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Chile’s Controversial Reforms
By admin November 3, 2015

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Chile’s economic performance is historically considered to be one of the strongest in Latin America. Chile’s per capita gross domestic product is about $22,000 in purchasing-power-parity terms, exceeding Argentina, Brazil, and Mexico. Moreover, Chile is often credited by economists as a model economy for its sound monetary policies. Chile’s central bankers have prevented inflation and have kept long term interest rates low. The country has also accumulated low debt throughout the years and its macroeconomic rigor has enabled the government to run expansionary fiscal policies. Over the past 30 years, Chile has experienced an average growth of 5.3 percent. Moreover, it is also the world’s largest producer of copper, which accounts for half of Chile’s GDP.

However, despite these successes, Chile’s economy has recently experienced some set-backs. The revenue from Chilean copper exports varies with the global price of copper. Unfortunately, the global price for copper has halved since 2011. That being said, mining firms have simultaneously cut back on their investments due to the drop in copper prices.

It is important to note that Chile has historically been able to adjust to the fluctuation of copper prices using a wise fiscal strategy that involves budget surpluses in years when copper revenue is high, with the additional funds channeled to a national stabilization fund for when copper prices drop. However, President Michelle Bachelet has recently been under fire for the recent stunt of growth in Chile as growth fell to 1.9 percent last year. Making matters worse, critics of President Bachelet say that her reforms continue to destroy the robust Chilean economic model, growth, and investment prospects.

Bachelet was voted into the presidency in 2013 with 62% of the vote on a platform of reducing inequality. In her first year in office, she pushed through reforms on taxes and education. Furthermore, there is currently a union bill being discussed in Congress to balance rights for workers with flexibility for business. Bachelet’s critics claim that last year’s corporation tax increase from 20 percent to 25 percent along with a boost in the power of trade unions will turn investors away from Chile. Furthermore, her critics claim that paying for universal education will require high tax rates and create a habit of mismanagement of fiscal policy.

Bachelet’s Finance Minister, Rodrigo Valdes, admits that the education reforms are expensive but argues that education is the key to unlocking Chile’s growth potential and enabling it to escape the “middle income trap.” Moreover, in regards to the labor reforms, Valdes says, “Modern societies have unions, and businesses are going to have to learn how to deal with that. I can quite understand that some businesses might not like it, but without the reform our social contract is not sustainable.”

The Finance Minister remains confident in Chile’s ability to bounce back from the external shock of low copper prices while simultaneously adjusting to the reforms pushed forward by the government. However, President Bachelet’s approval ratings have dropped to around 25% as the economy steadily slowed down and after a scandal ensnared her son, in which he appeared to use his influence to obtain a $10 million loan for a business deal. Analyst will continuously look into the economic performance of Chile to indicate whether or not the government’s reforms are successful on a macro level.

 

For More Information:

http://www.economist.com/news/americas/21676825-michelle-bachelets-reluctant-retreat-towards-centre-damage-control-chile

https://www.project-syndicate.org/commentary/chile-bachelet-economic-uncertainty-by-martin-feldstein-2015-10

http://www.bloomberg.com/news/articles/2015-10-10/copper-slump-pressuring-chile-to-shift-gears-valdes-says

http://www.ft.com/intl/cms/s/0/d60ac2b2-7453-11e5-a129-3fcc4f641d98.html#axzz3qOZGB5yf

http://www.ft.com/intl/cms/s/0/ea060ef4-6ae2-11e5-8171-ba1968cf791a.html#axzz3qOZGB5yf


Thanks for sharing !


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