Piñera's First Months Bring Strong Economy, Shaky Polls

David Gacs
August 12, 2010

Sebastián Piñera has devoted his first months in office to rebuilding and economic management.

Almost six months have passed since an 8.8-magnitude earthquake struck Chile, wreacking havoc weeks before President-elect Sebastián Piñera began his term in office. The country’s first conservative leader in two decades hit the ground running, visiting affected areas and deploying emergency relief efforts. The earthquake put a dampener on Piñera’s ambitious economic campaign promises—damages to infrastructure and industrial output figured at $30 billion—leaving the incoming government with the task of covering the price tag. Nonetheless, Chile’s sound fiscal policies buoyed the economy post-earthquake and helped it retain its sound economic position. However, despite the country’s strong economic showing post disaster, Piñera’s approval ratings have slumped. This, together with as-yet unfulfilled campaign promises and burgeoning social disquiet, could begin to pose challenges for the new administration.

Piñera came in on a vote against what many perceived was a stale ruling party. Introducing a cabinet heavily drawn from the private and academic sectors, the Harvard graduate promised to refresh the previous government’s successful economic policies and create one million new jobs along the way. “Our target of growing at 6 percent a year will allow us to achieve development in eight years, before the end of this decade beating the level of per capita income of southern European countries,” said the newly-elected president during his first national address. These figures, considered ambitious in a normal economy, were rendered near-impossible after the February 27 earthquake.

The self-made billionaire’s management-oriented government has looked for ways to fund recovery efforts and foment growth without drawing too deeply into the country’s sovereign wealth fund, an off-shore stabilizer fed on copper profits that financed the previous government’s stimulus spending and insulates the country from external market turbulence. Proposals include a $1.5-billion bond issuance, a replacement sliding-scale fuel tax estimated to save Chile over $2 billion, sizable tax reforms, and a modernized and technologically advanced bureaucracy. Furthermore, the government is adding to Chile’s 25 trade agreements, the most recent signed with Kuwait, with three more pending—Malaysia, Nicaragua, and Vietnam.

The Piñera administration still faces notable challenges, causing his approval ratings to fall to 45 percent in spite of Chile’s strong economic showing. Poverty remains a stubborn problem. According to a study by the Chilean Ministry of Planning and Cooperation social inequity increased 1.5 percent through the last four years, with extreme poverty rising 0.5 percent over the last three years, putting 2.5 million Chileans under the poverty line. Chile’s Congress recently rejected a short-term attempt to increase mining taxes in exchange for extended fix-term tax rates for mining companies, leaving the government $1 billion in the lurch, and an appreciating currency has caught the Central Bank’s attention.

Nonetheless, the country has continued to perform well, weathering the U.S. and euro zone slumps and attracting the highest levels of foreign direct investment in Latin America. It also earned the rating as the region’s most efficient tax environment. Chile’s industrial output, which fell dramatically in March, has surpassed pre-earthquake levels, and the president announced a modest budget surplus for the year’s first two quarters. The International Monetary Fund also forecasts a 6 percent GDP growth rate in 2011. The administration has proven it can manage macroeconomic growth, however it remains to be seen whether these successes will be enough to convince the Chilean public.

Learn More:

• AS/COA Online Resource Guide to Chile’s earthquake.
• Piñera’s economic campaign promises.
• Chilean Ministry of Planning and Cooperation assessment of social inequity.
• Read an AS/COA analysis on the Chilean cabinet members.
• Financial Times’ blog Beyond Brics analysis on Chile’s macroeconomics and voting behavior.

Send questions and comments for the editor to: ascoa.online@as-coa.org.

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