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Chile planning for their economic future.


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We could take a few lessons from these people in terms on how we try to save money.

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http://www.star-telegram.com/461/story/271669.html

 

Extra money, unlikely problem for Chile

 

By EDUARDO GALLARDO

Associated Press Writer

 

SANTIAGO, Chile -- Michelle Bachelet has a problem other presidents would love: What to do with billions of dollars overflowing the government's coffers.

 

As the world's biggest copper supplier, Chile is flush with cash from a spike in commodity prices. But plans by Bachelet's fiscally conservative government to keep socking away money and shoring up pension funds are stoking civil unrest and testing the mettle of Chileans and their politicians.

 

"If you receive some extra money, such as a Christmas bonus, you don't keep it if you have needs," said Jorge Luis Aedo, an accountant who lives in the port city of Valparaiso. "You spend that money for the benefit of your family. And we Chileans are the government's family."

 

But Bachelet says Chile's future depends on how the surplus cash - which could reach $20 billion by year's end - is handled.

 

"Nothing would be easier than taking populist decisions and spending all that money. We have to build now, but also in the future," Bachelet told foreign correspondents earlier this month.

 

Her position stands in marked contrast to Venezuela's bonanza of oil-fueled government spending, and Bolivia's aggressive push to tap natural resource wealth to ease social ills in South America's poorest country.

 

A booming world economy and rapid development in China swelled copper prices 440 percent between May 2003 and May 2005, when they reached a record $4.16 a pound. Prices now hover around $3.70 a pound, 380 percent above May 2003, data from Chile's Copper Commission show.

 

Copper alone brought in $33.3 billion in goverment revenue last year from both state and private mines and accounted for 40 percent of Chile's exports.

 

The windfall profits have only increased the political demands for more social spending - even from Bachelet's allies.

 

Months of street protests, fueled by anger over deteriorating schools and a botched subway project in the capital of Santiago, have driven the popularity of Chile's first female president down from 65 percent to 40 percent and have shaken the center-left coalition that has ruled since the end of Gen. Augusto Pinochet's dictatorship in 1990.

 

The anger extends beyond the poor, into Chile's relatively large middle class.

 

"A sensation exists that there is lots of money, and people feel that money is not reaching them," said Bachelet, acknowledging the pressure.

 

There is indeed a lot of money.

 

The government saved $11 billion in the first six months of this year, through strict fiscal discipline and surging income and tax revenue from state-owned and private copper mines.

 

With interest and continued copper profits, economists estimate the savings could reach more than $20 billion by year's end, about 13 percent of Chile's $155 billion gross domestic product.

 

In GDP terms, that's the equivalent of the United States socking away $1.8 trillion. In other words, for the U.S. to match Chile's discipline, it would have to save an amount equivalent to its entire federal budget of the year 2000 - in one year.

 

The U.S. hasn't run a surplus since 2001 and has debts hovering around $9 trillion.

 

But free-market policies and fiscal discipline have been the rule in Chile since the final years of the 1973-90 dictatorship, when Pinochet froze public workers' salaries, reduced pensions and made almost no improvements to hospitals and schools. In contrast, the socialist presidents who followed consistently raised government spending, even as they held onto surpluses.

 

Under democracy, Chile has reduced poverty, which it defines as an urban income of less than $94.70 a month per person, from 44 percent in 1999 to 13 percent last month, government data show. That compares with an average 40 percent poverty rate in the region - and 60 percent poverty in Bolivia - in 2005, according to figures from the U.N. Economic Commission for Latin America and the Bolivian government.

 

But Chile's gap between rich and poor remains wide, and only one-third of Chileans polled in July by the respected Latinobarometro think tank shared the government's tight-fisted stance on savings.

 

"People are protesting in the streets because they know there is a big cake and they want their slice of that cake," said sociologist Marta Lagos, who runs Latinobarometro.

 

Bachelet, a Socialist, has responded to calls for loosening up government purse strings with a 2008 budget plan that hikes social spending by 11.4 percent, including increases for education, health and housing.

 

The government's self-imposed obligation to maintain a 1 percent budget surplus is being reduced to 0.5 percent, freeing hundreds of millions of dollars for crowd pleasing projects, including $7 million for stadiums and soccer fields in working-class areas and $140 million to fix Santiago's flawed public transportation system and avoid rate increases.

 

While negotiations continue over how just how the transportation money will be spent, Congress is expected to approve Bachelet's budget by Nov. 30.

 

For now, the public anger has trumped warnings by Chilean economists, who credit the surplus cash for buffering Chile from international financial turmoil stemming from the U.S. mortgage morass and other global troubles.

 

They also note that money will be needed over the long term to fund Bachelet's plans for social security reform, including weekly pensions of about $130 to nearly 500,000 Chileans who now lack retirement income.

 

And since Chile's economy and government revenues are more dependent on commodity income than ever, the savings will be needed when commodity prices falter.

 

"It's the right thing to do, to accumulate resources now for future obligations," said University of Santiago economist Guillermo Patillo. "Economies work in cycles and at some point income will drop, but obligations will not."

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