Remember the fable of the grasshopper and the ant? The ant toils away storing grain for winter, while the grasshopper parties through the summer and dies of starvation in the winter.
Something like that is happening in Chile. Chile is the world’s largest copper producer. Like several resource-rich countries — especially those with oil like Saudi Arabia and Kuwait — Chile has a sovereign wealth fund, meant to increase the country’s wealth through external investments, independent of reserves.
(Actually, Chile set up two — one to be held against future federal pension shortfalls; the second, created in 2007 out of the old 1985 Copper Stabilization Fund, was to save when copper prices were high in order to smooth the economy when times were rough.) Dozens of oil countries have sovereign wealth funds but only a few are as transparent, well organized, or publicly accountable as Chile’s.
Most poor resource countries will say that Chile, a middle-income country, was better off to start than they were, and that they cannot have sovereign wealth funds: they need the money from the resources immediately, for urgently needed projects. Yet, with few exceptions (Botswana and Norway come to mind), their use of the money has rarely had the positive impact on their people or helped their economies as Chile’s approach.
Michelle Bachelet, the single mother who is Chile’s current president, is widely credited with the economic judgment that saved her country — and especially its most vulnerable citizens — from the worst of the global economic crash. She will leave office in a few months with the highest approval rating (76%) in history of any president of Chile. She had not been popular till the economic crisis.
The New York Times reports, like the ant of the fable,
“Ms. Bachelet resisted the cries of politicians to use revenues from copper sales to try to close Chile’s inequality gap, one of the world’s worst. Instead, during her first three years in office, her government set aside $35 billion in revenue from the boom. When the global financial crisis hit, the value of Chile’s exports sank by more than 30 percent. But by then Chile had nearly $20 billion invested in overseas sovereign wealth funds alone.
“We have the distinction of perhaps having the only sovereign funds that made money during the crisis,” said Andrés Velasco, Chile’s finance minister.
With billions of dollars saved, Ms. Bachelet’s government legalized alimony payments to divorced women and tripled the number of free early child care centers for low-income families. It added a minimum pension guarantee for the very poor and for low-income homemakers.”
And as importantly, in January, Chile announced a $4 billion economic stimulus including direct transfers to lower income families. The IMF had recommended less.
Bachelet said in a speech to the OECD (Organisation for Economic Cooperation and Development) Council in May:
“… instead of reducing social spending in the face of the crisis, we are actually raising it. And we are doing so without increasing public debt.
A few months ago, we modified our unemployment insurance system so that Chilean workers are better protected if they lose their jobs. This year too, thanks to a pension reform approved last year, my government will increase the basic solidarity pension, received by the most vulnerable Chileans, by 25%.”
Other countries (like China) have used their savings to smooth their economy during this downturn. But few have been as wise and humane as Chile’s.
