Question

Introduction This case highlights how capital controls work and further what their objectives are. It outlines the advantages and disadvantages of capital controls, especially controls on inflows of capital and whether these and other policies like bank regulation and fiscal policy spur or hinder economic growth. Activity Instructions Respond to the following: Why did Chile institute capital controls in 1991? What were the objectives of the encaje? How did the URR work? Did the controls meet their objectives? What was the role of other policies in Chile’s economic success in the 1990s? What were the arguments for and against getting rid of the controls in the context of the aftermath of the Asian and Russian financial crises? Discuss the importance of alternative policy options such as bank regulation and fiscal policy. Was Chile in danger of suffering a crisis such as that of 1982? When analyzing a case study, all the used references (including the Internet) should appear within the text [e.g. (John Doe, 2008)] and on the references page. You are expected to apply all applicable course concepts, as well as those specific to the chapter from which the case or paper topic is drawn. The analysis should also contain a summary of related current developments obtained through searches on the

Answer 1

Chile has been one of Latin America’s fastest-growing economies in recent decades thanks to a solid macroeconomic framework, which enabled the country to cushion the effects of a volatile international context and reduce the population living in poverty (on US$ 5.5 per day) from 30% in 2000 to 6.4% in 2017.

After growing at a rate of 4% in 2018, the GDP fell to 1.8% in the first half of 2019 due to a challenging external context, adverse climatic conditions and the delay in some Government reforms.

The current account deficit increased from 0.9% of GDP in the first semester of 2018 to 1.3% in the same period of 2019. The international reserves, however, remained stable since the current account deficit was financed by external debt (public and private) and, to a lesser extent by foreign investment.

The twelve-month rolling central government deficit remained at around 1.7% of GDP in the first half of 2019 as lower copper revenues were offset by the slowdown in current expenditures and the contraction of capital transfers.

However, given the recent slowdown, the authorities have changed the macroeconomic policy stance to foster growth throughout greater public investment and lower monetary policy interest rate.

The authorities are also seeking consensus on a reform agenda to tackle some medium-term challenges. The fiscal consolidation expected for the medium term will be crucial for stabilizing the debt and consolidating confidence. Government efforts to rationalize the tax system, facilitate employment mobility, reduce bureaucracy, improve the pension system, and strengthen the financial system will also be crucial to promote growth.

Encouraging innovation, improving the linkage between education and the labor market and promoting the participation of women in the labor market are also essential for improving long-term prospects. On the social front, enhancing the quality of health and education services and reducing constraints to access to well-targeted social policies will be key for reducing the remaining poverty and strengthening the middle class.