The Chile Story

The secret behind Chile’s macro-economic stability and robust growth over the past 20 years.

- Strong fiscal discipline. Over the last two decades, only in Chile were years of fiscal deficits roughly offset by years of surpluses; most other Latin American countries displayed a bias toward deficits. Fiscal discipline was reinforced by the introduction of the structural surplus rule in 2000. The reward has been a vastly lower debt-servicing burden, as fiscal discipline resulted not only in lower government debt but also in lower real interest rates.

-A credible inflation targeting framework has helped anchor inflation expectations at a low level. Under this framework, the central bank aims at keeping inflation within a 2–4 percent target range. In recent years, the central bank has also let the peso float freely.

-The financial system was strengthened and capital markets deepened. Financial liberalization was a mainstay of policy reform in Latin American in the 1990s, mainly focusing on deregulation and privatization. Chile took strong actions to strike the right balance of market discipline and sound banking supervision, while its capital market rapidly deepened.

- Trade integration, in conjunction with a broad financial opening, was significant. Chile’s export sector, one of the most open and diversified in Latin America, has proven an important buffer against current account shocks, while also boosting Chile’s growth potential.

- Institutional arrangements were set to create a more certain macroeconomic environment. Sound economic policies and reforms have been carried out within a stable institutional framework to avoid reversals. These institutional arrangements have helped reduced the incentives problems that have led to a lack of fiscal discipline, complex and distorted trade polices, and moral hazards in the financial system see elsewhere in the region.

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This page contains a single entry by Paul published on November 14, 2006 2:20 PM.

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