CHILE: The golden rule: keeping a 1% budget surplus
Chile is widely recognized as a Latin American success story. Sensible macro-economic policies have produced steady growth and rising standards of living for most Chileans, with the number living below the poverty line cut sharply.
In a recent interview with DiplomaticTraffic.com, Chile’s ambassador to Washington, Mariano Fernandez, attributed part of that success to a consensus in Chile that the excesses experienced under the Marxist rule of Salvador Allende, followed by 16 years of military dictatorship under Augusto Pinochet, should not be repeated.
Chile was the first Latin American country to secure a free trade agreement with the United States, which came into effect on January 1, 2004. And while the FTA increased bilateral trade dramatically, American investments in Chile have actually fallen. Rectifying this trend is one of the chief tasks the ambassador is working on.
Below are his comments on a range of issues.
The US-Chile Free Trade Agreement
The FTA is performing rather well, especially if you look at the trade figures, which have improved for both sides, but actually show a more rapid increase for US exports to Chile. The United States is traditionally the first trading partner for Chile, and currently the total in bilateral trade is over $10 billion, up from $6.2b in 2003. Chile’s exports to the US grew from 3.8b in 2003 to $4.9b in 2004 and 6.2b in 2005, over 25 percent a year. US exports over the same period grew by almost 40 percent, from $2.3b in 2003, to $3.1b in 2004 and $4.4b in 2005. Chile purchases more from the US than Russia, Indonesia or Argentina, showing that the agreement is good for both sides. The other elements in the agreement, such as the environment, are performing very well as well.
But American investments in Chile are weak. Traditionally, the United States is the number one foreign investor in Chile. From 1974 until today, 25 percent of all foreign investment has been from the United States, a total of $16b, but now the US is in the 5th position, after Spain, Australia, Canada and Great Britain. For 2004 and 2005 US investment represents only 2.5 percent of the total, which is almost nothing compared to its traditional role. The United States has invested in mining, insurance, banking and many other sectors. Usually with a free trade agreement investment increases, but investment is cyclical.
Investment promotion activities
We are searching for the cause. Two years may not be that significant. For example, perhaps there were no major mining, electricity, transport or highway projects for American companies. What we are doing now is very active investment promotion. We have planned a series of seminars, conferences and workshops about possible US investment in Chile. The first was organized in New York at the end of September, about energy and electricity, and it was a big success in terms of attendance and the business agreements.
In April we plan a workshop in Washington about the legal framework for investment in Chile. That means general legislation, settlement of disputes, etc. Most of the attendants will be lawyers and consultants advising companies. We will later have a seminar on investment in innovation, technology and high technology in Chile, a seminar about government concessions and tenders for hospitals, jails, etc, and a seminar about tourism and real estate investments, such as golf courses, hotels, etc.
Center-left government coalitions
The military dictatorship ended in 1989. Since 1990 we have been led by a center-left coalition of the Christian Democrat and the Socialist parties, and two smaller reformist, social-democratic parties. We have managed to achieve high growth and achieve great success in the fight against poverty. The new government of President Michelle Bachelet, voted in on March 9, belongs to the same coalition.
We had an average growth of over 7 percent in the 1990s. But at the end of the 90s there was the Asian, Russian and then Argentinian and Brazilian crises. We were not destroyed, but affected, and we restored high growth in 2003. In 1999 we had negative growth, and now we are over 5 percent. The average growth over the last 16 years is 5.5 percent.
We cannot grow at the level of China or India because they have very basic things to do, things that we have already done. For example, we have reduced poverty from 40 percent in the 80s, to less than 20 percent now. We have highways, modern airports. We will soon have wireless Internet covering the whole country. We now have over 4 million Internet users and over 7 million cell phones, in a population of 16 million.
Distribution of wealth
We now need to improve the distribution of wealth. To do that, we have to keep growing. If we do not have, we have nothing to distribute. A lot of technical intelligence is needed for distribution in order to avoid preventing growth. Just to impose more taxes is not a solution. But improving public expenditures, for instance, in health, education and jobs, to innovate, to improve employment policy (in which private and public sectors need to interact), and all the while following the golden rule that every year we must have a 1 percent budget surplus.
A surplus of 6% of GDP
This year, we will have a surplus almost equivalent to 6 percent of GDP, about $10b in cash. We are now having a difficult discussion about whether to save the money or spend it. We have an independent central bank, which has to control inflation to between 2 and 4 percent. We have to avoid spending that will push inflation above 4 percent. We have a very modern and efficient way to collect taxes.
The key to Chile’s success
My personal explanation is that the crucial political element behind all this success is after having a very cruel and bloody dictatorship, with exiled people, tortured people, disappeared people, executed people, including the president and her mother, who were in jail, both those of us who fought the dictatorship, and later those who supported it, tacitly agreed that we no longer want to see winds of crisis in Chile.
The government rules, but does not try to destroy the opposition. The opposition does oppose the government, but without trying to generate crises. There is respect for the majority and respect for the minority. Legislation is usually passed based on unanimity or a broad majority, almost consensus. We talk about a politics of consensus. This means that when the government implements policies, they don’t face political obstacles. This is a profound political background.
