Chile’s peso has been surging on a combination of factors, including rising copper prices, a recent dollar-bond sale, a need for international investment for earthquake recovery, and a “flight to safety” as investors seek stable places to stash their money amid turbulent times. Exporters of goods other than copper, such as Chilean sea bass and organic blueberries, started raising hell weeks ago because they end up with fewer pesos for their dollars, and hence less money to pay their workers, pay the electricity bill, or have a nice dinner of Chilean sea bass and organic blueberry tart. (Hah, just kidding, those products aren’t available in Chile no matter how many pesos you’ve got.)
The risk in this sort of situation is that a country with one really big, high-priced import can develop what’s known as Dutch Disease, but which writer Lisa Marginelli said should really be called Caracas Cough, since Venezuela had it long before Holland.
The short of it is that the currency strengthens because of the single famous export and the ease with which its producers can burn through dollars buying up local currency. This in turn makes life harder for everyone else who produces anything in the country: exporters get fewer pesos for their exports, as noted above, while citizens living on paychecks are able to buy imports more cheaply than locally produced goods. Local leatherworkers and other craftspeople have an incentive to stop making belts and start selling cheap goods from abroad, even with high protective tariffs. Other people see the chance to beg rather than work. It can be more worthwhile for a farmer in Venezuela to spend his time begging at the ministry than taking his chances tending crops. Eventually, you even lose the farm-to-market produce sector — Venezuela, for example, imports a lot of eggs and Christmas trees from Canada.
The best policy for an export-dependent developing nation, then, may be to intervene in the currency market in one way or another to avoid volatility and excessive currency strengthening. Few people believe one can control an exchange rate long-term, but it is possible to avoid peaks and valleys.
The current peso appreciation is the first big one since the inauguration of President Sebastian Piñera, who claims to be more a free-marketeer than his predecessors. The problem with Dutch Disease is it’s a market failure. If you let the free market run its course, you end up with a monoculture economy that is ever-more-vulnerable to price changes in your sole commodity export. The last two days have saved Piñera’s crew from having to make the decision about whether to intervene. The finance minister is in business newspaper Estrategia today saying that he’s tried to avoid weakening the peso, but leaves unsaid that he also hasn’t done anything to stop its strengthening. If copper’s rally picks back up and the peso goes to 450 to the dollar, it will be very interesting to see what happens to President Sebastian Piñera’s rhetoric.
Disclosure: My savings are not in Chilean pesos, so the last two months have cut my spending power here in Chile by 10%. So I’m with the blueberry exporters.
Setty's notebook 
The risk in this sort of situation is that a country with one really big, high-priced import can develop what’s known as Dutch Disease
should read
The risk in this sort of situation is that a country with one really big, high-priced EXPORT can develop what’s known as Dutch Disease
thanks, fixed that.
Good that you keep track of these looming things (as opposed to “things that have already happened”. If only we in L.A. would talk more about them BEFORE they actually happen.
I would call it “Venezuelan diarrhea”. It may sounds less sophisticated, but it is more to the point. Oil is the Devil’s Excrement, after all; and Venezuela has kept producing it non-stop for decades now. Things are so bad now that the country is literally bleeding.
OK, I hope I did not ruin your appetite and it is not dinner time when you read this.
Cheers
I doubt Chile will ever get the Caracas tummybug. For one thing Chile’s CenBank has never ben averse to slapping currency controls on the world’s ass when it decides this free market experiment goes too far (see 2008 for a great example or three). Secondly, copper (going on memory alone, though it won’t be out by much) isn’t more than 9% of country GDP. Yep for sure it’s very important for trade balances, but you’ll note that when those get out of kilter currencies tend to weaken anyway (gotta lurve neolib monetary theory). Then there’s the Intl currency reserves held by Chile (in their classic state and also in that Chilean countercyclical reserve fund), providing (neolib theoretical) ballast).
But most importantly, for all their faults Chilean policymakers aren’t dumbass about economics. If export revenue margins tighten too much, they have the means to improve things for the country’s macro wellbeing. And the experience.
Also, Piñera is a closet commie. Shhhh
Not sure. Chile has a huge trade surplus for a long time. And I am pretty sure that most people who are earning their money in sea brass or organic blueberry will get salario minimo. What I’ve heard about the working conditions in the región del Bio Bio frigorificos where they select the export apples, isn’t very nice. Those are jobs of last ressort. And overall the unemployment rate has fallen from 11.6% to 8.5% over the last half year.
Maybe the export opportunities that are interesting for Chile in its current stage of development like high skilled services outsourcing or atracting chinese firms to choose Chile as a headquarter for its latinamerican operations aren’t that price sensitive.
At least the higher peso price helps to keep inflation low.