Question

The twelfth paragraph states that the Chilean government’s "fiscal restraint" in the face of strong capital inflows during the 1990s left the government with "enough money...to cushion the economic downturn when foreign capital eventually turned tail in 1998." Explain.

https://www.economist.com/node/10286077

Answer 1

The Chilean government reduced government spending in the face of huge capital inflows coming to the country in the form of foreign investments. It reduced the inflationary pressure in the economy while the economy grew in different aspects. It means that the economic growth took place with price stability due to the government austerity measures. Besides, the government took the initiative to make the investors to put some money in the form of long term investment in the account that will be free from interest. Further, the strategic attention to control the ugly spending by the household also helped the government to control demand pull inflation. It means that all money could not go away quickly from the country and there was a building of a good forex reserve, contributed by the reduced government spending as well as deposition of the foreign funds in interest free accounts. These forex reserves and other funds to the government, helped the economy to steady itself when the crisis of 1998 took place. A good size of forex gave a cushion to the economy of Chile to absorb the shock and take prudent actions to resolve the crisis in time.