Chile – post-crisis and post-earthquake recovery

On February 27, 2010, a devastating 8.8 magnitude earthquake hit Chile. The death toll has climbed to more than 700 in three days. This weekend’s turn of events will pose a significant challenge for the new conservative President Sebastián Piñera, who takes office on March 11.  Previously poised to inherit leadership of one of the most successful economies in the region, the Piñera administration will now assume the task of ushering Chile through this time of hardship – with emergency relief and reconstruction of infrastructure as their principal concern. 

Like many countries in the hemisphere, Chile still finds itself recovering from the impact of the global financial crisis, which affected it through several channels. By the end of 2008, the price of copper and other exports had declined, causing terms of trade to deteriorate. The tightening of foreign credit led to capital outflows, external demand for exports collapsed, and domestic credit tightened. The net outcome was negative economic growth in 2009.

The Chilean economy was well positioned to face the global crisis, due to its current policy framework and track record of exemplary policies, large fiscal savings over the years, and absence of imbalances in the financial and corporate sectors. Nonetheless, Chile’s economy will be put to the test yet again as the social and economic impacts of this recent disaster emerge. Early reconstruction costs are estimated to be in the $30 billion range, equal to about fifteen percent of Chile’s GDP.

The Chilean response to the disaster was notably different than that of their Haitian counterparts, whose struggle with disaster relief was characterized by lesser financial resources. The administration of current President Michelle Bachelet was hesitant to request foreign aid until the extent of damage had been fully assessed. Nevertheless Bachelet was eventually persuaded by the magnitude of the destruction to accept foreign assistance.  Much of the requested aid is not monetary, as was seen in Haiti, but rather in-kind aid, such as needed supplies. 

During her Latin American tour, Secretary of State Hillary Clinton briefly visited Chile to begin discussions on aid measures, with a requested field hospital and water purification systems already in route to the hardest hit areas.  Chile’s neighbors have pledged aid as well. Argentina and Brazil sent field hospital supplies, and Peru pledged a hospital, doctors, and fifteen tons of blankets and tents.

Faced with meeting the urgent needs of those affected by the earthquake, incoming President Sebastián Piñera will also be forced to confront several structural shortcomings concerning the Chilean economy.  Unless outstanding problems such as income inequality, energy security, and the high cost of doing business (compared with OECD countries, an organization which Chile recently joined) are tackled, president-elect Piñera will likely find it difficult to follow through with his campaign promise of creating one million jobs and pushing yearly growth towards the six percent range.

Of course, Chile has proven itself capable of meeting challenges in the past. In particular, its history of accomplishments includes the structural reforms of the 1980s, including pension and health care; the early implementation of inflation targeting and capital controls during the 1990s; and the fiscal discipline rule enacted in the early 2000s, which has since required the government to annually post a structural surplus – thus forcing the government to save rather then spend its copper revenues.

On the macroeconomic policy front, the Chilean authorities embarked on a $4 billion stimulus plan in January 2009 aimed at minimizing the consequences of the global crisis. The Central Bank of Chile has acted aggressively, slashing its policy rate from 8.25 percent in late 2008 to a half percent in July 2009, enhancing liquidity access options for the banks, and relaxing foreign exchange requirements.

Thus, as Chile confronts the immediate and long-term needs of its people, its past success in confronting challenges augurs well for its future.  As many observers of the recent earthquake have pointed out, Chileans have experienced earthquakes of this magnitude in the recent past, citing in particular the 9.5 earthquake that struck Valdivia in 1960.  As a result, and in combination with the strength of Chilean government, building codes have been strictly enforced for decades, which played an enormous role in reducing casualties from the current earthquake. In fact, most deaths have come from the resulting tsunami and not the earthquake.  Generally regarded as one of the best managed nations in Latin America, it is difficult to envision that Chile will not meet its current challenges without success.
 

Flickr photo by Felipe Ovalle and used under the Creative Commons license