Chile

   

Economic Policies

#28
Key Findings
Despite a stable macroeconomic regime and generally prudent budget policy, Chile falls into the lower-middle ranks (rank 28) with regard to economic policies. Its score on this measure has declined by 0.2 points relative to 2014.

GDP growth has slipped slightly, but remains good at more than 2.5%. The economy is open and competitive, but depends strongly on commodity exports rather than industrial activity. Several recent rounds of labor-market reforms have increased the topics negotiable through collective bargaining and made work schedules more flexible.

The unemployment rate remained constant at about 7.2%, a high rate as compared to the last 10 years. The vast majority of workers earn low wages. Labor productivity is low. A controversial plan to integrate corporate-income and personal-income taxes was halted by the massive protests of October 2019, while pressure rose to increase taxes on the wealthiest 1%

An increase in tax revenues and decline in current expenditure resulted in lower deficits in 2018. Overall public debt levels are growing slowly, but remain low by international standards, in large part due to a fiscal rule that links government spending to estimated revenue trends.

Economy

#20

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
Chile has an advanced macroeconomic and financial policy regime in place. This is rule-based and combines a floating exchange rate, inflation targeting, an autonomous central bank, an overall government budget rule, and effective regulation and supervision of banks and capital markets. As a result, macroeconomic performance has generally been quite satisfactory. A dominant economic role is assigned to foreign trade, markets and the private sector, complemented by active government regulation and policies aimed at limiting noncompetitive market conditions, extending social protection, and – to a limited degree – reducing poverty and income concentration. Economic legislation and regulation provide a level playing field for domestic and foreign competitors. Barriers to international trade and capital flows are negligible, and international competitiveness, adjusted for labor productivity, is relatively high. These policies have enabled a relatively high level of growth, and poverty rates have fallen substantially in the last few decades. Studies by Chile’s central bank have revised forecast the overall economic growth rate for 2019 from an initial value of about 4% downward to between 2.5% and 2.75%. The International Monetary Fund forecasts subsequent growth rates of about 3% through 2024.

At about 7.2%, the unemployment rate showed no significant change in comparison to the last period under review. It thus remains at a relatively high level in comparison to the past 10 years.

At the same time, major structural weaknesses can be observed. Low labor productivity represents a persistent problem. This is especially the case in small and medium-sized businesses (SMBs), which are Chile’s main employers. Low levels of labor productivity is – among other factors – connected to low average skill levels within the workforce. Minor education-sector reforms have focused on higher education, but given Chile’s economic structure, there is a strong need to enhance capacities at a technical level. In the long run, deficiencies in the education system along with low investment rates in infrastructure and R&D will probably hinder economic growth and undermine the sustainability of the country’s development path. The highly bureaucratic public administration is a further factor impairing productivity.

Economic stability and growth in Chile depend primarily on the export of commodities (e.g., copper as well as agricultural and silvicultural products) with relatively limited or no added value at all. Thus, this South American country shows a comparatively low level of industrialization; the manufacturing sector is small and the majority of consumer, intermediate and capital goods have to be imported. Chile is also highly dependent on energy imports.

Citations:
Informe Política Monetaria del Banco Central
http://www.bcentral.cl
http://www.bcentral.cl/web/guest/-/informe-de-politica-monetaria-septiembre-2018

Instituto Nacional de Estadística
https://www.ine.cl/estadisticas/laborales/

https://www.latercera.com/pulso/noticia/fmi-rebaja-proyeccion-del-pib-de-chile-y-preve-que-crecera-menos-que-el-mundo-hasta-2024/861252/

Labor Markets

#33

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
By international comparison, Chile (like most Latin American countries) has very wide-ranging and restrictive labor-market laws and regulations, at least on paper. Excessive regulation of job content, termination restrictions, and flexible and part-time contracts create disincentives to formal-sector employment. Minimum wages are high relative to average wages in comparison with other OECD countries.

The unemployment rate remained roughly stable during the period under review at about 7.2%, one of the highest rates seen in recent years. About 70% of salary earners work in low-wage sectors or do not even earn minimum wage, despite being statistically registered as employed. Policies that would increase labor-market flexibility (e.g., greater integration of certain social groups such as women and low-skilled workers) have largely been ignored. The strength of trade unions varies greatly, from very powerful (in the public sector) to very weak (in the informal private sector); different factors influence this divide, such as inadequate legislation, a lack of enforcement or the prevalence of informality.

