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Transcript of Chile
Can create corruption and political instability
- Venezuela, Holland, Middle East
States have created stabilization funds
- Government creates a budget
- Any excess is transferred to the wealth fund
and invested abroad
Is valued at more than 10 billion dollars
Serves to smooth out business cycles
Helped Chile maintain investmetment- grade sovereign bonds
Tremendous impact on the recovery of recent earthquake
"Spend on what's permenent and save that which is transitory"
- Andres Velasco, Chilean Fance Minister In the 1960's the Netherlands experienced a vast increase in its wealth due to the discovery of large natural gas deposits in the North Sea
This development had huge repercussions
-The term "Dutch Disease" originated from that event
-Results when a country experiences larger-than-normal influx of foreign currency
Cause: Traditional export sector gets crowded out by Booming export sector and the Non-traditional export sector
With an increase of foreign exchange, the booming sector wage increases. Wages are spent on non-tradable goods and traditional exports are crowed out
Highlevels of exportation
Dependable on trade
Floating Exchange Rate- inflation Economy may grow 4.25-5.25%
CPI rise 3.7%
Government spent more than 900m We expect GDP to rise under the assumption of the Solow model which states that growth is due to capital accumulation. If this is correct than the fact that Chile will take billions from its sovereign wealth fund to rebuild its infrastructure should lead to more jobs and at the least a short-term boost in GDP, and possibly long term implications.
Chile's GDP had turned positive in the fourth quarter of 2009 after three consecutive downturns, and was expected before the quake to have an increase of 5% for 2010. Although they do expect less now , they still expect growth and not a recession. A growth of around 4% is instead estimated, riding mainly on the new jobs and investments taking place due to the rebuild. The fact that previously the economy was strong even in the global financial crisis, and copper prices are 25% higher than the government had expected is only a boost to Chile's confidence.
As stated before, Chile is the worlds largest copper producer, accounting for about 1/3 of world output, and the main copper producing areas of the north were unscathed. Although natural disasters are not something countries wish for, in Chile's case their fiscal responsibility previously led them to be equiped to handle it without massive borrowing from other nations or devistations to their institutional well being. Cobb-Douglas fx "A crisis is a terriable thing to waste"