Chile's Velasco says more pragmatism, less ideology can solve economic problems

Chile's Velasco says more pragmatism, less ideology can solve economic problems

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Andrés Velasco is frustrated when he hears experts trying to diagnose Latin America’s economic challenges. “In my view, the question of growth in Latin America typically gets tackled the wrong way, because it gets politicized very quickly,” says Chile’s former finance minister who now teaches at London School of Economics.

Both the left and the right have a simplistic way of approaching the economy, according to Velasco. “The right-wing approach says the government has to get out of everything and the market will do its work. This is too simplistic and wrong. And there is a simplistic, left-wing version that says get the government involved in everything and we will grow. It is also too simplistic and wrong,” he says.

While the political extremes may take different approaches on how to fix the problem, there is common agreement that Latin America will once again fall short of its economic potential in 2019. The United Nations Economic Commission for Latin America forecasts growth in the region to accelerate slightly to 1.7% from 1.2% last year.

While many economists attribute the mediocre performance in part to Venezuela’s economic problems, Velasco refuses to single out any one country. He advocates for a “pragmatic, less ideological” approach. “Sustained economic growth needs diversification and diversification needs a very active, vigorous and creative private sector and an active public sector to provide complementary services,” he says.

Weak export growth has also hampered the region’s economy, says Velasco. Countries need to improve productivity to raise out- put and reduce costs and they should consider diversifying exports beyond just commodities. “The experience of countries that have grown a lot over three, four, five decades is that they redeploy resources and have new export sectors. There are no new sectors in Latin America. We export the same things we exported decades ago,” says Velasco.

Velasco points out that there are a few promising trends on the trade front. After joining together to form the Pacific Alliance, Chile, Colombia, Mexico and Peru established a trade protocol in 2016. The four countries are now in talks with four potential new associate members – Australia, Canada, New Zealand and Singapore – that would deepen trade relationships across a broader Asia-Pacific region.

Meanwhile, Chile, Mexico and Peru are joining the 11-nation Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). The alliance could ultimately create new value chains and expand the export of services. “Latin America exports very little services. The Pacific Alliance could be a vehicle for developing an export platform for services” from financial to phytosanitary services, says Velasco.

Elsewhere, Velasco says countries in the region would benefit by adopting robust fiscal policies to control spending and creating sovereign wealth funds, as Chile did when he was finance minister. The fund was instrumental in insulating the market and economy from commodity volatility after prices reached record highs midway through the last decade, only to drop precipitously during the global financial crisis in 2008-2009.

“The reason for a fiscal rule and wealth fund is to reduce volatility. The fiscal rule will help get around the volatility problem and may give you a mild investment pick up if the environment is more predictable, but it is not a growth policy,” he says.

Colombia has employed the Chilean model for its fiscal policy and Guyana, where ExxonMobil is developing on huge offshore oil field, is following the Chilean example with its own sovereign wealth fund.

His advice for other countries is for fiscal policies to be simple, enforceable, transparent and strict, but they can’t be black and white. “You want to be rigorous, but you don’t want to be crazy. For example, losing weight by not eating altogether is not a good way to lose weight. If you want to lose weight, you go on a diet, but you still feed yourself. It is the same thing with fiscal rules. You want something that is sustainable and allows you some flexibility, but which constrains irresponsible behavior,” he says.