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A while ago we maintained "No one likes economists" but we skipped the topic after two commentaries without concluding it. Today let us fulfill this duty. Let us begin with Andres Velasco; a successful economists highly popular in his hometown. But do not worry, if it were last year; he would have pushed for the top in the list of most hated economists. Then, what does this tell? This at most tells that he talks a lot on issues people do not know much about. This is the case not only in Chile, but also in Turkey.
This week Andres Velasco was the centerfold guest of Wall Street Journal. Nowadays everyone likes him. And nowadays this is a golden blessing for an economist. Moody's has recently raised the credit rating of Chile. While all economies were heading down and everyone was wondering when the rating of the USA would be revised downwards, Moody's stated that Chile government debt securities (GDSs) could be invested in and raised Chile's rating. And this coincided with the period where the socialist government of Chile announced a series of increases in public expenditure and a four billion USD economic package to stimulate domestic demand and preserve the production capacity of the country. That is not a small matter; Chilean government recently decided to give 70 dollar "spending coupons" per capita (Yes, spending coupons we know; Chile is working on the importance of boosting domestic market). In the same period, Chilean Central Bank reduced interest rates a bit further. There exist real developments in Latin America. There are numerous signs of this. The world is no more the same.
Of course, these developments had a political outcome. Rate of support for President Michelle Bechelet, who took over the office in 2006, did not decrease but increased by 25 points since August 2008, the date of emergence of the crisis. Bechelet was elected as the first female president of Chile with 53.5 percent of the votes. Nowadays, rate of support for her moves around 67 percent. The rate had hit 40 percent once. She attained this success thanks to Andres Velasco. It is so that Senator Eduardo Frei, who criticized Volascı's policies, will probably become Chile's President next year as the candidate of united left wing. Such is life; people talk.
Anres Velasco is currently the Finance Minister of Chile. Economists know him from the Harvard Kennedy School of Government where he works with another estimable economist of this region, Dani Rodrik. And from METU Economics Congress that lives in our memories as a great economics feast. Velasco was born in Santiago in 1960. After the Allende coup, when he was 16 he and his family had to leave the country. In August 1976, when he returned home from a football match at school, he learned that his father, who was a lawyer and anti-coupist, was exiled. Then, he learned that his father took refuge in Venezuelan embassy and left the country with a Venezuelan airplane. Then, the family came together in the USA. Velasco told this in 2007 in an interview by Monocle magazine. He says that he was never detached from his hometown. In the meanwhile, he studied in Yale and Columbia universities. For the first time in 1988 he returned to Chile as an observer for the referendum "should the junta regime end?" While pro-coups were holding a referendum, he in the opposition side established a system to count the votes. Moreover, he always participated in the economic policy discussions and wrote commentaries in newspapers. At the Monocle interview, he was wearing shorts and t-shirts and holding his newborn kid in his arms.
Velasco, as a successful macroeconomist, has in fact fulfilled his part in the role. When things were on track in 2006 and when price of copper, which is a significant foreign exchange generator for the country, was high he did not allow the government to spend the inflowing money. He made the government establish a fund for rainy days. Every year since 2006, Chilean public budget accumulated surpluses. Value of the funds accumulated so far equals 30 percent of the national income. Now, the Chilean government distributes the public what already is owned by the public. Why? Because that is what the current milieu requires. Domestic demand is of importance anywhere and anytime. It is necessary to reduce social risks. Those who were angry at Valesco in the past as he did not allow the copper money to be spent are now grateful to him. A successful macroeconomist instantly recognizes and understands the hardworking ant and lazy grasshopper story of La Fontaine. If things are on track, not all but a part of resources at hand must be spent. Current income considered to exceed the average income must be saved. In fact, this is exactly what Valesco does. This is how he tells the story: "I gathered the most successful experts. I asked their estimate for the long term price of copper. They said 1.21 dollars per pound. At that time, the price was approaching 3.5 dollars per pound. We made a regulation that transfers the amount beyond 1.21 dollars to a fund. I did not allow them spend the amount beyond 1.21 dollars."
This is what happened in Chile. But, what happened in Turkey? We could have accumulated resources for rainy days since 2006, when the Turkish economy became to demonstrate a slowdown tendency. However, we did not do so. Primary budget surplus headed downward year by year. The figure below clearly shows this. This is so because in 2007, two elections were carried out. In 2008, we dealt with political uncertainty. In 2009, there were local elections though were as tense as general elections.
Then the crisis emerged; however, the public budget had no resources left from those old prosperous days to relieve the public sector today. Now, the only option to tackle the crisis is to use our future income. And the medium term fiscal perspective and fiscal rule that will ensure this is not yet put forth in a credible manner.
Submitted to the information of grasshoppers
Figure: Ratio of Primary Surplus to National Income in Turkey (%)(Program defined consolidated public sector primary balance),
This commentary was published in Referans daily on 30.05.2009