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Fireside chat with Professor Joseph E. Stiglitz, Nobel Laureate in Economic Sciences, and Felipe Larrain, Minister of Finance of the Government of Chile, on challenges of globalization for emerging economies. More photos from the event.
By Samantha Marshall
The U.S. may arguably be the world’s foremost superpower. But when it comes to facing global realities like climate change, multi-lateral trade, aging populations and the growing wealth gap, some smaller countries are leading the way in terms of more progressive thinking and innovative solutions. And one such example would be Chile.
That was one of many takeaways during a sweeping discussion this past spring between Nobel Prize-winning economist Joseph Stiglitz and Felipe Larrain, Minister of Finance of the Government of Chile -- a prominent economist in his own right. Professor Stiglitz, former Chief Economist of the World Bank, was moderating the conversation coordinated by the Sanford C. Bernstein & Co. Center for Leadership and Ethics, The Jerome Chazen Institute for Global Business, Columbia Global Center: Santiago, and InBest Chile, a nonprofit dedicated to the development of Chilean capital markets.
“You’re lucky to have such a distinguished economist as your finance minister,” Professor Stiglitz quipped to the many Chilean delegates who filled the lecture hall alongside CBS students. “Some countries aren’t so fortunate, and they are suffering now as a result.”
Chile has recently found itself at the center of several high-level global conversations, including the recent meeting in Washington, D.C. with the World Bank, the International Monetary Fund and the G20. Together with Finland, Chile (which is not a member of the G20) has been leading the Coalition of Finance Ministers for Climate Action, to drive stronger collective commitment to act on climate change and its impact. The largest of its kind, the coalition endorsed what’s known as the “Helsinki Principles” -- so-called because they were conceived at a meeting led by Finland and Chile in Helsinki in February. These principles are designed to support the finance ministers as they share best practices and experiences on macro, fiscal, and public financial management policies for low-carbon and climate-resilient growth.
“The environmental problem in the world is too big to just be left to environment ministers,” said Larrain. “We need to come in, and we need to take action.”
Those actions start with the hosting of the finance ministers in Santiago, Chile at an APEC summit towards the end of this year, as well as the COP 25 – the largest annual environmental gathering in the world – which Larrain hopes will lead to the signing of the “Santiago Action Plan.” He warned that overreach might scare off some fossil-fuel dependent countries (there are more than $500 billion in fossil fuel subsidies globally, and Ecuador spends more on this than healthcare). But “doing something” can include cleaning up energy metrics, sharing best practices for climate budgeting, strategies for green investment and procurement, introducing pollution and environmental damage taxes, and the gradual phasing out of fossil fuel subsidies. These finance leaders will also be encouraged to factor climate risks and vulnerabilities into members’ economic planning.
Another step, suggested Prof. Stiglitz, may include regulating banks and firms on their “carbon disclosure” – along the lines of an initiative led partly by former New York City Mayor Michael Bloomberg.
“That is, you have a big portfolio of dirty carbon coal and you are at risk when the world recognizes the danger of carbon,” explained Prof. Stiglitz. “The value of coal will go down to zero, and your company will be worthless.”
Alternative investments can include renewables. Chile, for example, has benefited from the almost 50 percent reduction in production costs for solar panels, which has allowed it to meet its 2025 goal of sourcing 20 percent of its energy from renewable sources already.
Chile is also in the planning stages of issuing a green sovereign bond in the second half of this year to help meet its climate targets. This is historic as it would be the first Latin American country to do so.
“And we are now planning for a completely carbon-free generation of electricity in Chile,” said Larrain, noting that the Atacama desert in the north gives his country a distinct advantage in producing solar energy, which has already been connected to a single grid to benefit the whole of the country.
Investment from China, one of the world leaders in renewable energy, has also helped expand Chile’s production of solar and wind energy.
In fact, China is the leading trade partner for much of the southern part of South America, noted Larrain, which is one of many reasons why smaller and developing economies like Chile are nervous about the untold global reverberations of a trade war between the U.S. and China.
“One of the worst things that can happen to the developing world is a trade war, because we need market access to developed nations,” said Larrain, whose country has trade agreements with 64 countries, the most extensive web of free trade agreements in the world. “In a trade war, no one wins.”
Chile’s own economy has seen solid improvements, including 4% GDP growth in 2018, up from just 1.3% in 2017, and a reduction of the fiscal deficit from 2.8 of GDP to 1.7% of GDP.
“That’s about $3.4 billion dollars in Chile, a lot of money for us.”
The country has been raising revenues through taxes and focusing on developing itself into a regional financial center, looking to other successful smaller economies such as Singapore, Hong Kong, and Luxembourg for guidance. This will create more jobs in the local economy and will help the Chilean government achieve its goal of providing financial education and inclusion to the country’s poorest and most vulnerable citizens through the ministry and state bank, along with a digital technology training program with job guarantees in the private sector.
But a projected slow down in the world’s economy, along with uncertainty over tariffs, are the kinds of challenges that buffet smaller markets like Chile, no matter how many smart moves they make internally. The Trump administration’s decision to walk away from many international agreements, its insistence on special treatment, and the apparent dismantling of the framework for dispute resolution through the WTO, are threatening the most-favored international principles that have worked for decades, noted Prof. Stiglitz, adding that these factors, combined with U.S. fiscal policy contributing to a projected $1 trillion deficit in 2019, is creating “investment uncertainty which you feel all over the world.”
On that note, Prof. Stiglitz could not resist a final dig that Larrain, bound by politics and international diplomacy, tried his best to avoid.
“Now this is where the real danger comes,” said the Nobel Laureate. “From having a president, an Administration, that does not understand economics.”