclical regulation of the capital account becomes unavoidable. One policy tool
still available to Chile is the reserve requirement that can be imposed by the
Central Bank while a complementary tool would be counter-cyclical regulation of
institutional investors such as the AFPs.
Finally, it is necessary to strive for a fiscal policy that moves forward
towards a strong counter-cyclical approach.39
39
A related issue is the tax burden and its composition. Only minor and, in some cases, regressive
adjustments were made after the major overhaul introduced in 1990. The government which took office in
2014 considered that the current tax burden was insufficient to finance the public goods required for
inclusive development and the composition of revenue was not progressive. There were three main
challenges: (i) the need to dismantle clearly regressive exemptions and channels for tax avoidance and to
combat evasion, (ii) to increase taxation of wealth and profits, and (iii) to enhance pro-productive
development linkages of public expenditure and revenue. Some of these challenges were addressed by a
tax reform enacted in 2014.
24
It is essential to find the way back to sustainable real macroeconomic
equilibrium. Along with deep microeconomic development-friendly reforms (proSMEs and pro-employment), this would allow Chile to return to sustained higher
rates of GDP growth and achieve a progressive reduction in inequality. Beyond
low inflation and fiscal responsibility, this implies an active macroeconomic
policy that focuses on the real economy, working close to potential GDP, with
sustainable external balances and exchange rates that are functional to
productive development. Prolonged recessive cycles structurally damage job
creation, reduce fiscal income and place costly burdens on entrepreneurship
and, particularly, small businesses.
Real macroeconomic failures are a determinant variable underlying the
slowered Chilean development convergence.
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26
Table 1
Selected macroeconomic indicators, 1990-2013
(average rates of growth, and % of GDP)
1990-98
5.4
1999-13
2.8
(1999-03)
1.4
1999-07
2.7
(2009)
-2.0
2008-13
2.9
GDP
7.1
3.9
2.6
3.9
-1.0
3.9
3
GDP exported
9.9
4.3
5.5
6.4
-4.5
1.3
(2.0)
(1.4)
(1.4)
(1.6)
(-1.1)
(0.3 )
4
GDP non-exported
6.5
3.8
1.7
3.1
0.1
4.9
(5.1)
(2.5)
(1.2)
(2.3)
(0.1)
(3.6)
Non-copper exports
10.3
4.9
7.1
7.6
-3.6
0.9
Non-traditional exports*
14.1
-
7.9
8.5
-10.3
-
6
Imports
12.7
7.5
3.0
8.3
-16.2
6.5
7
Current account (% of current GDP)
-3.0
0.0
-0.9
0.9
2.0
-1.3
8
88
148
96
123
165
185
25.1
21.5
20.9
20.6
21.8
22.9
13.1
12.1
11.9
12.2
10.7
12.0
11
Terms of trade index (1989 = 100)
Gross investment ratio (% of
current GDP)
Net investment ratio (% of real
GDP)**
Fiscal expenditure
6.6
6.2
4.0
5.4
16.5
7.3
12
Fiscal balance (% of current GDP)
1.8
1.1
-1.0
1.8
-4.4
0.0
13
CPI (Dec. to Dec.)
11.2
3.2
3.4
3.8
-0.6
2.9
14
Real average wage
3.9
2.1
1.7
1.9
4.8
2.5
15
Real minimum wage
5.3
3.5
4.8
3.6
4.8
3.2
1
GDP per capita
2
5
9
10
Sources: Abridged from Ffrench-Davis (2014, Tables I.7 and VI.6), based on Central Bank and National
Institute of Statistics (INE) data updated to 2013. All growth rates are in real terms. Figures in brackets in
rows 3 and 4 represent the contribution of exports and non-exports to GDP growth, respectively. *
Excludes from non-copper exports nine groups of large items; at present includes about 5,000 items.
**Net investment in fixed capital at constant prices was adjusted in 2010 for an estimated 3% drop in the
stock of capital due to the destruction caused by the 27F earthquake; it reduced the 1999-2013 average
ratio by 0.5 points and that of 2008-13 by 1.2 points.
27
Table 2
Fiscal indicators, 2001-2013
2001-03 2004-07 2008 2009 2010-12 2013
1. GDP actual (% annual real change)
3.2
5.6
3.3 -1.0
5.7
4.1
2. GDP trend (% annual real change) (previous
year consultation)*
3. Copper price actual (nominal US$/Lb)
4. Copper price mid-term trend (nom. US$/Lb)
5. Fiscal balance actual (% of current GDP)
6. Structural fiscal balance (% of current GDP)
7. Fiscal income (% annual real change)
8. Fiscal income (% of current GDP)
9. Fiscal expenditure (% annual real change)
10.Fiscal expenditure (% of current GDP)
4.2
0.74
0.90
-0.7
0.9
4.1
20.4
3.8
21.1
4.6
2.31
1.00
5.4
1.2
18.2
23.5
7.2**
18.1**
5.0
4.9
3.16 2.34
1.37 1.99
3.9 -4.4
0.0 -1.2
-9.5 -20.4
24.2 19.0
9.3 16.5
20.3 23.4
4.7
3.68
2.58
0.5
-1.2
13.7
22.1
4.8
21.7
5.0
3.32
3.06
-0.6
-0.5
-1.4
21.0
4.1
21.6
Sources: Ffrench-Davis and Heresi (2015), based on data from the Central Bank and DIPRES (2014).
