The costs of good behaviour

The numbers are not particularly encouraging. Inflation is nearing double digits, growth forecasts are revised downwards, the Central Bank complains of upward pressure on interest rates, unemployment is creeping up, and the political mood is ugly. The economist Felipe Larrain, a Piñera advisor, denies that Chile is in crisis. He calls the situation “delicate”. Given this delicacy, there is no more talk of external vs domestic causes. In the context of next month’s presentation of the 2009 budget to Congress, politics has come into it, and politics, as we know, are local.

Now that politics has come into it, one would think that Finance Minister Velasco – not affiliated with any political party, and naturally disinclined to playing politics – would have an easy time of it. However, while the economic scenario is complicated, the stars have conspired to hand him the most favourable political hand that he has had since coming to office. He has remained totally loyal to the president, and the president has returned the favour. The president probably recognises that, far from being the intransigent technocrat that many make him out to be, Velasco has shown quite a bit of flexibility, giving in in a few key areas, such as the injection of additional funds into the Fuel Stabilisation Fund and a funding feud with the Supreme Court, while keeping public spending within reasonable margins. In fact, despite all the rhetoric of social spending, public spending as a percentage of GDP started to fall in 2008, after peaking the year before, and is projected to fall further in 2009. In this regard President Bachelet should be given credit for allowing Velasco to resist the political pressures (while also allowing him to take quite a bit of the political flak). President Bachelet does not get credit for much these days, but it should be recognized that she has kept her cool with respect to the finance minister.

There remain important pressures on spending, not the least of which is the still un-resolved problem of the badly misdesigned reform of Santiago’s public transportation system, which requires roughly 40 million dollars a month just to cover its operating deficit and to keep it functioning at its current – and still far from optimal – level. And there are unspoken pressures which remain unaddressed, such as a long term plan to solve the country’s energy needs – probably Chile’s greatest long-term public policy challenge. Yet today, few, except for political outliers like Senator Zaldívar, call for the finance minister to be sacked. With the municipal elections later this year, and the 2009 presidential race already very much on people’s minds, the Concertación is mindful of the 1999 campaign – the last time a presidential election was fought in the midst of an economic downturn. That time, Joaquin Lavin came very close to taking the presidency, and for all their differences, Concertación leaders are united in wanting to avoid an Alianza victory next year. So in current budget negotiations, Velasco will at least be able to count on a bit of breathing room from his own coalition – something he has not really enjoyed before.

All of which combine in the oddest possible way: a Latin American government, not exactly smashing the opposition in public opinion polls, rich in fiscal resources, but unable and even unwilling to spend in an election year. Will Chilean voters respond to all this good behaviour?