Wednesday, October 10, 2007

Andres Velasco Interview, from Monocle Magazine

Last fall Chilean Finance Minister Andres Velasco garnered attention for actions that sound paradoxical: he purposely slowed the economic growth of his country. It was a fiscal maneuver that embodied the long-term strategic vision that has been his hallmark, both as a professor at Harvard’s Kennedy School of Government, and at the Finance Ministry, where he’s served on and off since 1990.

Velasco was born in 1960, and left with his family in the mid-1970s, for Los Angeles. He later studied at Yale, and at Columbia for his PhD. Since then, he’s consulted for the IMF, the World Bank, and was Chile’s negotiator for the 1995 NAFTA treaty. In his spare time, he wrote a pair of best-selling novels that featured much football and some heartbreak. On a Sunday evening two weeks ago, Velasco and his wife, Consuela Saavedra, the young anchor for Chilean TV’s evening news, invited Monocle to their home. In a quiet neighborhood, the 1960s low-slung modern, built around a greeny courtyard, was furnished with Saarinen pieces, abstract painting, and an undue number of books for such a minimalist environment. Consuela bustled about, preparing for her first workday since maternity leave. For a moment the minister, wearing shorts and a t-shirt, was left holding the baby.

JSL: You were away from Chile for many years, but you returned to work on the campaign for the 1988 plebiscite.

AV: If there’s one day in my life where I thought the things one did could make a difference, it was that day, when the dictatorship conceded that they had lost the plebiscite, and would have to hold elections and leave power. I’d helped with some of the ads, mostly conducting background research, and on the day of the vote, I was assigned to be in charge of the team of poll-watchers for downtown Santiago.

JSL: Odd, the idea of a vote over the future of a dictatorship.

AV: Odder, for non-Chileans, that a dictatorship, when it loses a vote, decides to accept the result. The armed forces recognized that the cost of turning back would be too great. Another reason they accepted it was they knew that the opposition was conducting a parallel count. An ingenious sampling method was designed Edgardo Engel, and election results were reported to an undisclosed location. By 7 pm we had a preliminary count, well before the government.

JSL: And when you knew the results?

AV: At about midnight, a large group of us who’d been involved in the campaign—young student leaders, activists, etc.-- walked together peacefully down the main avenue across the city. By three in the morning it was joyous, particularly for the exiles who’d come home. We couldn't believe that without a single shot being fired, simply through the ballot box, the dictatorship had been defeated. That campaign was successful mostly because it had courage and wit and a lot of creativity.

JSL: What do you mean by creativity?

AV: A group of us came up with a concept for some ads that at the time was very controversial within the opposition. Our idea was not to confront the dictators, but rather to soothe people's fears, whether fears about retaliation, or fears that things would become unhinged. One powerful ad showed a demonstrator running away from a policeman during a street demonstration. The kid trips, and the policeman raises his club, and as he is about to strike him the video freezes, and a circle appears around the fallen demonstrator, then a voice-over says, “This Chilean wants no more violence.” You think that’s the end of the ad, but the interesting turn came next because then another circle appears around the policeman, and the voice-over adds: “This Chilean doesn't want any more violence either.” It made it seem that we were all on the same side. And it worked.

JSL: Could you speak about Pinochet’s legacy?

AV: Pinochet stopped being a factor in Chilean politics long before he died. Associations with the former dictator tend not to be a source of votes. Observers from abroad tended to overemphasize his continued presence, and the shadow of that legacy.

JSL: What do you make of Milton Freedman’s assertion that the effect of a free economy leads generally to the end of centralized control of society?

AV: Let me say first that under no circumstance were the dictatorship or violence necessary. As to your question--economic growth unleashes many forces, some of which make difficult the maintenance of an authoritarian regime, whether of the left or of the right. Marx himself said that capitalism is a revolutionary force. On that score, Marx, unlike on many others, was right.

JSL: You've been in government and academia for years. Are these roles complementary?

AV: Problems recur across time and geographic boundaries, so it helps to know how they’ve been handled. One way to think about Chile is the following: Small country. Very well-endowed with natural resources. Geographically removed from the largest world markets but with good human skills. In that sense, Chile looks somewhat like the Finland of thirty years ago. One should ask: how did Finland develop so quickly? We saw that Finland fostered interchange between business, particularly high tech-business, and academia. That would be one interesting way forward.

