Andrés Velasco

Andrés Velasco, Chile's finance minister, believes the country has coped better with the credit crunch than practically all other countries in Latin America because of its prudent fiscal and monetary policies.

Chile has been a democracy since 1990, when the president, Augusto Pinochet, decided to voluntarily relinquish office after a plebiscite in 1988 in which Chileans voted for the introduction of democratic rule. Patricio Aylwin then assumed the position in 1990 in a period known as 'the transition'. However, Mr Pinochet had embraced free-market reform in the 1970s and 1980s and set up the much-vaunted private pensions system, which became a model for other countries around the world that wanted to create a sound retirement system and stimulate their capital markets.

"There is a consensus in Chile across the political spectrum about the important role of free markets," says Mr Velasco, who studied philosophy and economics at Yale University, undertook postgraduate studies at Harvard University, and took his PhD in economics from Columbia University. "Perhaps no such consensus exists anywhere else in Latin America," he adds. Mr Velasco has had a strong grounding in politics: he was educated in the US after his father was exiled by Mr Pinochet in 1976 for criticising the military dictatorship.

Presidential elections

Chile will have its first round of presidential elections on December 13 and, in the event that no candidate wins an absolute majority of votes, a second round will take place on January 13.

The main favourites are: Sebastian Piñera, a billionaire businessman who represents the right-wing coalition Renovación Nacional; Eduardo Frei Ruiz-Tagle, who was president between 1994 and 2000 and is the candidate for the centre-left coalition Concertación de Partidos por la Democracia; and Marco Enríquez-Ominami, a 36-year-old film-maker who is running as an independent socialist candidate. Although the three candidates have very different personal styles and some major policy divergences, all of them recognise that markets must continue to play an important role in Chile's economy.

In Santiago, the main business leaders and economists - including Mr Velasco - are often referred to as Chicago boys, an allusion to the fact that a large number of them were educated in the US city's economically liberal university. Chile has one of the most open economies in the world and, by Latin American standards, deep and sophisticated capital markets. It even has a system of education vouchers that can be used to top up children's state education, as well as a law that enshrines fiscal responsibility.

Today, one of the main criticisms of Chile, which has a total gross domestic product (GDP) of $136bn, is that the country may have one of the best Latin American economies but that there is limited socially mobility. "It is true that many members of the political and economic elite send their children to private schools," says Mr Velasco. "However, President Bachelet went to a state school, as did my mother. There is social mobility in Chile but of course it could be better."

One of the biggest problems in the country is unemployment: Chile has a population of 17 million but more than 1 million are unemployed or under-employed. Chile also has one of the worst income distributions in Latin America, along with Mexico. It has an important private banking market, but the outer neighbourhoods of Santiago, a city of 5 million people, are very poor. The indigenous population, called 'the Mapuches', feel alienated and do not fully share in the country's current economic success.

This situation creates a great deal of social tension, which is especially noticeable on September 11, the anniversary of the military coup of 1973. Some analysts argue that Chile's labour markets have gradually become more rigid, and although this makes it tougher for businesses to fire people, it also makes it harder for small- to medium-sized employers to recruit new staff.

"Public education and job creation are certainly priorities for the government," says Mr Velasco, who has been Chile's finance minster since March 2006, and is on leave from his post as the Sumitomo-FASID professor of development and international finance at Harvard University's John F Kennedy School of Government. "We are well aware that these issues must receive our full attention," he adds. Mr Velasco is a strong believer in effort being rewarded and everyone being given a fair chance (which is not always easy in Chile where class and connections are very important).

Reversal of fortune

President Michelle Bachelet has been in office since March 2006. Until this year, many analysts did not regard her presidency as a great success, as Chile's average rate of economic growth has been much slower since 2000 than it was in the decade after the country embarked on democracy (in Chile, the presidential term is four years and the president is unable to run again consecutively).

However, the credit crunch has revealed the underlying responsibility of the country's political and economic managers: during a three-year copper bonanza, Mr Velasco and Jose De Gregorio, the Chilean central bank president, put to one side $48.6bn in case of a rainy day. Codelco, the world's most important copper producer, remains a state-owned company and its profits have in effect been used to create a sovereign wealth fund that is a powerful counter-cyclical instrument. Now that the rainy day has arrived, the government has used this money for subsidies and cash handouts to poor families and for tax cuts.

Consequently, this year President Bachelet's popularity has recovered, as many people recognise the good sense in having created this fund and Mr Velasco has become one of her most popular ministers - a far cry from November of last year when striking public service workers burned effigies of him in the streets.

In September, Chile's central bank revised down the real GDP estimate for 2009, to between -1.5% and -2% from its May forecast of between -0.75% and 0.22%.

"We are confident that the economy reached an inflexion point during the second quarter of this year," says Mr Velasco. "We believe we will see activity gradually get firmer throughout the rest of this year and well into the next one. On the banking side, all of the banks have a strong prudential position and have managed to cope with the credit crunch well.

"Chile has had sensible economic and political policies for a long time and that is now paying off, as many of our Latin American peers recognise," says Mr Velasco.

He believes it is essential for a small country such as Chile, that is so tied to one product, copper, to take full account of commodity cycles, otherwise the country would become too in hock to other states' economic vicissitudes. He adds that the policy the country has been following for the past few years breaks with two centuries' of boom and bust.

Mr Velasco believes Chile has an assured future. It will continue growing in a stable way and gradually see a further deepening of its financial markets, which are already probably the most sophisticated in the continent. One of the wealthiest neighbourhoods of Santiago, El Golf, is currently awash with cranes, as property developers attempt to out-do one another with ever-more glamorous towers and hotels. This is a testament to the economic vitality that the country enjoys.

Mr Velasco firmly believes it is important that Chile embraces Asia and plays a full role in international organisations, such as Asia-Pacific Economic Co-operation (APEC).

He is also keen on the country deepening its links with other Latin American states. "Brazil is a great country," he says. "It is essential that Chile has strong links with it and other countries in the region."

Mr Velasco likes to compare Chile with Finland 30 years ago. He says that Finland grew so fast by encouraging interchange between business, particularly high-tech business, and academia. He believes that could be one of the ways forward for Chile - the country is highly dependent on copper exports but much of the value-added refining of the metal does not even take place in Chile.

Chile has come a long way economically since it became a democracy and Mr Velasco is a member of an important group of Chilean politicians who see that social progress is also vital for the country to progress.