Good story on Bloomberg,"Harvard's Peso Doctor Vindicated as Chile Currency Evades Slump", describes the prudent policies of Chile during the run-up of copper price. Copper is the main export of Chile and represents the key driver of government revenues; consequently, government deficits will be fluctuate with the price of copper. The Finance Minister, Andres Velasco, provides for a reserve fund to bank some of the gains from the copper run up. He took a lot of heat on this from the Chilean people, but now the prudence of his policy shows through. The government cut-back far less because the reserve fund can be used to smooth expenditures. The effect has been a more stable currency and a country business cycle that has less extremes. To be sure, the Chilean economy has suffered like other emerging markets but it looks to be in better shape.
This is a good lesson for other countries that are dependent on single exports. In fact, this is a good lesson for even local state governments that never reserved against a recession.
This is a good lesson for other countries that are dependent on single exports. In fact, this is a good lesson for even local state governments that never reserved against a recession.
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