There are of course several sub-decisions that are important for success. For example, in the mid-1990s we prohibited short-term investments, to avoid capital flight. It was very successful. (It required investors to keep their money in Chile for at least one year.) Today we are strong enough to resist the problems of speculation. Today a major problem is the low value of the dollar.
Free trade agreements: a huge market
Chile has free trade agreements with Canada, Mexico and the United States, also with Mercosur, the Central American countries, the Andean countries, with Caricom, with the European Union, EFTA, with China, with Korea, with P4: Singapore, Brunei, Australia and New Zealand. This means that for Chile the Free Trade Agreement of the Americas would simply be to amalgamate a series of existing agreements into a single document. The average tariff in Chile today is just 2.4 percent. We have the most competitive cell phone market in the world.
The Pinochet legacy
In my opinion his legacy of accomplishments is like Hitler’s highways. [The highways were a good innovation but the human cost of Hitler’s rule was too high.] I would prefer by far not to have the Pinochet legacy and not to have such a brilliant country today.
People tend to overlook the two times Pinochet led the country into bankruptcy, in 1974 and in 1982. The latter crisis came from a big mistake in monetary policy, fixing the dollar to 1.39 pesos. In 1982 the GDP dropped 14 percent, in 1983 it was 4 percent and 1984 it was 1 percent. The first year of growth was 1985. No democratically elected government would have been allowed to stay after such a crisis. The Chile central bank purchased the debt, for which we are still paying. After Pinochet we accepted the debt to maintain stability.
We should not forget that Pinochet was defeated in a plebiscite. He thought he would win. Even the armed forces opposed his re-election. At one point the army paid Pinochet’s son millions of dollars, mainly commissions on military sales. A secret fund of $27 million was found at Riggs Bank.
The war on terror
Of course we understand the concern of a country when two symbolic buildings are destroyed [and three thousand people were killed] in one day, but we disagree with some measures [taken in reaction]. We voted against [the US] in the UN Security Council, for which the Chilean president had 100 percent support of the Chilean people. We have the biggest Palestinian immigrant group in the world, about 250,000 families, mainly Maronite Christians. We have Jewish families working with Palestinian families, and Jewish women married to Palestinian men. We have a very integrated society, and we don’t like conflicts coming inside our borders.
Biography of Mariano Fernández Amunátegui
Born in Santiago, Chile, on April 21, 1945
Married to María Angélica Morales
Three children: Magdalena, Mariano and Cristóbal
Law Degree from the School of Legal and Social Sciences of the (Facultad de Ciencias Jurídicas y Sociales) of the Universidad Católica de Santiago (1965-1970)
Major field of study: Political Sociology at Bonn University, Germany.
1967-1974 Member of the Chilean Foreign Service
1971-1974 Third Secretary, Embassy of Chile in Germany
1974-1982 Exiled in Bonn, Germany.
Editor of “Development and Co-operation Magazine.”
Chief Editor of news agency “IPS-Dritte Welt Nachrichtenagentur”
Chief Editor of “Handbuch der Entwicklungshilfe” (1974-1976)
1982 Returned to Chile.
1982-1990 Researcher and member of the executive committee of the Centre of
Studies for Development (CED)
1990-1992 Ambassador of Chile to the European Community
1992-1994 Ambassador of Chile to Italy and non-resident Ambassador to Malta
1994-2000 Vice Minister of Foreign Affairs
2000-2002 Ambassador of Chile to Spain and non-resident Ambassador to Andorra
2002-2006 Ambassador of Chile to the United Kingdom
2006- Ambassador of Chile to the United States
1982-1984 Board Member of Fintesa Financial Agency (Banco del Desarrollo).
1984-1986 Editorial Board Member of the Chilean magazine “Mensaje.”
1986-1988 Editorial Board Member of the Chilean newspaper “Fortín Mapocho.”
1986-1989 Editorial Board Member of the Chilean magazine “APSI”.
1982-1990 Board Member of “Radio Cooperativa.”
1992 Vice-President of the European-Latin American Relations Institute
(IRELA) of Madrid, Spain.
1992-1993 President of IRELA.
1994 Vice-President of the Italo-Latin American Institute (IILA), Rome.
1994-1996 Executive Committee Member of the Jacques Maritain Institute, Rome.
1996-1998 President of the International Council of the “Latin-American Centre
For Relations with Europe” (CELARE), Santiago.
Political Science Association of Chile
Académie International du Vin
Cofradía del Mérito Vitivinícola de Chile
Honorary President of the Chilean Association of Sommeliers
Grand Cross of Argentina
Grand Cross of Brazil
Grand Cross of Colombia
Grand Officer of Croatia
Grand Cross of Ecuador
Grand Cross of Finland
Grand Officer of Germany
Grand Cross of Germany
Grand Cross of the Holy See
Grand Cross of Italy
Grand Cross of Mexico
Grand Cross of Panama.
Grand Cross of Peru
Grand Cross of Spain
Grand Officer of Sweden