Since powerful labor unions, including the Central Unitaria de Trabajadores (CUT) and Comisiones Obreras (CCOO), stress wage-related issues, the limited labor-market policies that have been implemented focus on wage levels rather than on work conditions or on the quality of the labor force. Continuing-education and skill-enhancement training programs are given little support. Despite diminishing productivity, comparatively high wage levels have been established mostly in the mining sector, where wage increases have exceeded the inflation rate.

After several disputes in the Senate and an intervention by the Constitutional Court, a labor reform was enacted by former President Michelle Bachelet in August 2016. The reform sought to modernize labor relations mainly with regard to collective bargaining, broadening negotiable topics and mandating that at least 30% of labor-union representatives had to be women.

In 2018, President Piñera announced a further labor-reform initiative that had been included in his government program. The initiative that was finally presented to the Congress in January 2019 focused on modifying the Labor Code in the following way: (1) ensuring that companies can continue their operations during strikes; (2) ensuring the recognition and involvement of all stakeholders in collective-bargaining processes; and (3) making work schedules more flexible, in part through the introduction of an overtime account with a weekly or monthly limit. In addition, due to the pressure generated by the social and political crisis of October 2019, the Congressional Commission for Labor approved a bill to reduce total official weekly working hours from 45 to 40. By the end of the period under review, no overall studies evaluating the impact of the reforms and reform projects on the labor market had yet been presented. The reform bill had not yet come to a vote in Congress.

Citations:
See news on labor reform, for instance:
http://www.emol.com/noticias/Economia/2016/08/29/819506/Cuales-son-las-principales-modificaciones-de-la-Reforma-Laboral.html

http://www.cnnchile.com/noticia/2016/08/29/presidenta-bachelet-promulgo-la-reforma-laboral
http://www.lanacion.cl/noticias/economia/laboral/reforma-laboral-senado-aprobo-veto-presidencial-y-esta-listo-para/2016-06-22/203636.html
http://reformalaboral.carey.cl/

Study about wages and salary income structure in Chile:
http://www.fundacionsol.cl/estudios/los-verdaderos-sueldos-chile-panorama-actual-del-valor-del-trabajo-nesi2016/

Sebastián Piñera’s labor-reform initiative:
https://radio.uchile.cl/2018/12/27/proyecto-de-reforma-laboral-derecho-al-abuso/

Reduction of weekly working hours
https://www.df.cl/noticias/economia-y-politica/laboral-personas/40-horas-comision-aprueba-excluir-colacion-de-tiempo-de-trabajo/2019-11-04/160022.html

Instituto Nacional de Estadística
https://www.ine.cl/estadisticas/laborales/

Taxes

#35

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
6
Chile has a moderately complex tax system. The tax reforms passed in September 2014 and February 2016 raised the corporate income-tax rate from 20% to a range of between 25% and 27% (companies may choose between two different tax regimes) and eliminated a tax credit (Fondo de Utilidades Tributarias, FUT). This latter measure expanded the base for taxes on capital income. Thus, companies now have to pay taxes not only on distributed profits, but also on profit retained for future investments. These changes are expected to increase overall equity within the system, according to a World Bank study commissioned by the Chilean Ministry of Finance. However, the short- and long-term effects are not fully evident, as a component of the reform package has not yet taken measurable effect (e.g., elimination of the FUT tax credit).

As a result of the massive protests of October 2019, the government halted its tax-reform project. Even before the social crisis, the initiative, which sought to integrate corporate-income and individual-income taxes, had been fiercely criticized by the opposition. Critics argued that the integration of the two forms of tax would have primarily benefited the wealthiest sectors of the population. By contrast, the political and social crisis that emerged at the end of the period gave new impetus to the initiative to tax high-income households, given that the wealthiest 1% of households control 33% of total national income (while the wealthiest 0.1% control 19.5% of total national income).

The highest marginal rate for personal-income taxes is 40%. This implies that high-income wage earners have a high tax burden compared to low-income earners in general, and to high-income non-wage earners in particular. Few exemptions are applied to corporate and income taxes, reflecting a relatively high level of horizontal equity within each income-tax category. High-income non-wage earners can legally avoid high-income taxes through incorporation. The value-added tax (VAT) of 19% is the third highest in Latin America (after Uruguay and Argentina) and remains flat. It favors allocative efficiency but has a regressive impact. There is certainly tax evasion in Chile, probably at higher levels than the OECD average due to the prevalence of informality. Yet efforts to ensure tax compliance have generally been successful. Moreover, Chile probably has one of the most efficient computer-based tax-payment systems in the world.

