John S. Wolfe

These are some observations gleaned from the recent international practicum of Executive MBA students at Arizona State University in Chile and Peru.

It’s kind of unsettling to get lessons in federal fiscal prudence from individuals from Chile.

The long and thin South American country along the Pacific Ocean – picture Texas squeezed into a 100-mile-wide strip from Los Angeles to New York — has been ruled by the center-left since 1990. Prior to that, a military dictatorship led by Gen. Augusto Pinochet had run things since the 1973 coup that featured a bombing of the presidential palace in downtown Santiago and the suicide of Marxist President Salvador Allende.

Over the last decade Chile – a country of 17 million – has seen steady growth, for the most part spurred by exports of natural resources like copper and timber. Yet, knowing its recent path, it kept federal spending to a minimum and avoided social re-engineering to “make things fair.”

Dr. Manuel Sanchez Masferrar, a Stanford-educated economist at the Universidad del Desarrollo in Santiago, explained that Chile had to address the issues every country around the world faced when the economic turmoil began in 2008. As major banks failed, the country saw trade fall and commodity prices drop. Fewer export dollars came in. Rather than jump in with deficit spending to maintain the status quo, Chile’s government lowered interest rates, cut taxes and provided a stimulus for small businesses and housing. It had also set aside some money when the copper price went over $3.

Now, Chile isn’t the United States. It has unemployment among the young and old, and, the professor noted, probably spends less than it should on health care, education and pensions. But the government sees its role as fostering commerce through monetary policy and maintaining low inflation, not attempting to cure every social ill.

Another professor, Eugenio Guzman of the university’s School of Government, said Chileans have come to see government as a tool for society, not the engine of commerce. Like some colleagues who have joined center-right President-elect Sebastián Piñera’s administration, he believes government should liberalize business, expand labor flexibility and encourage investment. “Leave people alone,” he said.

The incredible growth of the U.S. deficit – estimated at $1.35 trillion for 2010 – has spooked countries that have seen problems on a much lower scale. The previous high deficits for the United States were $455 billion in 2008 and $413 billion in 2004.

Government should avoid dabbling in income redistribution, he said. Instead, if it wants to help the poor, it should offer services. He notes that the “poor” in Chile don’t resemble their counterparts from 1970. Many are obese and have personal items like shoes and clothes.

Carlos Capurra, a Chilean who works in the mining division of the U.S. Embassy in Santiago, said the 500% inflation at the time of 1973 coup taught his countrymen that there are some things government should not oversee. He related the story waiting a year to get a car under the Marxists, seeing it break down after a year, and having no parts available to repair it. High tariffs prevented foreign automakers from selling vehicles in the country.

After liberalizing higher education, the number of universities grew from six to almost 70. More individuals are pursuing professions, which is expanding the middle class. The country has an A+ credit rating.

Chile still has challenges, he said. There is underemployment, low GDP per capita, low productivity, and higher labor costs. The government is focused creating consortiums to handle projects like tunnels and allowing private organizations to manage entities like ports and hospitals.

Robert Moreno, investors and strategy relationship manager for Banco Santander, a leading Latin American bank, said financial institutions there also took the precaution of maintaining higher capital limits than their U.S. counterparts. It required discipline to manage risk, maintain a solid balance sheet, and control costs, he said.