APEC Peru 2008: "Nations should resort to Keynesian measures and increased capital flows during crisis"

(David Azócar from Lima) A day after Foreign Minister Alejandro Foxley’s P7 announcement, the Asia-Pacific portal spoke to Hernán Somerville, President of the Chilean Association of Banks and Financial Associations, regarding his impressions on the announcement. Chile’s representative to the APEC Business Advisory Council (ABAC), spoke about the decision to invite the US, Australia and Peru into the P7 (formerlyP4).

In your opinion, how will the P4 expansion affect Chile?

In the case of the US, the economic impact in Chile will be secondary, whereas we have an extant FTA with the Americans.  We also have a tariff agreement with Australia. But in the case of Peru, there is an existing agreement.  Though it is being expanded, it ,unfortunately, has not yet been ratified by Congress. Therefore, a P7 may very well increase the fluidity of these issues.

However, for the purposes of an APEC-wide Free Trade Agreement (an issue we raised at APEC Chile 2004), the entry of new members can be conducive to other nations, such as Vietnam, Japan and the remainder, being drawn in.

We are proposing ideas to the public sector such as labor mobility among nations. Economies not only require technology and capital. They also need qualified human resources. Of course, this would be accomplished under the aegis of concomitant labor standards.

Whereas we have free movement of capital within the group, I see no reason why we should not also liberalize the movement of workers. The bottom line is that, given current demographics in developed nations like Japan and Australia, there is a significant need to attract qualified professionals. This is principally due to a lack of said professionals within these nations' population.

In relation to its peers, what is the role that Chile must play at the 2008 APEC summit?

Our country has been quite imaginative and has applied some innovative solutions in times of crisis. When the issue of external debt arose, we incorporated the conversion of debt into risk equity; truly innovative for the time.

Chile is clearly a second-tier player in the international sphere. The economies of the United States, Japan, China and Europe are those which truly responsible for moving the world’s economy along. What Chile must do is propose ideas and maintain our policy of openness.

What is the best way to prevent protectionism from overcoming markets during a crisis?

We have two major concerns. One is the financial crisis itself. The other is the impact of same on the global economy. We believe that its impact will be significant and that the world is going to go through a period of fairly deep recession. Thus, many fear an increased enthusiasm for protectionism. It is also quite likely that the developed world will adopt said measures in the face of production drops and rising unemployment.

Accordingly, the G20 recently adopted a resolution urging its members to avoid any further restrictions to trade or investment for the period of one year.

 
In fact, I recently proposed that APEC adopt said G20 resolution. A factor which favors the proposal is that nine members participate in both international forums. The United States, Canada, Mexico, Japan, China, Indonesia, Korea, etc., are members of the G20 and APEC. It is quite feasible, therefore, to expect that the APEC leadership will adopt the same agreements as the G20.

It is important that we not demonize globalization. For instance, there are countries that meet their obligations then blame the system; as is the case with Argentina. The keys in Chilean model are simple. It has maintained an immaculate macro-economic policy and kept its markets open for more than three decades. In the beginning, it was a unilateral effort. But later, with the return of democracy, the markets to which we exported opened too.

During his campaign, President-elect Barack Obama stated he would review the Bush-era FTAs. Is this that a shift towards a more protectionist stance?

One thing is to give a campaign speech and another is the reality of taking office. Clinton, in his pre-presidential statements was very protectionist. He even said he was going to review NAFTA. Then he became a true champion of free trade.

The United States is the world's largest economy. If they begin to adopt protectionist measures, then powerful areas such as Japan, China and Europe would also be tainted with the same attitude. If this were to occur, the crisis could reach unimaginable dimensions.

How can we increase the liquidity of institutions that generate investments? And by this I mean banking institutions.

The message from APEC is that governments use every monetary instrument at their disposal. And, in this instance, I am referring to the Central Bank (which is been doing exactly this to date). We might we add to this statement, fiscal spending policies and tax cuts. Consumer consumption has dropped across the entire globe, mainly due to panic. Investment by these same consumers has also dropped.

As such, we need to see more spending and more investment, à la John Maynard Keynes (UK economist who trumpeted State spending as a crisis solution), whose theories were closeted away for so long. It’s time to wear them out in public again.

No matter what country we are talking about, there are sectors that have been particularly reticent about the progress of free trade; namely, textiles and agriculture.

Is it possible that the Bogor Goals result in a partially-free APEC trade zone which protects these two sectors?

We must be clear that the Bogor Goals will not be met within the stipulated time frame. There is just no way to achieve a zero tariff in the developed world by 2010. However, we do want the goals developed in 1994 at Bogor to experience a gradual acceleration.

There is concern that the crisis heeds groups that do not want free trade. Chile has had high resistance to the milk scandal and we finally agreed on a P4 timeline to address the issue. There are ways to resolve issues and they are not necessarily new.