The government’s tax and non-tax revenue is sufficient to pay for government expenditure, at least at current spending levels. Additional revenue stemming from newly introduced fiscal changes is slated to finance reforms within the education and health systems. By and large, Chile has been successful in generating sufficient public revenue. There are flaws in the efficiency of tax spending, but in general the national budget corresponds to the claims of different sectoral ministries. However, most of the tax income generated by corporate and personal taxpayers is based on VAT, and therefore has a very regressive effect.

Nevertheless, the tax system promotes vertical equity through redistribution at only a relatively low level in comparison to other OECD member states. Expenditures for education and social security are far too low both compared to other countries in the region and to do justice to the needs of the lower-middle class and the poorer population. Tax policy fails to produce equity with regard to tax burdens, as large companies and economic elites pay relatively low tax rates. This has preserved Chile’s relatively strong international competitiveness, especially with regard to services and products of comparatively low sophistication. Although Chile was ranked only 32nd out of 36 countries in the Tax Foundation’s 2019 International Tax Competitiveness Index, it was deemed the region’s most competitive county in the World Economic Forum’s latest Global Competitiveness Report (2019), ranked 33rd out of 141 countries. This latter report highlights the country’s stable macroeconomic environment, its competitive and open markets, and strong financial system. Thus, in general terms, Chile’s tax system contributes to the country’s competitiveness with respect to world trade and investment flows. On the other hand, taxation policy does not foster innovation or increase productivity, and thus endangers competitiveness in the long run.

The only reasonable way to assess Chile’s tax system and the amount of revenue needed to finance a welfare state equivalent to 50% of GDP is to check whether Chile’s ratio of government expenditure to GDP per capita is within the empirical cross-country range suggested by Wagner’s law, which predicts that the development of an industrial economy will be accompanied by greater public expenditures as a share of GDP. Chile’s expenditures do indeed fall within this range.

Regarding the promotion of ecological sustainability, a green tax (Law 20,780), first introduced in 2014, has provide an essential mechanism. The new levies, the first of their kind in the country, focus on the emission of local (micropollutants (MP), nitrous oxide (NOx) and sulfur dioxide (SO2)) and global (CO2) pollutants from stationary energy sources. After a three-year phase in which the institutional arrangements and procedures were adjusted, the green tax came into force at the beginning of 2017, applying mainly to power plants featuring boilers or turbines with a thermal power rating of at least 50 megawatts. According to a Ministry of Finance analysis, the tax revenue collected in association with these stationary emissions sources was expected to reach approximately $160 million per year by 2018. By implementing these taxes, Chile became the first country in South America and one of the first among developing countries overall to have adopted a price for carbon. Nevertheless, the taxation of important productive sectors such as the mining, forestry, fishing and agriculture industries does not explicitly foster ecological sustainability.

Citations:
http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx

http://www.tradingeconomics.com/chile/highest-marginal-tax-rate-individual-rate-percent-wb-data.html

http://www.latercera.com/noticia/negocios/2015/10/655-649927-9-banco-mundial-73-de-la-recaudacion-de-la–reforma-tributaria-provendra-del-01-de.shtml

http://radio.uchile.cl/2014/09/09/lo-bueno-lo-malo-y-lo-escandaloso-de-la-reforma-tributaria

http://www.reformatributaria.gob.cl/principales-modificaciones.html

http://www.sii.cl/pagina/valores/global/igc2015.htm

Economist Intelligent Unit, Country Report CHILE, Generated on November 24th 2014.

Luis Eduardo Escobar, “Michelle Bachelet en busca de la transformación de Chile,” in: Nueva Sociedad, Nr. 252. Julio-agosto 2014, 4-14.

On recent Tax Reform Initiatives (2016-2019):
http://www.reformatributaria.gob.cl

https://www2.deloitte.com/content/dam/Deloitte/cl/Documents/tax/ReformaTributaria/cl-modernizaci%C3%B3n-reforma-tributaria.pdf

https://www.cooperativa.cl/noticias/economia/impuestos/los-ejes-de-la-reforma-tributaria-del-presidente -sebastian-pinera/2018-08-21/202417.html

http://www.sii.cl/portales/reforma _tributaria/index.html#&panel1-1

https://www.senado.cl/reforma-tributaria-los-pasos-que-vienen-en-el-segundo-tramite-en-el/senado/2019-08-28/175804.html

On VAT in Chile in comparison: http://www.emol.com/noticias/Economia/2015/07/28/740297/Chile-tiene-el-tercer-IV A-mas-alto-de-America-Latina-y-se-ubica-por-encima-del-promedio-mundial.html

