The copper sector, fiscal rules, and stabilization funds in Chile : scope and limits

Historically, Chile has been an economy dominated by mineral and agro-industrial products and subject to frequent external shocks particularly in copper prices. Since the 1980s, the authorities have developed various mechanisms to cope with these shocks and dampen their effects on the domestic business cycle. These mechanisms include a fiscal rule, an economic and social stabilization fund, a pension reserve fund, and a (informal) 'defence fund'. The first two sovereign wealth funds are regulated by a Fiscal Responsibility Law and complemented by a flexible exchange rate regime and an autonomous Central Bank. This paper recognizes that this macro framework has been associated (causality is another matter) with reasonably good macro outcomes. However, the paper highlights some trade-offs and questions not always recognized in evaluations of the Chilean case and cautions against a blind endorsement of macro rules as the cornerstone for good macro management. In general, this framework entails more discretion than often portrayed and includes: (i) frequent revisions in the methodology that affects the fiscal rule and the level of the structural balance by the authorities, thereby reducing its anchoring role on expectations and policy predictability; (ii) SWFs tend to have clear rules for accumulating resources at good times but no rules for using them at bad times; and (iii) a possible bias to over-accumulation of resources in SWFs without paying attention to the opportunity cost of over-investing in stabilization funds at the cost of less resources being available for funding egalitarian social policy in a high-inequality country.