Friday, April 28, 2006

Can Chile perfomance match foreign expectations?

It has been usual to say that Chile is far away form the rest of Latin America countries, specially because of its economic and institutional progress. But ,what about the chances of getting even better economic results, to consolidate this position?. Answer this question requires to check additional background to what has been known and done so far .Among these ones, it is the presence of a prospective economic strategy capable of anticipating events with negative impact either over society as a whole or the economy, also it is the implementation of a strategy to reform education ,and a strategy to pursue higher innovation levels. The evidence suggest that Chile lack of these three orientation. Let looks to the first one : a prospective strategy.-
The high copper price has meant good news for the Chilean economy , although not so for economic authorities .This paradox arises from the fact that nobody was prepared for such scenario. Real appreciation of the exchange rate not too far its long term trend(1986-2005) , budget surpluses over the 6% of GDP, it has meant a scenario with unexpected effects.Let looks first two questions:
a.-Was it possible to anticipate the high copper price and its effects?. If it was so and nothing was done about it ,that is a worrisome signal. If it was not so, and nobody knows what to do to about it now, that is also a worrisome signal.-
I do believe that is was possible to anticipate a steady increase in copper prices, so to design the proper response to apply it just in time it was needed. Probably ,it was hard to set a U$$3,2 (lb) dollar ,but with China pushing strong the raw material markets it was a fair probability to have important prices increases, even if copper prices is adjusted by dollar depreciation. My own estimation at the end of 2002, was a steady increase in copper prices ,moderating itself near the end of the year 2005 . It seems that it was nobody ´s interest to anticipate this increases, and now it is the problem of what to do about it. Central Bank authorities looks the fundamental and long term real exchange rate ,to rule out intervention into the exchange rate market ,for neutralizing the appreciation of Chilean peso .But exporters are complaining louder because of loosening competitiveness. Government authorities are trying to design the Norwegian fund approach ,to cope with excess of foreign currency which it will require months to implement. In the meant time , exporters insist the need to do something about the appreciation of Chilean peso, forgetting that this is not the only relevant price for theirs business.
It is not the first time that there is failure to anticipate major real shocks .Gas supply reliability from external sources, is another one, Still there is not a clear energy policy. Besides, only afterward the free trade agreement were signed, it was noted that tax revenues coming from foreign trade would be lower. Concerning the new strategy for education, experts has said Chile is ten years late to implement the necessary reforms.-
b.- How deep is the key role the private sector have in the economy, whether government ´s help is requested at any difficulties along the road?. Efficiency firms actually supported by Free trade agreement, should be able to cope with a stronger peso (local currency)as they did in the nineties.. Management model based on long term contracts with flexible clauses, low import cost for inputs and capital equipment, low interest rate to finance financial needs, lower shipment cost, and more productive labor force ,should means efficiency gains sufficient enough to confront this challenge. Not to mention innovation, quality of products ,and market diversification
Then, How far is Chile from its fellows Latin America economies?. Given the long tradition of improvisation ,it seems that after all Chile is still into the realities of Latin America way of life ,except that from the economic point of view, it have made some progress not enough though to qualify in the major leagues. So, Chile is on the most difficult part of the development process, the one which requires additional step hard to implement , because it requires to broke up with the fear to make changes, along with the mental legacy of the past. In this stage ,some chilean economist argue for looking abroad to learn experiences, for instance Ireland and its extraordinary achievements in the last twenty years, but it is easy to forget that Ireland is surrounded by strong economies . Another alternative is Finland and its achievements in innovation ,but this country is also endowed with strong economies around. Chile needs proper models to follow throughout the next stage to achieve development and to meets the foreign expectations; but much of those models are in their own understanding that beyond diagnosis, it is necessary a willing for strategic decisions to be applied soon.-

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