JSL: Can a country's natural resources be a curse?

AV: It’s a problem when your economy is held hostage to their price cycles.

JSL: Is this why you’ve adopted policies that sometimes slow economic growth?

AV: Taking account of the effects of commodity cycles has been a key to our policy. When this government came in, we gathered a committee of experts and asked them their best estimate for the long-term price of copper. The average opinion was $1.21 dollars per pound, while at the time the price was approaching $3.5 per pound. From that we constructed our budget, saying if that is long-term price of copper we should spend that and no more. The rest we would save for those years when the price of copper is below its long-term price. That meant that in the course of 2006 we ran a budget surplus. Recently, the price of copper has fallen, from a peak of almost four, to around two and a half dollars today. Traditionally, you would expect that as the price of copper goes down the Chilean economy would be in trouble, but we can look at the future without fear because we have managed to save a good deal of the 2006 windfall. This is a policy that breaks with two centuries of boom and bust cycles.

JSL: This is your so-called counter-cyclic fiscal policy?

AV: That's another way of phrasing it: when your income is high, you save. When your income is low, because the economy is low, because the price of copper is low, you spend more than you would otherwise to move against the cycle. This stabilizes economic activity and provides for an economy that grows more smoothly during economic fluctuations.

JSL: Why have you put the government savings abroad, in dollars, rather than pesos?

AV: These savings belong to all Chileans, and we want diversification to protect them. We tend to save abroad when the price of copper is high because those are times when the Chilean peso buys quite a few dollars. We bring those savings back to Chile at a time when the price of copper is low because then the US dollar would buy quite a few pesos. This also stabilizes our exchange rate and so safeguards our export potential.

JSL: Would Chile consider adopting the Euro as a reserve currency?

AV: The creation of these reserve funds dates back only to January first of this year, so this is a process that is just beginning. We're not limited to investing in dollars, and there is no one reserve currency.

JSL: Please tell me about Chile’s privatized pension scheme.

AV: Chile has long had a pension system where your employer directs ten percent of your paycheck toward your own individual retirement account. This system has worked well for people with regular jobs in the formal labor market, where deposits into your account are made regularly. A large portion of people over 65 are now well-protected for old age. However, the system leaves too many people outside. Also, fees are too high because competition among pension-fund administrators is too low. All this is under a wide-ranging review.

JSL: Would those concerns apply to a similar scheme the US is considering?

AV: Certainly, but the United States faces the issue of a pay-as-you-go system; namely, when demographics change, the number of people getting pensions goes up and the number of people financing those pensions goes down. Something has to be done. US experts disagree on how imminent a threat this is. Should the solution to the US pension problems have an element of private accounts in it? Why not?

JSL: Are free markets inherently destabilizing to developing countries?

AV: The problem with many of the free market reforms in emerging market countries was that they were sometimes not accompanied by fiscal policies that would be stabilizing, or there were instances of capital flows from abroad that were eventually reversed and so turned out to be destabilizing. One of the challenges in running an emerging market is to show that you can follow market-based policies, and at the same time foster a predictable economic environment. That is precisely why policies such as budget rules, the counter-cyclical fiscal strategy, and surplus savings abroad are so important.

JSL: How does one make trade fair?

AV: Chile sees trade as an opportunity not as a threat. We were, under Pinochet, rather closed to world trade. Today, we are one of the most open economies in the world. This shift in policies has meant that our exports have grown tremendously, creating economic growth and jobs. When I first joined government in 1990, I wrote a speech in which I included the prediction that Chilean exports would someday reach fifteen billion dollars. I was told to go back and revise that figure because it was so large as to be incredible. Some fifteen years later Chilean exports have reached sixty billion dollars.

JSL: There’s no controversy in passing free-trade legislation?

AV: It passes unanimously, because it’s paid off.

JSL: Is there a dream policy you’ve wanted to implement?

AV: Not so much a policy, but many of my generation have a vision of what kind of a country we should build. The most important thing was that democracy be reinstated. Since then, the country has become more prosperous, with more mobility and opportunity than ever. That said, in Chile, who your family is still matters too much. The neighborhood in which you grew up still matters too much. The name of the school to which you went still matters too much. Chile should be a place where effort is rewarded, and everyone has a fair chance.

