Friday, January 28, 2011

Central Bank Intervention:Another symptom of the Chilean economy disease?(II)

It has been well known the case of an economy which has a positive price shock on its main export good, and later it has not tool to deal with its implications: It is known as ” The Dutch disease”. Chile, might have a similar problem with its leading exports good : Copper .So far, and as expected , the impact on the local currency has been an appreciation to drive it somewhat below its long run trend, within the overvalued range,creating room for Central Bank intervention on the basis of protecting welfare levels.(the gains from consumers, do not compensate the loses of exporters).-
Having said that, the issue becomes more complicated because at the beginning of the year 2000,it was set the goal for the Chilean economy, to become a developed country ending that decade, taking as a reference to set the target the Portugal economy. The target was to move from a middle income range (roughly USS 14000 p/capita), up to U$$ 24000 in the year 2010.
That goal was not possible to get. Productivity level did not increase, and it decreased specially in the last five years,(2005-2009), unemployment could not go down below 8,5% on average, inflation went out of course in 2007-2008(6%) which forced a more restrictive monetary policy , and GDP start to decrease from 6% (annual rate ) in 2004 down to -1,5% in 2008. This latest decrease, mainly due to the Global Financial crisis. Poverty increased from 13% up to 15%(roughly), in the years 2009-2010.
Thus, Chilean economy seems to have a second disease as well. This one related to the Malaysia economy , which deal with the constraints arising along the way , to move up from middle income to higher income levels status, keeping the economy in a sort of middle income trap (, January 12,2011 newsletter).In the Chilean economy case, it applies as far it was unable to become less dependent from copper exports, building up a more diversified export basket with industrial goods on the rise, to get away from the risk of too much export concentrated on raw materials, which have high price volatility. .
This second disease, was already present when copper prices start to rise at a stronger pace in recent years, and it has made more difficult to overcome the impact of such a shock. Thus, “The Chilean economy disease” means two symptoms (a).the middle income trap,(b) the loses of competitiveness on its exports due to currency appreciation.
What about the cure of this disease?. Paradoxically ,the solution goes beyond the traditional and already implemented microeconomics reforms. It includes decentralization , a long run strategic focus for public resources allocations, taking into account local government needs ,regional economies potential and better quality in services. It is needed a forward looking political reforms, an outward expansion of opportunities for citizens to take action about what they consider to be the key issue for their community . The reforms made in 2005 were inward looking, past based reforms unable to inspire collective mood . Recent polls ,show that Chilean people do not believe neither politics nor politicians who are protected in their close and narrow view of what the country need. The Chilean economy disease is mainly a political one.It is necessary to fit politics with economics.