October 18, 2010
Chile's success is just one sign of a shift in economic powerPosted in Articles · 192 comments ·
How did you feel when you saw those Chilean miners being pulled out of that hellhole?
Wasn’t it wonderful to see one of the best news stories of recent times unfold in front of your eyes?
As each miner was released from their underground prison, the unbridled joy of their rescuers was infectious.
Rightly, this story has had blanket media coverage with 24hour TV coverage and many millions of column inches of comment.
Chatting to friends, I was taken aback by a casual comment I heard, to the effect of: ‘‘Wasn’t it amazing that a South American country had the resources, skill and wherewithal to mount such a rescue?”.
My friend was just reinforcing our Eurocentric view of the world, where Europeans and North Americans are developed and the rest of the world is in some way backward – or, to use the expression mostly reserved for South American countries, ‘‘basket cases’’.
This view is so outdated as to be dangerous. In reality, it is we who are falling behind.
For Ireland – as we grapple and bitch about the way out – the lesson from the rest of the world is that they are marching ahead.
No one is waiting for the Irish to sort out their house.
They are moving and it is we who will be forced to catch up, not them.
Another story that came out of Chile on Thursday is revealing.
Amid the national euphoria, the Chilean central bank raised the key overnight borrowing rate by 0.25 per cent to 2.75 per cent. In fact, the Chilean central bank has been raising the rate steadily since June, when it was at 0.5 per cent.
This is because the recovery in the Chilean economy has led to inflation worries.
But the point is that the economy is expanding again.
As usual with central banks, the bank statement on Thursday that accompanied the interest rate decision gives a hint of the risk factors they see on the horizon. Their biggest worry is us – the developed world.
This is what the Chileans had to say about us: ‘‘A slower-than-expected recovery in developed countries is an important risk factor in emerging economies.”
Click to view larger chart.
It is fairly obvious why a resource-rich South American economy would see the developed world’s sluggish recovery as a risk, but a chart published by the FTAlphaville blog earlier this month shows that there might be something more fundamental happening to the global economy.
For the first time since the 1870s,when thousands of Irish people left Ireland for Argentina and Chile, the contribution to global GDP of the G12 emerging economies (China, India, South Korea, Indonesia, Saudi Arabia, Russia, Turkey, Mexico, Brazil, Argentina, South Africa and Australia) has surpassed the contribution of the G7 (US, Canada, Germany, Italy, France, Britain and Japan).
It could be argued that the global crisis has passed emerging markets by, and they have had to do little themselves as the developed world fell below them. But this would be a huge over-simplification of the issue.
The chart shows that, yes, the G7 share of global GDP has fallen in recent years. But there has also been massive growth in the G12, as global growth has shifted from the developed world to the developing world.
While Chile is not in the G12, it is a great example of what an emerging market economy can do if it gets its economic policy right.
Chile seems to be getting a lot right at the moment.
In fact, one of the starkest observations is just how virtuous economic policy and behaviour have been within the developing world in recent years.
In contrast, the developed world economies – particularly the US, Britain and Ireland – have behaved like financial delinquents.
We are the ones who have comported ourselves like adolescents, borrowing other people’s money and blowing it. In the meantime, the developing world has saved, invested and done all the ‘‘right things’’.
If you have time to keep up with global economic developments, you may have heard of AndrÃ©s Velasco, the economist appointed as finance minister of Chile (imagine that, a Minister of Finance that actually knows something about economics).
He decided in 2006,when the price of Chile’s main export (copper) reached record levels, to save the surplus from the boom, rather than add it to current spending.
This was not an easy decision to stick to, as he came under intense political pressure to spend the extra money.
Had Velasco taken the McCreevy ‘‘if I have it, I’ll spend it’’ approach to economics, Chile wouldn’t be in the position it is today.
Politically, he prevailed.
In the first nine months of his office, he creamed $9.6 billion off the top of the copper price – 5 per cent of GDP – and squirrelled it away. Last year, that copper-based contingency fund amounted to 30 per cent of GDP.
It helps that the government owns the biggest mine in the country – the mine which mounted last week’s rescue operation. When the economic crisis hit, the war chest meant that Velasco could then spend the money in the economy to cushion the blow, thus preventing Chile from falling into recession.
And what did he spend the money on?
Velasco has won praise from Unicef for continuing to increase investment in early intervention in children’s education all the way through the global recession – he could do this because he had the good sense to save in the good times for the rainy day.
It would be easy to contrast the performance of the authorities in Chile with the authorities here, but that is not the point of this article.
What Chile is doing very well, and what policymakers in the developed world are failing to do, is to manage its economy.
Chile is flexible; its policies are set to meet the current needs of the economy, even if they are sometimes unpopular; and it is willing to move quickly as the need arises.
It may be that the global economy has reached an inflection point, where the countries that have driven growth for the last century will continue to fade.
For billions, this will be a great liberation. It is our challenge.
Are we up for it? If not, could our children again emigrate to South America, as they did 120 years ago? Stranger things have happened.