Challenges for the Chilean economy under cyclical shocks, 1999–2016

ABSTRACT

A brief summary of the evolution of economic policies and growth in Chile since 1973 is presented, distinguishing between four periods: 1973–89 with average growth of 2.9 percent, 1990–98 with 7.1 percent (notably above the 3.2 percent Latin American average), 1999–2013 with 3.9 percent, and 2014–16 with 1.9 percent, explaining the main forces underlying these sharp differences. Analysis focuses on the fiscal and external disequilibrium associated with the fiscal treatment of the copper price and the adoption of a free exchange rate since 1999. Subsequently, the focus is on the macroeconomic situation in 2013 and five sources of accumulated disequilibria that suggested a high probability of significant deceleration of the economy. The article ends with a discussion of the actual deceleration in more recent years, converging with the negative average outcome of the region, and concludes that worsening economic performance has been associated mainly with the shift from the coherent countercyclical policies of the 1990s to the procyclical opening of the capital account, liberalization of the exchange rate, and adoption of sharp inflation targeting overcoming other relevant macroeconomic targets since then.

KEYWORDS:

• Macroeconomic real disequilibria
• pro-cyclical policies
• development
• Chile

JEL CLASSIFICATIONS:

• E63
• 011
• O23
• O24
• F41

Notes

¹Economic reforms, policies, and outcomes in Chile from the military coup of 1973 up to 2012 are covered in Ffrench-Davis (2014). More recent analysis and data are found in Ffrench-Davis (2015).

²The average was 2.5 percent in 2004–6; then, an international boom in food prices began and lasted until the global crisis exploded in 2008, generating significant imported inflation. The annual CPI change rose to 7.5 percent in 2007–8 and fell to ‒1.4 percent in 2009.

³The experience with the structural fiscal balance (SFB) started in 2001 is analyzed in Frankel (2013) and Ffrench-Davis (2016a).

⁴The relevant copper price is that in real terms, deflated by the international inflation relevant for Chile. In addition, climbing copper production costs, related to falling ore grades, must be considered.

Additional information

Notes on contributors

Ricardo Ffrench-Davis

Ricardo Ffrench-Davis is a professor of economics at the University of Chile, former chief economist of the Central Bank of Chile, principal regional adviser of ECLAC, and cofounder of CIEPLAN, a Chilean think tank. The author appreciates the research support of Simón Ballesteros.