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One economist after another has laid into Chile’s economic performance in recent weeks. Hernán Büchi, Conservative finance minister in the mid-1980s, said the decline in growth “ought to worry us”, while Eduardo Aninat, his Christian Democrat successor in the latter half of the 1990s, said he was concerned by “public complacency”.

But Andrés Velasco, the current minister, shows little sign of being a man under fire, patiently defending his government’s plans to smooth the rate of expansion and reduce the volatility resulting from highs and lows in the price of copper, which accounts for almost 60 per cent of exports.

Chile’s growth – likely to end the year at about 4.5 per cent – seems respectable by Latin American standards. But it has fallen markedly from last year’s 6.3 per cent and is well below the average of 7 per cent in the 1990s.

Critics say the government’s rigid adherence to macro-economic orthodoxy has undermined its ability to take advantage of copper prices, which have tripled in the past three years. Mr Velasco rejects this. “They get short-term macro-economic performance and longer-term growth trends mixed up,” he says.

In an interview with the Financial Times, Mr Velasco blamed the slowdown in growth this year on short-term supply shocks, among them strikes and accidents in Chile’s largest copper mines and rising international oil prices.

On top of that, Argentina unexpectedly almost doubled the price of the natural gas it exports to Chile and cut volumes. Chile depends on Argentina’s gas for more than a third of its electricity generation, though industry was most affected by the cuts, being forced to use diesel fuel at up to five times the cost.

Although he has come under pressure to take advantage of increasing revenues from the copper boom to pump up spending in needy areas, Mr Velasco is sticking firmly to the counter-cyclical fiscal rule introduced in 2000. It requires a structural budget surplus of 1 per cent of gross domestic product, with spending targeted to revenues based on long-term copper prices, which for 2006 were calculated at $0.99 per pound – less than a third of the highs reached this year.

Mr Velasco says that because of this rule, Chile has had “dramatic success” in stabilising growth and he rejects criticisms that Chile should be growing more because of high copper prices: “The very purpose of macro-economic policy in Chile is to insulate economic activity at home from commodity prices abroad.”

Volatile growth caused by copper prices “was precisely Chile’s problem for decades and to have overcome that is the biggest achievement of macro-economic policy in Chile”.

However, in spite of success in stabilising the economy, the sagging growth has prompted a chorus of criticism, notably from the so-called “group of 20” of Chile’s leading economists, who are calling for the phasing out of the 1 per cent surplus rule to allow greater spending on education and to promote competition through tax breaks for businesses.

“We have to pay more attention to micro-economic problems but the government lacks ambition to carry out serious reforms in this area,” says Harald Beyer, of the centre-right CEP think-tank in Santiago and one of the group.

Felipe Larraín of the University of Chile, another of the 20 economists, highlights four main problems that must be tackled to stimulate growth: low education standards, a lack of innovation, rigidity in labour markets and over-regulation in areas such as the environment.

Copyright The Financial Times Limited 2017. All rights reserved.
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