MercoPress. South Atlantic News Agency

Chile's dilemma: what to do with so much money

With copper prices soaring and no limit in sight Chile faces an ironic situation since governments traditionally and historically are struggling to make ends meet.

With an average copper price of 2.64 US dollars per pound in 2006, Chilean officials forecast the Treasury will be receiving this year, 11 billion US dollars from the red metal, up 69% from 2005.

This in practical terms means Chile's budget will have this year a structural surplus equivalent to 8 billion US dollars, even possibly 9 billion, 6% of GDP. Last year the surplus was 5.4 billion US dollars, 4.5% of GDP.

So the big question is how to make the most of the exceptional prices of copper and turn the benefits into sustainable investments.

However there are come back draws to take into account: the Chilean currency will continue to appreciate having a negative impact for exporters and the temptation to believe that the additional income can be sustainable in the long term with all its inflationary implications.

Chilean economists argue that the first golden rule to be respected is the 1% GDP structural surplus, (actually a bill) which is the backbone of the country's long term finances. This means additional expenditure must be financed with structural revenue, and additional revenue on structural expenditure, which depends basically on the long term sustainable price of copper: 99 US cents a pound.

The discussion must then be centered in how to "neutralize" the surplus revenue.

One proposal is follow on the famous oil rich Norwegian experience. A special oil fund was created with Norway's savings and is invested mainly overseas so as not to impact the domestic economy.

Another is to partially cancel for three years the "structural surplus" concept or accept a lesser than 1% surplus which would enable to spend some of the additional funds.

An even more pragmatic option is to increase the long term price for copper on which the structural budget is built upon, for example taking the 99 US cents to 120 cents per pound.

This would immediately give the Chilean government an additional 1.2 billion US dollars to spend in 2007.

How to invest the additional income? Education and scientific research where apparently Chile is lagging strongly, is one of the proposals and helping to eliminate much of the immediate domestic impact in the economy by making it an "overseas" educational trust.

Another is to invest the money in a special fund to help the Chilean real economy recover the competitiveness lost to an ever rising Chilean currency (and falling value of the US dollar) as the country is "flooded" with US dollars.

"The government should launch initiatives to improve competitiveness by reinforcing education and training programs, increasing access to digital technology and fostering technological innovation", says economist Hernan Cheyre.

This effort should be complemented with lower taxes for farming, industry and fuel.

Other initiatives for the additional funds include improving Chile's international country image in the long term and a greater effort in monitoring and improving environmental conditions, particularly in metropolitan Santiago.