Chile

   

Economic Policies

#28
Key Findings
With social and public health pressures undermining its record of budget prudence, Chile falls into the lower-middle ranks (rank 28) with regard to economic policies. Its score on this measure has declined by 0.3 points relative to 2014.

The pandemic caused a severe recession in 2020, with GDP falling by 5.8%. However, growth returned to more than 10% in 2021. Similarly, the unemployment rate bounced to nearly 13% in 2020, but returned to about 7.5% by period’s end. The rate of informal employment was nearly 30% as the pandemic began.

Government policies during the pandemic allowed employers to stop paying workers while still covering social-security contributions, and made teleworking easier. The vast majority of workers earn low wages, and labor productivity is low. A new tax will force digital services providers to pay VAT.

Budget discipline had come under pressure due to commodity-price declines even before the pandemic. Following the social disturbances of 2019, the government tapped pension and stabilization funds for current spending. Overall debt remains low by international standards.

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.

The rise of social unrest by the end of 2019, the subsequent COVID-19 pandemic and the uncertainty that a new constitution might imply all had an impact on markets and international competitive indicators. However, economic policy has provided a reliable and relatively stable economic framework given the circumstances.

Studies by Chile’s central bank indicate that GDP increased between 10.5% and 11.5% in 2021, but underline that this significant growth followed a severe recession caused by the COVID-19 pandemic in 2020, when GDP dropped by about 5.8%. During 2021, inflation increased up to 6.7%, but is likely to stabilize at around 3% again in the years to come. The International Monetary Fund’s adjusted forecast indicates a subsequent growth rate of about 1.8% to 2.5% through 2025. Something similar applies for the unemployment rate. Whereas during the second half of 2020 the unemployment rate reached 12.9%, by the end of the period under review it had returned to 7.5%.

Major structural weaknesses can be observed. Low labor productivity represents a persistent problem. This is especially the case in small and medium-sized businesses (SMEs), which are Chile’s main employers. Low levels of labor productivity are – 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 research and development (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 still highly dependent on energy imports; however, major efforts have been undertaken in order to produce renewable energy.

Citations:
Central Bank of Chile, “Informe de Política Monetaria”, September 2021, https://www.bcentral.cl/resumen-ipom/-/detalle/resumen-ipom-septiembre-2021, last accessed: 13 January 2022.

National Institute for Statistics (INE), https://www.ine.cl, last accessed: 13 January 2022.

International Monetary Fund (IMF), https://www.imf.org/en/Countries/CHL, last accessed: 13 January 2022.

Organisation for Economic Co-operation and Development (OECD), “Economic Outlook Chile 2021”, http://www.oecd.org/economy/chile-economic-snapshot, last accessed: 13 January 2022.

La Tercera, “FMI sube a 11% crecimiento de Chile 2021 y es el más rápido de la región en volver a niveles prepandemia”, 12 October 2021, https://www.latercera.com/pulso/noticia/chile-liderara-crecimiento-regional-en-2021-y-sera-uno-de-los-ganadores-de-la-transformacion-verde-segun-el-fmi/AGF45UDG2ZBRZOQHL6Y72BNJC4, last accessed: 13 January 2022.

Labor Markets

#31

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, but are significantly lower when considering actual purchasing power parity.

When the COVID-19 pandemic reached Chile in March 2020, the unemployment rate was about 7.2%. However, the rate of informal employment was 29.6%. Both rates represented one of the highest of the recent years. During 2020, unemployment increased significantly, reaching a rate of nearly 13% at its peak, but recovered to a pre-pandemic level by the end of 2021 (7.5%).

About 70% of salary earners work in low-wage sectors or do not even earn minimum wage, despite being statistically registered as employed. This structural problem was exacerbated by the COVID-19 pandemic, as the group of self-employed and informal workers were disproportionately affected by the public health crisis and the resulting restrictions, given that they usually depend on close physical proximity to other people in order to offer their services or products.

To address the effects of the pandemic on the labor market, the government implemented a series of measures such as the employment protection law, by which employers can temporarily stop paying salaries to their employees while maintaining their legal obligation to cover social security, as well as new regulations governing teleworking.

In general terms, 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); a variety of factors influence this divide, such as inadequate legislation, a lack of enforcement and 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 skills-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.

