Mixed Praise For Chile’s Economic Performance

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By J C Suresh | IDN-InDepth NewsAnalysis

TORONTO (IDN) - Chile has received kudos for making significant economic progress in the previous three years but has been faulted for “some glaring inequalities”. A new study finds that – together with Mexico – Chile displays “the greatest inequality gap” in the 34-nation Organisation for Economic Co-operation and Development (OECD).

The average income of the wealthiest 10 percent in Chile and Mexico is 27 times that of the poorest 10 percent, in other words, a ratio of 27 to 1. By contrast, the OECD average is around 10 to 1, informs the 2013 Economic Survey of Chile.

Nevertheless, the South American country has made considerable progress in combating poverty despite some obvious inequalities. It has also been gradually reducing its levels of inequality. Presenting the Survey on October 23 in Santiago de Chile, OECD Secretary-General Angel Gurría said: “Although the country still has far to go in the social field, welfare yardsticks such as the ‘degree of satisfaction’ and life expectancy are now close to the OECD averages, while incomes per capita have doubled in the last 20 years and are now the highest in Latin America.”

All this has been made possible by notable economic growth rates. According to the Survey, the Chilean economy has been growing since 2010 at a rate close to 6 percent, nearly 3 times the growth rate for the OECD as a whole and well above the average for Latin America, at 4.5 percent.

The Survey traces Chile’s economic growth to the export boom in commodities as well as to “prudent macroeconomic policies, with particular emphasis on controlling inflation, and on the consolidation of a healthy financial sector”.

Building on this economic dynamism, Gurría said, Chile has also taken important steps to broaden the productive base of its economy and to boost the entrepreneurial spirit by reducing barriers to the entry of new firms.

“This has helped to create a more dynamic labour market, and has brought the unemployment rate down to its lowest level in 15 years. These measures have been focused on supporting innovation and on making it a quicker and easier process to access credit for research and development, to open a business, and to obtain financing.”

These are important advances, but much remains to be done, Gurría said, adding: “As the report notes, the country faces great challenges in promoting growth that is more inclusive and less dependent on external factors.”

Required Improvements

The Survey has listed areas requiring improvements. These include access to labour market. At present, despite progress, the participation rates for young people (15 to 24 years) and women still trail behind the OECD average and behind countries such as Brazil. On the other hand, some of the measures taken by the government in favour of unskilled workers are affecting labour market access for recent arrivals, and particularly the young.

The education sector, which is also lagging behind, needs improvement too. “Chile has made some considerable progress, yet according to the PISA test scores Chilean youngsters perform poorly against the OECD average in reading, mathematics and science. On the overall PISA reading scale, Chile ranks 44th among the 65 countries and regions assessed,” says the Survey.

It adds: There is also much to be done to promote green growth. Air quality in Chile's main cities is still low, although it has improved in Santiago. Chile stands last in the environmental dimension of the OECD Better Life Index and is facing serious water supply problems. Moreover, there is still a shortage of information on soil pollution and arsenic emissions from mining activities, an essential consideration for establishing taxes that will adequately cover environmental externalities.

The Survey finds that Chile faces considerable challenges in the area of innovation. The last decade has seen an accumulation of human and physical capital, yet spending on research and development and on innovation is still among the lowest in the OECD, at less than 0.45 percent of GDP.

The Road Ahead

To address these and other challenges and to consolidate the progress the Survey offers a series of policy recommendations:

- In order to create a more inclusive labour market and overcome the barriers that impede women's participation, the OECD Survey considers it essential to improve childcare services and social attitudes through education. Also working hour regulations could be made even more flexible, and day care services should be more accessible.

- At the same time, young people’s access to the labour market needs to be improved by reducing the obstacles that in some cases result from high severance allowances and minimum wages for unskilled workers. The age cut-off for the reduced minimum wage could be extended to cover all people under 25 years, and not only those under 18, while public employment services could be strengthened.

- In order to improve basic education, says the Survey, Chile needs to promote reforms in the area of teacher training and selection. “It will also have to increase student loans for low-income families, reduce interest rates on those loans, and gear them to income levels. These measures should be accompanied by improvements to the tax system and to social security, by broadening the tax base, eliminating exemptions and combating evasion. The family allowance system known as ‘Ingreso ético familiar’ as well as the ‘Chile Attiend’ single-window programme should be further expanded, together with improvements in access to public services.

The Economic Survey highlights the need to promote green growth in order to improve air quality in Chile's major cities. This will require the implementation of mechanisms to offset environmental costs through higher prices (particularly when it comes to water pollution and overuse). Such a move could generate new revenues for protecting the environment and promoting "green" innovation.

The Survey also stresses the need to expand the production of renewable energy, which at this time is confined to hydroelectric power. “This will require the offer of greater market incentives for wind, geothermal, solar and wave energy. It would also be well to re-examine the tax treatment of profits from natural resource exploitation, in order to guarantee long-term development. Achieving these objectives will require improvements in institutional arrangements for the design of environmental policy, and a comprehensive strategy for green growth,” says the Survey.

It adds: “If long-term economic growth is to be maintained, Chile will also have to improve and expand the innovation system and strengthen its institutional coherence. The recent proposal to create an Innovation Ministry could lead to better coordination of these policies. Yet the key point will be to ensure that the innovation programmes put in place are reviewed regularly so that they can be expanded, adjusted or cancelled in light of their results.”

At the same time, Gurría said, Chile needs to continue strengthening its human capital for the knowledge economy, boosting the number of fellowships for engineers and scientists and creating interactive networks between researchers and the private sector. [IDN-InDepthNews – October 31, 2013]

Picture: (Left/right) Felipe Larraín, Chile's Minister of Finance and Angel Gurría, OECD Secretary-General on October 23, 2013 in Santiago | Credit: OECD

2013 IDN-InDepthNews | Analysis That Matters

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