Chile Economy Profile 2012

Chile’s strong recovery lost some momentum as the world economy slowed, weakening copper prices and consumer confidence in Chile. Given considerable uncertainties regarding the health of the world economy, additional supportive macroeconomic policies may be needed in the short run. In the longer run, reducing poverty and inequality is a key challenge. Both remain high by OECD standards, notwithstanding impressive evolution. Redistributive transfers and progressive taxes are very limited. Better education and job opportunities for the poor would enable additional Chileans to contribute to a additional dynamic and productive economy and thus to higher welfare.

The following measures would help Chile overcome the challenging situation of the world economy in the short run and attain stronger increase and a additional inclusive society in the longer run:

Supportive macro policies in the short-run. Given the uncertain world environment monetary policy should remain on hold for now. A slow pace for consolidation is appropriate at the moment, but once the external environment improves the government should return to a structural fiscal balance to rebuild buffers against shocks.

A strengthened fiscal policy and higher tax revenues to finance long-term spending increases. Chile’s structural fiscal balance target has led to low debt and large assets in the sovereign wealth funds. The government plans to create an independent fiscal council, which could validate the correct application of the policy and assess the target chosen by the government inclunding changes in the methodology applied. This shift should strengthen Chile’s fiscal framework. There is as well strong request for higher quality education and social services in Chile, which is likely to mount as the country develops. The government already plans significant spending increases on such programmes, which will need to be financed on a sustainable basis. Higher environmental taxes would be a particularly efficient source of revenue. A reduction of regressive tax loopholes and of still-pervasive income taxes evasion would as well make the tax system additional progressive.

Higher cash transfers for the poor combined with support for recipients to find employment, as envisaged by the government through the new Ingreso Ético Familiar programme. The government currently plans to target the bulk of the transfers to families living in extreme poverty. Over time, it should consider opening amount new transfers to a wider range of participants, for example through a additional gradual benefit withdrawal. This would as well enhance work incentives for beneficiaries and limit fraud. To assess whether transfers should increase over time the government should evaluate the impact of higher cash transfers on recipients’ work incentives, employment opportunities and capacity to invest in their human capital.

Better access to quality housing along with measures to reduce residential segregation and enhance mobility. This could improve access for the poor to higher-quality education, social services and jobs. Better targeting of housing subsidies will be essential to free resources for those truly in need. At the same time the government should rethink subsidies, which are currently directed exclusively at home ownership. Means-tested rental cash allowances coupled with additional balanced tenant-landlord regulations would strengthen the rental market, thus enhancing residential mobility and potentially reducing segregation. Other measures that would contribute to lowering segregation and inequality include: better enforcement of social housing quotas, additional investment in infrastructure and social services in poorer neighbourhoods and development of unused land in urban areas.

Chile is one of the Latin American countries most actively pursuing bilateral trade agreements

Chile has signed more or less comprehensive free trade agreements with the US, Canada, the European Union, EFTA, South Korea, Japan, Central America and Mexico. In June 2005, it finalized a four-way deal with Pacific neighbours Brunei, New Zealand, and Singapore (P-4). In June 2006, it signed an FTA with Panama.

Chile is the first Latin American country to have sealed an FTA on goods with China (2005) and since early 2007 has been working with Beijing on an expansion of the deal to cover services and investment. Further agreements in this regard were reached during President Bachelet’s visit to China in April 2008.

Chile also has bilateral “economic complementation agreements“ with Bolivia, Peru, Venezuela, Argentina, Ecuador, Colombia and Mercosur, as well as a partial agreement with Cuba.

In 2008, Chile signed FTAs with Australia, Honduras, and Colombia while expanding its agreements with Peru and Cuba. Negotiations with Turkey, Malaysia, India, and Panamá are ongoing.