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Chile's Economic Reform: Lessons and Future Challenges

Discover the economic background of Chile, its successful reform efforts, and strategies for re-election. Explore the current economic scenario, employment creation, inflation, fiscal deficit, and international credit conditions. Learn about the government's net creditor status and the Budget Structural Balance Rule. Delve into the new reform efforts, including the modernization of the state, corporate governance reforms, and strong policy in the international arena. Finally, explore the government's goals for growth, job creation, poverty reduction, and becoming a developed country.

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Chile's Economic Reform: Lessons and Future Challenges

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  1. How to Reform and be Re-elected?Chile’s Experience and Future ChallengesRodrigo Álvarez ZentenoUndersecretary of Finance of Chile

  2. Presentation Overview • About Chile: an Economic background • Chile’s Reform • How to be Re-elected?

  3. About Chile: an Economic background • Chile’s Reform • How to be Re-elected?

  4. The current economic scenario • Population: 17,1 MM (2010 estimate) • GDP 2009: • Total: US$164 bn • Per capita (current dollars): US$9.525 • Per capita (PPP): US$14.341 • Human Development Index 2007: 0,878 (high, rank: 44/182, 1st in Latin America) • Life expectancy at birth (years): 78,5 • Adult literacy rate (% aged 15 and above): 96,5

  5. Quarterly Economic Growth Highest growth rate in the last 5 years Source: Central Bank of Chile 5

  6. Monthly Economic Activity: Highly Dynamic Highest monthly growth rate since July 1996 Immediate effect of the earthquake Source: Central Bank of Chile

  7. Strong Employment Creation Employment creation since January-March: 164.780 Since mobile quarter January-March 2010 data are based on the New National Employment Survey. Due to the conceptual differences between the new survey and the older one, data can not be spliced. Source: INE

  8. Inflation Average 2000-2009: 3.3% Source: Central Bank of Chile, Monetary Policy Report, September 2010

  9. Inflation: Total and Long range Inflación Septiembre: 0.4% Inflación en 12 meses: 1.9% Inflación Acumulada 2010: 2.7% Fuente: INE

  10. Fiscal Deficit During Global Recession Source: Eurostat, OECD, IMF and DIPRES

  11. About Chile: an Economic background • Chile’s Reform • How to be Re-elected?

  12. The “old” Reform • A huge first step to reform our economy was given on the 80´s 90´s, when an extensive program of privatizations and State modernization. During the last 20 years there was stability and development. • As a result we have a solid and healthy Public Finance • All is reflected in today’s Chile’s economic performance…

  13. Chile´s Declining Macroeconomic Volatility Source: Own elaboration based on Central Bank of Chile

  14. Chile´s Very Favorable International Credit Conditions Source: JP Morgan and Bloomberg

  15. Public Debt Burden: A Comparison Source: Eurostat, OECD, IMF and DIPRES

  16. The Government of Chile: A Net Creditor Source: DIPRES

  17. Chile’s Economic and Social Stabilization Fund (Sovereign Fund) July 2010: 11.1 Source: DIPRES

  18. The Budget: Structural Balance Rule The SBR isolates the impact of the economic cycle on public finances The SBR commits to a balanced budget (zero deficit) when The economy grows at its potential rate Copper price is at its long-term level In practice, this means Saving during economic booms, when extraordinary revenues are received Dissaving in downturns, when fiscal revenue drops

  19. Central Government Balance 1987-2009 After the Structural Balance Rule Before the Structural Balance Rule Source: DIPRES

  20. The “new” Reform • The overall Chile’s experience in crisis situation is positive • The world face us with new challenges • Preventive measures should be considered within political reform schemes

  21. Modernization of the State Human Resources (Senior Public Management (ADP) and Civil Service) Evaluate new services to be incorporated Review advertising and requirements for applications to increase turnout in contests 21

  22. Reforming Chilean Administration New State comission for the reform of Public Administration. Delivery Unit to fulfill the Government compromises New agency for the revision of Public Policies 22

  23. Strong reforms on Analisys:Reform of the Corporate Governance for Public Companies Reform of the Corporate Governance for Private Companies Reform of the Regulatory Agencies: Financial, Banking, Capital Market Strong Policy in The International Arena. We will continue the negociations regarding free trade agreements and tax treaties

  24. Bicentennial Market Capital Reform Consumer protection Tax Risks and Financial Stability Transparency and information Markets and new financial models Institutional reform Middle class and Small and middle Companies

  25. Tax Incentives for R&D • Tax incentive which allows companies to use 35% of expenditure in R&D (extramural) in contracts with research centers registered as a tax credit (established 2008) • Only generated 19 contracts totaling US$ 1,5MM • Will create an additional tax incentive for private investment in R&D conducted within the enterprise (intramural) • Will extend the limit of investment tax credit for extramural R&D 25

  26. About Chile: an Economic background • Chile’s Reform • How to be Re-elected?

  27. Chile choose to change • From 1990 until 2010 a center-left coalition governs. • People wants a new political performance, “a new way of govern” • President Sebastián Piñera, assumed his position on 11 march 2010.

  28. GOVERNMENT PROGRAM 2010-2014 • Grow at 6% average annual rate • Create 200.000 jobs annually (2010-2014) • Increase investment (Gross Fixed Capital Formation) from 21% of GDP (2009) to 28% of GDP in 2014 • Eliminate extreme poverty by 2014 • Lay the ground to become a developed country by 2018

  29. RECOVERY OF THE CAPACITY OF GROWTH AND JOB CREATION OF CHILE • Recover investment • Accelerated depreciation • Tax incentives for small businesses • Reduce costs of bureaucracy • Increase employment • Incentives to hire • Emergency jobs • National training plan • Adaptability of the workforce • Protection of labor rights • Improve productivity • Promotion of science and technology • Promotion of innovation and entrepreneurship • Modernization of the state

  30. Basic Principles • Financing the government program does not require tax increases • A temporary tax increase is only needed to finance about one third of the reconstruction effort

  31. Resources Needed for the Government Program Government Program: US$9.3 bn

  32. Chile’s Road to Development by 2018

  33. High Economic Growth Expected in 2011 2009: -1.5% Source: IMF, Consensus Forecast and Central Bank of Chile

  34. How to Reform and be Re-elected?Chile’s Experience and Future ChallengesRodrigo Álvarez ZentenoUndersecretary of Finance of Chile

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