Chile's Copper and Its Fiscal Rule

How Chile, the world's largest copper producer, used a structural fiscal rule and stabilisation fund to manage volatile copper revenue.

Chile is the world’s largest producer of copper, which makes up a large share of its exports. Copper prices swing widely, which could destabilise public finances.

The structural balance rule

In 2001, Chile adopted a structural balance rule. The government bases spending on:

The long-term copper price, estimated by an independent panel of experts, rather than today’s price.
The economy’s potential output, rather than the current cycle.

When copper prices are high, the government saves the extra revenue. When prices fall, it can spend from savings.

The stabilisation fund

In 2007, Chile created the Economic and Social Stabilisation Fund to hold savings from copper booms.

Results

During the 2008-09 crisis, Chile used savings for a large stimulus without heavy borrowing.
Chile’s finance minister at the time, Andrés Velasco, was criticised for saving during the boom but praised when savings cushioned the crisis.

State copper company

Codelco, the state-owned copper company, is one of the world’s largest copper producers, contributing revenue to the government.

Lithium

Chile is also a major lithium producer, part of the “lithium triangle”, and in 2023 announced a national strategy giving the state a larger role in lithium.

Lessons

Independent estimates and rules can take the politics out of spending decisions and protect against commodity booms and busts.

The boom decision

Copper prices surge, and the government's revenue jumps. Under the rule, it saves most of the windfall. When prices crash two years later, it uses the savings to maintain spending on schools and hospitals.

Thinking governments should spend all revenue when prices are high

Saving during booms protects public services when prices fall.

Key takeaways

Chile is the world's largest copper producer.
Its 2001 structural balance rule bases spending on long-term copper prices.
A 2007 stabilisation fund stores boom savings.
Savings let Chile respond to the 2008-09 crisis without heavy borrowing.