/Can Chile Rebalance Economic and Social Development?

Can Chile Rebalance Economic and Social Development?

With presidential elections coming in November, Chile’s economy has been at the core of ongoing political debate and recent controversies in the government. President Michelle Bachelet nears the end of her second term in power, leaving sluggish economic growth and unfulfilled promises of social inclusion behind —a stark contrast to her more successful first spell from 2006 to 2010. Bachelet’s economic team resigned last month in an unprecedented event since Chile’s return to democracy. Their decision came after the government blocked an iron ore mining venture, valued at US $2.5 billion, due to pressure from environmentalists. The investment was politically sensitive to backlash from the administration’s left-wing base. At the same time, it presented a considerable opportunity to revitalize Chile’s prominent mining industry amid weak GDP growth, averaging below 2 percent in the past three years. Despite recent upticks in export growth and the President’s approval ratings, which reached a two-year high of 34% this month, the country faces strife over feeble economic results. This recent development points to a predominant question about the future of Chile and Latin America: can economic growth be rekindled to the benefit of social gains?

On September 22nd, former president and current presidential race front runner, Sebastian Piñera, spoke at the Wilson Center on sustainable economic growth in Latin America. Piñera’s grasp of the drivers and challenges of sustainable development intertwined those of globalization and contemporary economic theory. Although his pro-business, right-of-center, platform presents him as the “pro growth” candidate, Piñera stressed that “our mission is not only economic growth. It is much more than that. It is to improve quality of life – and for that, you have to improve the quality of our democracy, our institutions and to combat corruption in a much stronger way.” Piñera launched a list of proposals for his government in May of this year and will present an economic plan by the end of month. It will remain uncertain if the presidential candidate’s plan could tangibly contribute to economic growth while improving social inclusion. The translation of these ideas into result-oriented action has been hard, especially in Latin America. Regardless of the results in the November election, some of the main challenges that Chile’s next President could face include mounting pressure for reforms, commodity prices, and balancing the role of China and the U.S. in the region. Chile has become Latin America’s richest country in terms of GDP per capita, thanks to an open market economy, natural resources wealth, and strong institutions. According to a recent UNDP report, real incomes for the poorest decile of the Chilean population grew 145 percent from 2000 to 2015, in comparison to 30 percent for the richest decile. Inequality remains high in Chile, but its performance stands as a shining example for the region.

Source: IMF Outlook Report, 2016

The question now is whether Chile’s next government can build on what has been achieved. President Bachelet’s approach to social development focused on redistribution, as progressive tax and labor reforms were passed during her second term. These reforms were harshly received by the Chilean public, as their favorability plummeted especially after implementation. Bachelet’s successor will have to enact tax and labor regulations that deepen social development without stifling growth and competitiveness. Whoever sits in La Moneda will also have to pass a much-needed pension reform. Pension payments have not yet been updated to consider longer life spans, and the current administration is running out of time and backing to amend the system. With regards to commodities, Chile is the world’s largest copper producer, responsible for around one third of total global output. It is also highly dependant on trade, as export revenues account for roughly half of its GDP. Copper, which makes up for close to 50 percent of Chile’s total exports, presents two threats for the country.

The first is the trade-off between achieving higher output and dealing with interests from unions and social movements. Earlier this year, Chile faced a 43-day disruption at its largest copper mine due to labor strikes. This disruption alone translated into almost half a percentage point loss from the country’s annual growth rate. Current supply interruptions from mining company Antofagasta and any future disturbances present a threat to the country’s economy, as well as to social stability. The second threat is the prospect of declining revenues. After plummeting in the past two years, prices of copper futures have rebounded, rising close to 20 percent this year. Prices are pushing higher mainly due to China’s above-expected industrial performance and its demand for the metal, which accounts for over 60 percent of global copper usage. However, market fundamentals could deteriorate if China faces a steeper slowdown, or if abundant stockpiling reduces future copper demand. Such a slowdown would hurt cash flows for Chile, and if budget planification includes bullish copper pricing, then the government may end up with substantially less money than expected. This would in turn affect the implementation of government spending and investment. Another challenge for Chile’s next government is continuing to diversify both its sources of revenue and trading partners. Significant progress has been made, as high-tech agricultural products like apples, grapes, and nuts have gained weight in the country’s export basket. Strengthening trans-pacific relations have seen Chile become China’s main supplier of these goods as well as copper. In 2015, The Chinese government vowed to increase trade with the region to over US$ 500 billion and direct investment to US$ 250 billion by 2025. While the United States withdrew from the Trans-Pacific Partnership, the already-prominent influence of China in Latin America is expected to grow substantially. China has already surpassed the US as Chile’s main trading partner, as it has in Peru and Brazil. However, the US remains a critical market and regional leader.

The next Chilean government will have to address this shifting balance of power, while looking to attract investment and expand trade beyond China and the United States. At the same time, it must enact reforms that complement its historically successful market economy, diversify its trade products and partners, and maintain its competitiveness as technology rapidly develops. Despite low commodity prices during her term, President Bachelet’s tweaks to Chile’s market economy have sidelined the pro-economic growth agenda that spurred the country’s development in previous years. Even as distributive policies have sought to ameliorate social inclusion in exchange for business alternatives, it is important for Chile to maintain its competitive advantage if they seek to continue fostering sustained growth.

Thanks to LAPO for sharing this piece with us.