A labor reform enacted in 2016 modernized 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 2019, President Sebastián Piñera presented a further labor-reform initiative that 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.

By the end of the period under review, only the first-mentioned draft law, related to assuring minimum service levels during strikes, was about to be approved. Other legislative initiatives had yet to be approved by the parliament or had shown no significant progress.

Citations:
National Institute of Statistics (INE) – Indicators, https://www.ine.cl, last accessed: 13 January 2022.

On minimum wage in Chile:
Fundación Sol, “Salario mínimo en perspectiva comparada. Evidencia actualizada a 2020”, September 2020, https://fundacionsol.cl/blog/estudios-2/post/salario-minimo-en-perspectiva-comparada-6648, last accessed: 13 January 2022.

Study about wages and salary income structure in Chile:
Fundación Sol, “Los verdaderos sueldos en Chile”, September 2021, https://www.fundacionsol.cl/blog/estudios-2/post/los-verdaderos-sueldos-de-chile-2021-6796, last accessed: 13 January 2022.

On the progress of draft legislation:
Fundación Ciudadano Inteligente, https://deldichoalhecho.cl, last accessed: 13 January 2022.

United Nations (UN) Economic Commission for Latin America and the Caribbean (ECLAC), Observatorio COVID-19 en América Latina y el Caribe – Impacto económico y social (2020), https://www.cepal.org/es/temas/covid-19, last accessed: 13 January 2022.

Taxes

#38

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. Since 2014, the corporate-income tax rate has been increased from 20% to a range of between 25% and 27% (companies may choose between two different tax regimes) and a tax credit mechanism has been eliminated (Fondo de Utilidades Tributarias, FUT). This latter measure expanded the base for taxes on capital income.

As a result of the massive protests of October 2019, the government halted the core part of its tax-reform project, which sought to integrate corporate-income and individual-income taxes, and 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 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 strongly 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. Since June 2020, foreign companies that are not domiciled or resident in Chile have been required to pay VAT for services provided within the national territory. This includes digital platform services in particular. Furthermore, the Defensoría del Contribuyente (DEDECON), an agency serving as an intermediary in matters relating to the Chilean Tax Administration (Servicio de Impuestos Internos, SII), was created in November 2021. It is intended to provide advice to SMEs and the most vulnerable taxpayers.

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. However, the social crisis of 2019 and the subsequent COVID-19 pandemic placed significant stress on the national budget. 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. Chile was ranked 27th out of 37 countries in the Tax Foundation’s 2021 International Tax Competitiveness Index; in this report, the authors are critical of its worldwide tax system, while most OECD countries have territorial provisions. At the same time, the authors note positively that Chile has the second-lowest tax wedge on labor among OECD countries (7% compared to the OECD average of 34.6%). The country was deemed the region’s most competitive country in the World Economic Forum’s latest Global Competitiveness Report (2021), ranked 44th out of 64 countries.

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:
Ministry of Finance (Ministerio de Hacienda), Indicators and Reports, https://reporte.hacienda.cl, last accessed: 13 January 2022.

On VAT in Latin America:
Inter-American Center of Tax Administrations (Centro Interamericano de Administraciones Tributarias, CIAT), “Impuesto al Valor Agregado: su aplicación en América”, July 2021, https://www.ciat.org/ciatblog-impuesto-al-valor-agregado-su-aplicacion-en-america, last accessed: 13 January 2022.

Tax Foundation, International Tax Competitiveness Index 2021, October 2021, https://taxfoundation.org/publications/international-tax-competitiveness-index/#Chile, last accessed: 13 January 2022.

World Economic Forum, “Global Competitiveness Report 2019”, October 2019, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf, last accessed: 13 January 2022.

World Economic Forum, “Global Competitiveness Ranking 2021”, https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness, last accessed: 13 January 2022.

Chilean Tax Administration (Servicio de Impuestos Internos, SII), http://www.sii.cl, last accessed: 13 January 2022.

On the progress of draft legislation:
Fundación Ciudadano Inteligente, https://deldichoalhecho.cl, last accessed: 13 January 2022.

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

Budgets

#5

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
In general terms, Chilean budgetary policy has been very successful in the past 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.

The application of and general compliance with this rule 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.

