Tuesday, May 15, 2007

Chicago Boys Legacy

Chile shows the benefits of three decades of free trade, limited government:

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.

"The question that plagues Latin America and other emerging markets is: How do you avoid the booms and busts from commodity cycles?" says Chile's finance minister, Andrés Velasco. "In Chile we have a simple answer: spend that which is permanent and save that which is transitory."

So far, Chile has set aside about $6 billion for the stabilization fund and expects to add another $6 billion or so by the end of the year. The sum would be equivalent to about 10% of the country's gross domestic product, the total value of goods and services it produces in a year.

....The government aims for a budget surplus of about 1% annually, and calculates its projected revenue using an estimate of the average price of copper over the coming decade. When copper's price exceeds the long-term estimate, as it has in the past few years, the government runs up much more than a 1% surplus and routes the excess into the stabilization fund, where it is invested overseas.

....The government also is starting a second fund tied to the copper boom. This "innovation fund" comes from a tax on mining that's expected to raise more than $200 million annually. The fund's details are still being worked out in the Chilean Congress, but the goal is to finance ventures that would diversify the Chilean economy away from commodities into technology and services. Harvard University economist Ricardo Hausmann, who consults with the Chilean government, says that Chile resembles California in terms of wine and agriculture, "but it's a California without Hollywood and without Silicon Valley."

In the cautious Chilean fashion, the innovation fund is meant to bolster Chile's long-term prospects, not produce quick gains. "We want a higher trend rate of growth," says Mr. Velasco, the finance minister. "But we don't want [the economy] to oscillate with the price of copper."

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