United Nations Development Report (2017) on income inequality
https://www.undp.org/content/dam/chile/docs/pobreza/undp_cl_pobreza-Libro-DESIGUALES-final.pdf

https://taxfoundation.org/2019-international-index/

World Economic Forum: http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf

Ministry of Finance: http://www.dipres.gob.cl/594/articles-115572_doc_pdf1.pdf

Budgets

#11

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
Chilean budgetary policy has been very successful in terms of national debt reduction and reserve fund accumulation. The country’s budgetary policy is based on a fiscal rule that explicitly – and relatively transparently – links overall government spending to an estimate of government revenue trends. This puts Chile at the international best-practice frontier regarding budget policies and fiscal regimes. Although the rule was temporarily suspended during the difficult 2009 – 2010 period, its application since 2001 (and the adherence to fiscal orthodoxy even without comparative legislation since the mid-1980s) has enabled the government to reduce overall debt, accumulate sovereign wealth and reduce its overall financial liabilities to negative levels. This policy proved absolutely adequate in dealing with the global financial crisis. In order to improve fiscal transparency and the validation of the public balance, the Fiscal Consulting Council (Consejo Fiscal Asesor) was created in 2013.

According to the U.N. Economic Commission for Latin America and the Caribbean, in 2018, an increase in tax revenues together with a decrease in public spending (from 4.7% of GDP in 2017 to 3.3% in 2018) reduced the fiscal deficit (from 2.8% of GDP in 2017 to 1.9% in 2018). The fall in public expenditure was mainly related to a decrease in current expenditure (from 6.3% of total state expenditure in 2017 to 3.0% in 2018) paired with a recovery in capital expenditure (from -3.1% of GDP in 2017 to 4.8% in 2018). The fiscal-policy stance allowed the central government to moderate the growth of its overall debt level (24.8% of GDP in 2018 compared to 23.6% in 2017).

Citations:
Cf. DIPRES, Política de Balance Estructural:
http://www.dipres.gob.cl/572/w3-propertyvalue-16156.html

Instructions on the implementation of the budgetary law in the public sector 2018 and 2019 (Ley de Presupuesto)
http://www.dipres.gob.cl/597/articles-172486_doc_pdf.pdf
http://www.dipres.gob.cl/598/articles-189284_doc_pdf.pdf

ECLAC: Balance Preliminar de las Economías de América Latina y el Caribe – Dec. 2018.
https://repositorio.cepal.org/bitstream/handle/11362/44326/17/BPE2018_Chile_es.pdf

Research, Innovation and Infrastructure

#34

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
5
Research and development (R&D) expenditure as a share of GDP is very low in Chile compared to other OECD countries, and most of this expenditure is undertaken by the government rather than the private sector. But Chile has shown that it is aware of shortcomings in the area of technological innovation, with potentially deleterious impact on the country’s future economic and social development. Significant reforms have been put in place to raise R&D funding, including earmarked taxation (a royalty tax on mining), higher government expenditure, the improvement of tax incentives for private R&D, and the creation of the Ministry of Science, Technology, Knowledge and Innovation in 2018. Although results have to date been disappointing – in large part because of bureaucratic hurdles to the approval of private and public projects – Chilean institutions show good results at least in the area of basic research. But the steps required to transform this strong basic research into applied research are almost never taken. Universities are often not prepared to support research that operates at the interface between basic research and industrial development. This is reflected in the comparatively low number of patents registered per year on a per capita basis, whereas the number of scientific publications is relatively high. In general, access to the limited public funds available for research tends to be quite difficult due to high bureaucratic barriers (red tape). Despite these facts and considering the development of the last decade, clear improvements regarding innovation policy and scientific cooperation can be observed.
Chile is ranked 51st out of 129 countries in the latest version of the Global Innovation Index (2019). Given its previous-year ranking of 47th out of 126 countries, the country’s innovation performance appears to be stable.

Citations:
http://www.expansiva.cl/media/en_foco/documentos/17032010150429.pdf
http://www.scidev.net/america-latina/innovacion/noticias/tres-paises-lideran-innovacion-en-latinoamerica.html
https://www.globalinnovationindex.org/

Global Financial System

#25

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
Given its small size and consequent inability to wield hard power, Chile has quite limited weight within international financial structures. Although it participates in regional institutions and regimes, the country has distanced itself from its Latin American neighbors’ recent efforts to strengthen their independence from international-level political hegemony/ and financial sources. During the world economic and financial crisis, the government applied an austerity policy and engaged in a responsible budgeting policy mandating a structural surplus of 1% of GDP, largely shielding itself from the worst effects of the crisis. Nevertheless, in the national as well as international context, the official political discourse privileges the virtue of a totally deregulated free market, combating any forms of state regulation.
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