The original Fiscal Consulting Council (Consejo Fiscal Asesor) was transformed into an autonomous entity called the Autonomous Fiscal Council (Consejo Fiscal Autónomo). It represents a key factor in support of fiscal transparency, and helps to validate the public accounts.

Even before the social and political crisis Chile experienced in late 2019, the country’s budgetary policy had come under pressure due to declines in the price of copper, slowing economic growth, state spending that had risen faster than GDP, a rising structural deficit and an increase in debt – although this latter was still within reasonable proportions, considering the positive trend of the last 20 years and the country’s level of debt (34.4% of GDP) in comparison with the OECD average (78.02% of GDP). Thus, the pandemic found the country in difficult circumstances regarding it’s adherence to fiscal orthodoxy.

In order to attend to the demand for a reinforced social agenda and the restoration of the damaged public infrastructure following the social and political crisis, the government tapped the Pension Reserve Fund (Fondo de Reserva de Pensiones, FRP) and the Economic and Social Stabilization Fund (Fondo de Estabilización Económica y Social, FEES). By the end of 2021, both funds together reached a market value of about $10 billion, a diminution of about $13 billion in comparison to 2019, when the total value of both funds had reached approximately $23 billion.

Citations:
Ministery of Finance (Ministerio de Hacienda), “Estado de la Hacienda Pública 2021”, September 2021, https://www.hacienda.cl/areas-de-trabajo/presupuesto-nacional/estado-de-la-hacienda-publica/estado-de-la-hacienda-publica-2021, last accessed: 13 January 2022.

Dirección de Presupuesto – DIPRES, “Informe de Finanzas Públicas 3er Trimestre 2021”, September 2021, https://www.dipres.gob.cl/598/w3-article-244741.html, last accessed: 13 January 2022.

Dirección de Presupuesto – DIPRES, “Balance estructural 2019/2020”, https://www.dipres.gob.cl/598/w3-propertyvalue-16156.html, last accessed: 13 January 2022.

Instructions on the implementation of the budgetary law in the public sector 2022 (Ley de Presupuesto),
https://www.dipres.gob.cl/597/w3-multipropertyvalues-15168-34905.html, last accessed: 13 January 2022.

Autonomous Fiscal Council (Consejo Fiscal Autónomo), https://cfachile.cl, last accessed: 13 January 2022.

Consejo Políticas de Infraestructura, “Gobierno estimó en USD$ 1.400 millones los daños a infraestructura tras el estallido social”, 16 January 2020, http://www.infraestructurapublica.cl/gobierno-estimo-usd-1-400-millones-los-danos-infraestructura-tras-estallido-social, last accessed: 13 January 2022.

OECD Data on government spending, https://data.oecd.org/gga/general-government-debt.htm, last accessed: 13 January 2022.

OECD – Economic Outlook Chile (2021), http://www.oecd.org/economy/chile-economic-snapshot, last accessed: 13 January 2022.

Centro de Investigación Periodística – CIPER, “¿Existe más espacio en la billetera? Radiografía al esfuerzo fiscal para ayudar a los chilenos en la pandemia”, 26 May 2020, https://www.ciperchile.cl/2020/05/26/existe-mas-espacio-en-la-billetera-radiografia-al-esfuerzo-fiscal-para-ayudar-a-los-chilenos-en-la-pandemia, last accessed: 13 January 2022.

DIPRES: Fondos Soberanos
https://www.dipres.gob.cl/598/w3-propertyvalue-21941.html

Research, Innovation and Infrastructure

#36

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 (Minciencia) 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 53rd out of 132 countries in the latest edition of the Global Innovation Index (2021). Given its previous-year rankings, the country’s innovation performance appears to be stable.

Citations:
Global Innovation Index (2021), https://www.globalinnovationindex.org/Home, last accessed: 13 January 2022.

Ministry of Finance (Ministerio de Hacienda), November 2021, https://www.hacienda.cl/noticias-y-eventos/noticias/ministerio-de-hacienda-y-dipres-valoran-despacho-del-presupuesto-2022-del, last accessed: 13 January 2022.

Global Financial System

#30

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 between mid-2007 and early 2009, 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.

In general terms, Chile coordinates closely with international financial institutions such as the World Bank, the International Monetary Fund and the Inter-American Development Bank, and usually contributes to the generation of new knowledge through the development of national studies and evaluations.
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