Economic Survey of Chile 2005

 

Published on 4 November 2005

Executive summary

An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared

The OECD assessment and recommendations on the main economic challenges faced by Chile are available by clicking on each chapter heading below. Chapter 1 identifies the challenges for which the subsequent chapters provide in-depth analysis and policy recommendations.










 

 

Chapter 1: Fostering long-term growth: the challenges ahead
The recovery from the 1998-2003 slowdown is now well entrenched. Private investment rebounded particularly strongly, raising the investment-to-GDP ratio to 25% in 2004, well above the level prevailing on average during Chile’s “golden age” of rapid GDP growth in 1985-97. Nevertheless, lifting the economy’s growth potential remains Chile’s overarching policy challenge. This can be addressed by encouraging innovative activity, continuing to strengthen pro-competition regulation, especially in network industries, and raising labour force participation and productivity. In doing so, Chile’s income gap with respect to the more prosperous nations is likely to close more rapidly. Currently at less than 40% of the average OECD income level, Chile’s per capita income (adjusted for purchasing power parity) leaves ample scope for further catch-up in relative living standards.

Chapter 2: Entrenching macroeconomic stability
Chile’s macroeconomic management has been exemplary. With the recovery now firmly established, monetary policy is returning to a more neutral stance in line with the convergence of inflation expectations towards the mid-point of the inflation target range. The key macroeconomic challenge is to entrench fiscal rectitude, given that the structural budget surplus rule adopted in 2000 is not embedded in law and future administrations may choose to abandon it. Pressures for greater fiscal activism should not be underestimated in the future in an environment of relatively low public indebtedness and in view of the need to satisfy multiple social demands. It is also important to deal with the contingencies associated with the pension system, in the light of continued low density of contributions. This can be addressed by pre-funding these contingencies, benefiting from the currently healthy fiscal position. Debt management could aim for further reductions in USD- and inflation-indexed debt, contributing to the development of a domestic peso-denominated fixed-income market.

Chapter 3: Encouraging innovation
A good framework for investment in innovation can contribute to increasing Chile’s growth potential. Spending on R&D is currently low in relation to GDP and heavily reliant on government financing. Innovation activity in the business sector is also limited by insufficient seed and venture capital and human capital constraints. This is despite several favourable framework conditions, including a stable macroeconomy, liberal foreign trade and investment regimes, and reasonably pro-competition regulations in product markets. The government intends to increase public spending on R&D, to be financed by revenue from the mining tax introduced in May 2005, and to create a National Innovation Council. The effectiveness of these measures will depend largely on the extent to which they will boost business-financed innovation consistent with Chile’s comparative advantages.

Read also ECO Working Paper 454Fostering innovation in Chile

Chapter 4: Strengthening regulation in network industries
Chile’s regulatory framework is working reasonably well. The country’s structural reforms since the 1980s, with the privatisation of utilities and deregulation of product and labour markets, have improved resource allocation and increased the population’s access to basic services, while calling for a comprehensive upgrading of regulatory institutions. At the same time, public-private partnerships (PPPs) are contributing to closing Chile’s infrastructure deficit, particularly in transport. The recurrent cuts in shipments of natural gas from Argentina since 2004 have put additional strain on regulation in the electricity sector to encourage investment in generation and ensure the security of supply. This chapter reviews regulatory reform in three network industries (electricity, gas and telecoms), where further liberalisation, particularly in electricity retailing, and improvements in the regulation of telecoms would do much to further improve the business climate. The governance of public-private partnerships can be improved by increasing transparency and accountability in the concession process. In doing so, the government’s exposure to contingent liabilities can be contained.

Read also ECO Working Paper 455: Strengthening regulation in Chile: the case of network industries

Chapter 5: Making better use of labour resources
To sustain a high rate of GDP growth over the medium term, Chile needs to improve the functioning of its labour market. This chapter discusses options for reform in this area. The 2003 Survey found that Chile had greater potential for increasing labour supply than most OECD economies, having a relatively young population and low employment/population ratios for women and youths. An increase in labour supply could be achieved by relaxing restrictions on the duration of temporary contracts and the allocation of working time for full-time workers, as well as by improving options for childcare and pre-school education. Lower productivity accounts for most of Chile’s income gap relative to the OECD area. To bridge this gap, human capital accumulation could be encouraged for those already in the labour market by improving the efficiency of labour training at the enterprise level, in addition to continuing to raise the quality of formal education.

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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

Este es el enlace con la versión española de las recomendaciones del Estudio Económico de la OCDE sobre Chile.

To access the full version of the OECD Economic Survey of Chile:

  • Readers at subscribing institutions can go to SourceOECD, our online library.
  • Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop. 
  • Government officials can go to  OLISnet's Publication Locator.
  • Accredited journalists can go to their password-protected website .

For further information please contact Chile Desk at the OECD Economics Department at webmaster@oecd.org.  The OECD Secretariat's report was prepared by Luiz de Mello and Nanno Mulder under the supervision of Silvana Malle.

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