China

Economics Department
 
 The Chilean economy is booming again.Not that it ever really declined. True, asmall dip in GDP of 0.8% in 1999 spelt the end of a long period of growth that had lasted since the mid-1980s. In that 15-year period, Chile became known as “Latin America’s Tiger”, with an economy whose growth performance showed more in common with dynamic countries in southeast Asia than its neighbours. Indeed, though not a member of the OECD, Chile outperforms some OECD countries, in labour productivity, for instance. Since 1999 growth remained relatively sluggish by Chile’s standards, before rebounding in 2004 with a rise of 6% in GDP. Opinions are divided on the main causes of that slowdown, some blaming cyclical and external developments, others emphasising internal structural weaknesses. Both camps are right. But the strength of the recovery leaves little doubt that theChilean economy can notch up fast growth, especially when external conditions are favourable. Copper prices are at a 15-year peak, and copper accounts for about 40% of exports. Overall fixed investment leapt by nearly 13% last year, while private consumption also rose by nearly 6%, the fastest expansion in years. Chile’s GDP per capita has risen faster than, say, in Mexico or Turkey. However, as a recent OECD survey argues, Chile needs to sustain robust growth over the longer term if it is to close the gap in living standards with the OECD area as a whole. Income per capita measured in purchasing power terms is only about 40% of the OECD area average.  There can be no sustained growth without a sound economic foundation and Chile has done a great deal to create one. Monetary policy is working well, delivering low, stableinflation, at 2.4% in 2004. Fiscal management has also been exemplary. Those high copper prices have helped, of course, but the government has nonetheless managed to resist pressures to spend the revenue windfalls. This is because the authorities introduced a fiscal rule in 2000 requiring copper-related revenue windfalls to be saved in good times and to retire debt and finance spending in lean years. Compliance with this rule is paying dividends. The public debt is coming down, too. The net debt of the central government and central bank combined accounted for less than 6% of GDP in 2004, down from about a third of GDP in 1990. This has allowed the government to begin to spend more on social programmes and reduce its dependency on foreign financing–the Achilles’ heel of many economies in the region. In fact, Chile is now the only OECD Observer No. 252/253 November 2005


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