JSL: You're married to a woman powerful in her own right. How do you find that?

AV: When we walk down the street, many more people recognize her than me.

JSL: How did you and Consuela meet?

AV: I was a guest on her television show. She asked me about the economy, inflation and so forth…

JSL: You talked to her about economics… and that worked?

AV: Perhaps not. I didn’t see for a very long time, except on TV.

JSL: Are you working on another novel?

AV: A novelist friend of mine gave me a little moleskine notebook and I’ve recently taken some notes.

JSL: Do you still get to follow football?

AV: I was once a devoted fan of the University of Chile team. My team has not been doing very well recently, and the demands of the job have limited my visits to the stadium.

JSL: But at least Chile’s wine industry is doing well.

AV: Foreign sales in particular have flourished. It’s a good example of how foreign trade, and investment of foreign capital and expertise, can work for the benefit of a local industry.

JSL: We mentioned that you were away from your country for many years…

AV: I was away from the country for many years, because one Friday… August 6, 1976… as I was coming out of a football game at school, someone told me my father had been kidnapped. Chile, then, was a dangerous place. My father was a prominent lawyer and academic, and head of the Social Democratic Party. After the coup, he became very active in the defense of people who’d been arrested. In June of 1976, some foreign delegations were convening in Chile, and he arranged to have a say among them. He and some other lawyers provided the visiting foreign ministers with evidence of killings and torture. This, as you can imagine, caused quite an uproar. Soon after the foreign ministers left, my father was arrested, and taken illegally to Argentina. Argentina, then, under that regime, was not a good place for someone who’d been arrested by the Pinochet government. Somehow, he was smuggled into the Venezuelan embassy, left Argentina on a Venezuelan plane, and eventually made his way to Los Angeles.

JSL: What an awful time. That feels far away.

AV: This is a country with a deeply-rooted tradition of electoral politics. When I was a little boy, on election day, my father would put me on his shoulders and take me to vote. That was part of life here. You go, and even if it's hot, or even if it's cold, you stand in line and you vote. There's been concern recently about why voting has gone down from 95 to more recently 80-something vote, which is still very high. Election day is always a Sunday. The country stops and that’s all you talk about. They’re typically in December, which is early summer here, so the weather's nice, just like today. Some people put on a barbecue, and everyone pulls out their TV, and while you grill your fish, you watch the election results as if it were a sporting event. My father died in 2001, and one of the last things we did together was, when the election came, he said, “Take me to vote.” I wheeled him out, pushed his wheelchair to the school where voting always takes place, and stood outside the booth while he cast his ballot. That's the essence of this country. And that's why it was such a painful shock, at a time when we were the only country in Latin America with a democracy, a country with a democratic tradition stretching back almost two hundred years, to have that taken away… taken away for seventeen years. If you're Chilean that's the one thing that you're allowed to get teary-eyed about.

Interview by James Scott Linville, January 2007. An abbreviated version of this appeared in the debut issue of Monocle magazine.

1 comment:

mriesco said...

Minister Velasco declares that the privatized pension system "has worked well for people with regular jobs in the formal labor market." He adds: "A large portion of people over 65 are now well-protected for old age"

That seems quite an overstatement.
1) In Chile the pension statistics show that just about everybody have jobs in the formal labor market... sometimes. Trouble is, only 11% of the workforce holds them regulerly, 12 months a year in the average. meanwhile, over half work less than 4 months a year in the formal market, over one third less than two monts a year, and fully one fifth less than one month a year, on the average.
2) Furthermore, even in the case of those who have regular formal jobs, the pensions delivered by the private system are far less than those still offered by the public pay-as-you-go system, which even now pays pensions to over 90% of those over 70 years old.
3) In the case of women this is even worse. Take the real case of a medical doctor who has contributed every single months since 1981 to the private system and for the top salary (about US$2.000 a month. Her pension is less than US$800, wheras in the public system she would have received the top pension, presently at US$1,600. ¡twice as much!
it is not only that the privatized systems leaves over two thirds out of it, as the current reform has assumed. it is also quite orse then the oay as you go system for the rest.
it has been gorgeous though for the AFP and insurance industry, which has pocketed one out of every three pesos contribute since 1981. Also for the 12 large financial groups who presently hold over half of the pension fund in the form of equity or debt.
Manuel Riesco
Vice president