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The challenges facing Chile’s economy

Over the past three decades, an economic model has gained a foothold in Chile that has proven successful at a number of levels, such as enabling high GDP growth rates (yearly average of 5.3%), helping the country to significantly bridge the income gap with developed countries such as the U.S. and Germany and improving  in the living standards of the population.

This model is characterized by an economic structure compounded by a self-governing Central Bank, with a clear commitment to ensure price and financial stability, a consolidated floating exchange rate scheme, a Government that fulfills a subsidiary role and a fiscal regulations that have contributed to dampen economic cycles. All this rounded off with a commercial and financial openness policy and a successful banking oversight and regulation system that have helped Chile claim a spot among the world’s 35 most competitive economies.

“From an economic standpoint, the country faces cyclical and structural challenges, the most pressing being the recovery of its capacity to grow

One of the effects that this story of growth and success over the past three decades, has been the growth of the country’s middle-class, which demands better public services, including education, security, healthcare and transport. For public authorities, satisfying these demands without compromising the solid financial position that Chile has achieved is one of the greatest challenges they face in public policy matters. Also, just as in the rest of the world, it has become evident that economic growth has not come with a sufficient reduction in income inequality, a fact that has driven large sectors of the population to support wealth redistribution policies.

From an economic standpoint, the country faces cyclical and structural challenges, the most pressing being the recovery of its capacity to grow. With the decline in mining investments triggered by the end of the commodities super-cycle, total investment figures have been declining for the past three consecutive years. Additionally, the expectations of the economic agents have dropped to levels not seen since the 2008-2009 international crisis, leading to a delay in investment and consumption decisions. As a result of this situation, economic growth has stalled in the past three years, in what has been the first downturn since the Asian financial crisis for the country in its path to bridging income inequality with developed countries.

Boost the confidence

Boosting confidence among economic agents is key to recovering the country’s capacity to grow in the short term. To this regard, the economic and political impact of the manner in which structural reforms (fiscal, labor and education) have been implemented over the course of the past three years has taught a valuable lesson to authorities, who have become aware about the importance of engaging in a technical debate and taking a consensus-building approach when considering any further transformations in the future.

Another key issue to curb the country’s economic vulnerability to commodity price cycles is reducing copper dependence. Although this would require either diversifying or adding value to the current export portfolio, it certainly would be very hard to achieve without a competitive exchange rate.

So far, the country has borne only the negative effects of its currency’s depreciation (inflationary impact), which has failed to increase exports sufficiently. In fact, the sector has been under stress by a drop in its prices in dollars, while production costs have spiked and product demand has declined.

“Another key issue to curb the country’s economic vulnerability to commodity price cycles is reducing copper dependence

Only through a steeper and multilateral depreciation of the peso, a further adjustment of the labor market, or a combination of both will it be possible to make the adjustment that the sector needs come to fruition. Considering the hefty social cost that the second option would entail, the first one seems to be the most viable course of action, and this will require maintaining or expanding the monetary boost.

An issue over which a large portion of Chile’s society seems to agree is the need to adopt measures aimed at boosting productivity, a key factor for ensuring higher growth rates in the long term.

Considering that two of the main factors undermining competitiveness are the lack of innovation and the low level of sophistication of businesses, it is essential to build a more skilled workforce, more closely linked to the business world and, at the same time, offering more and better job opportunities to women and youths, through the implementation of policies that help progress towards a more flexible and modern labor market.

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