Notes: Values correspond to a simple annual average for each period. Real GDP growth figures are from
the National Accounts in 2003 prices; as from 2006, the rates of change of the new chained base,
reference 2008, are used. All rates of change are in real terms. For figures presented as % of GDP, the
GDP at current prices, reference 2008, is used.
* Trend GDP corresponds to calculations of the Finance Ministry, based on inputs provided by the
Advisory Committee on Trend GDP. The figures in row 2 correspond to estimates from the annual
consultation of trend GDP for the budget of the next year. Given that the Trend GDP Committee
delivered the first estimate for the next budget year in 2002, the values used for 2001 and 2002 are the
estimates presented in the 2002 report. **Fiscal expenditure in constant prices rises faster than GDP, but
falls as share of current GDP, because this variable increases notably due to the boom of export prices in
this 2004-07 period with respect to 2001-03.
Table 3
Sovereign funds, 2008-2013
(US$ current millions)
2008
2009
2010
2011
2012
2013
FEES
FRP
FEES+FRP
(% of annual
GDP)
20,211
11,285
12,720
13,157
14,998
15,419
2,507
3,421
3,837
4,406
5,883
7,335
12.6%
8.5%
7.6%
7.0%
7.8%
8.2%
Source: DIPRES and Central Bank.
Notes: Consolidated Treasury assets at the end of each year in the Economic and Social Stabilisation
Fund (FEES) and the Pension Reserve Fund (FRP). The last column shows the total amount accumulated
in both funds as a percentage of GDP of the respective year. GDP in US$ corresponds to the series at
current prices, reference 2008, divided by the average nominal exchange rate of the year.
28
Table 4
Macroeconomic disequilibrium indicators, 2008-2013
(indexes 2007=100; and average annual % changes)
2008
2009
2010
2011
2012
2013
103.7
102.6
108.5
114.8
121.0
125.9
Average
annual
growth
(%)
3.9
2.Quantum of exports
99.3
94.8
97.0
102.3
103.5
107.9
1.3
3.Quantum of imports
111.2
93.2
117.4
135.7
142.4
145.6
6.5
4.Real fiscal expenditure
109.3
127.4
135.7
139.9
146.5
152.4
7.3
5.Real fiscal income
90.5
72.0
92.4
103.0
104.4
103.0
0.5
6.Real fiscal non-copper income
101.5
91.8
107.7
123.6
132.0
136.1
5.3
7.Domestic demand
108.3
102.2
116.1
126.8
135.6
140.2
5.8
1. GDP
Source: Taken from Ffrench-Davis (2014, Table IX.5), updated to 2013. Based on Central Bank figures
for GDP, exports, imports and domestic demand from the chained base, reference 2008 series. Nominal
fiscal figures from DIPRES (2014), deflated by the annual average CPI, here scaled to 2007=100; rows 4
to 6 correspond to the central government, row 6 excludes fiscal revenue from CODELCO and the ten
largest mining companies.
Figure 1
Pension fund outflows and real exchange rate, 1995-2000
(% of total portfolio, 1986=100)
Appreciation zone
Depreciation zone
RER
Investment
abroad
limit
Investment
abroad
Sources: Taken from Ffrench-Davis (2010, Table IX.1), based on Central Bank and Pension Fund
Superintendency figures.
29
Figure 2
Actual and target inflation, 1999-2013
(12-month % change in CPI)
Source: Based on figures from Central Bank for inflation target and from National Institute of
Statistics (INE) for monthly rates of change of the CPI.
Notes: In 1999 the Central Bank defined a target of 4.3% for the year and of 3.5% for the
following year. It then established a 2% to 4% band, centred on a 3% target as from 2001.
Figure 3
Chilean and US monetary policy rate, 1998-2013
(annual %)
Source: Based on monthly Central Bank figures.
Notes: The Monetary Policy Rate (MPR) in Chile has been set in nominal terms since August 2001. Prior
to this date, the MPR was expressed as an annual percentage over the CPI.
30
Figure 4
Evolution of exports and imports of goods and services, 2004-2013
(cumulative changes, index 2004=100)
42%
25%
Sources: Based on Central Bank figures in prices of 2003. As from 2006, growth rates of the chained
2008 series are used. Exports and imports correspond to the volume (quantum) of goods and services. The
figures between the two curves show the cumulative excess of imports over exports since 2004, as a
percentage of exports.
31
Figure 5
A. Potential and actual GDP, 1997-2007
(millions of constant US$)
B. Potential and actual GDP, 2008-2013
(millions of constant US$)
Sources: Adapted from Ffrench-Davis (2010c, appendix to Chapter I), updated with data from Central
Bank for actual GDP and stock of capital.
32
Figure 6
Chile: Real exchange rate (RER), 1999-2014
(index 1986=100)
115
743
110
649
105
613
100
RER
95
90
475
85
472
443
80
75
70
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
RER
RER Average 1986-2004
Average adjusted by changes in Tariffs and "Reintegro Simplificado" 1999-2004
Sources: Ffrench-Davis (2014, Figure A.3), based on Central Bank monthly average figures for the real
exchange rate of a broad basket of currencies of Chile's trade partners, DIPRES for the collected effective
tariff and "simplified reimbursement" to non-traditional exports.
Notes: The gap between the straight and the dotted lines show the compensatory adjustment to the RER
necessary to maintain the competitiveness of tradables production, considering the 10 percentage point
drop in import tariffs and the eliminated 10% reimbursement for non-traditional exports (which are the
share of exports with higher price elasticity). The numbers presented in the RER curve correspond to the
monthly average of nominal Chilean pesos per dollar at the corresponding dates.
33