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Velasco: Chile to stay the course

When Michelle Bachelet, 55, takes office on March 11 as Chile's first female president, she will be advised by a cabinet staffed with an equal number of men and women -- a first in Latin America.

When Michelle Bachelet, 55, takes office on March 11 as Chile's first female president, she will be advised by a cabinet staffed with an equal number of men and women -- a first in Latin America. And her four-year presidency will be the fourth consecutive term for the Concertación Democrática coalition of Socialists and Christian Democrats, a rare demonstration of popularity -- and continuity -- by a Latin American leftist political force. But although there will be a new feel to the Bachelet administration, the thrust of its economic policies will not change, says Andrés Velasco, 45, the Harvard professor who will serve as Finance minister.

"She is not going to reinvent the wheel," Velasco told Institutional Investor in an interview shortly before his appointment to Bachelet's cabinet. "There will be a mixture of targeted social policies and very prudent macroeconomic policies."

A key member of Bachelet's brain trust throughout her campaign, Velasco is a political independent and the most market-friendly member of the cabinet. The Finance minister, who holds a Ph.D. in economics from Columbia University and has researched financial crises in emerging markets, was most recently a professor of international finance and development at Harvard's Kennedy School of Government, where he has worked for the past five years. Before Harvard, Velasco taught for ten years at New York University. He is also the founder of Expansiva, an online think tank that is pro-market but also supports progressive social policies.

According to Velasco, Chile will increase its social spending by $6 billion over the next four years. "That $6 billion is fully financed by additional revenues," he adds, pointing to a projected growth rate of 5.5 percent, 6 percent annual increases in tax revenues and an estimated long-term price on copper, Chile's principal export, of $1 per pound over the coming four-year term. The new spending, he says, will be used to expand and improve education and health services for children, the poor and the elderly. Velasco says that the government will not implement a legislated 1-percentage-point decline in the value-added tax, which will remain at 19 percent.

The new administration inherits a remarkably benign economic environment, a legacy of Bachelet's predecessor, the highly popular Ricardo Lagos, who served two terms during favorable international market conditions. Growth in Chile averaged 6 percent over the past decade; the fiscal surplus meets the legislated target of 1 percent of GDP; and inflation is within the targeted 3 percent range. The country's credit rating is high, interest rates are at historic low levels, and investment is at a record 30 percent of GDP. Exports and trade relations should get a boost from a major free-trade agreement signed with China in November.

With Velasco at the helm of Finance, Chile is expected to maintain its positive momentum. But an enormous challenge looms: "Chile has a growing economy," says Velasco, "and growing energy needs." Chile is dependent on oil and gas imports and has been hard-pressed to secure either. While seeking to improve relations with its prickly, gas-rich neighbor Bolivia, the country hopes to benefit from a planned but languishing South American energy ring -- a pipeline that would deliver gas from Peru to Argentina, Brazil, Chile and Paraguay.

Meanwhile, Velasco plans to reform Chile's inadequate pension system. "Better coverage is urgently needed," he explains, especially for women and the self-employed, who contribute too little or too infrequently. The goal, he adds, "is not to replace the system. We are going to improve the system."