Social Protection and Private Coping Strategies during Recessions: evidence from Chile

Produced by: 
Universidad de Chile
Available from: 
November 2014
Paper author(s): 
Julio J. Guzman (School of Government, Universidad Adolfo Ibanez)
Poverty - Inequality - Aid Effectiveness

This article analyzes the Chilean experience in coping with the 1999 downturn, triggered by the Asian financial crisis, and how the implemented policy reforms have enabled reconciling strong growth in social spending with a balanced fiscal policy. Unlike the last global crisis (the Great Recession), the 1999 crisis enables us to look at the long-term sustainability of the Chilean reforms adopted after this episode. The Chilean experience can suggest innovative social protection solutions for European countries, in a way to make long-term social investments and medium-term fiscal consolidation mutually supportive and sustainable. The analysis reveals that the fiscal discipline and the robust public institutions developed by Chile before and after the crisis have strengthened its social protection policies and have reduced its vulnerability to new turbulent episodes. Specifically, the 1990s public debt reduction, the Copper Stabilization Fund created in 1987, the adoption of the structural surplus rule of 1 percent of GDP introduced in 2000, and the new combination of monetary and fiscal policy adopted after the crisis have reduced and mitigated the exposure of the Chilean economy to external crises. Accordingly, the new Chilean policy framework allowed the implementation of a countercyclical fiscal policy during 2000-2003 and during the Great Recession. The article also examines the private coping mechanisms adopted during the crisis by estimating econometrics models based on micro-data from the Chilean Encuesta Nacional de Empleo (ENE) and other data sources. The evidence suggests that there is a tendency for families to cope with the effects of the crisis by increasing underused labor of wives, but not of children. Paternal unemployment does not lead to a significant decrease on school attendance of children.


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