2016 - The year of productivity in Chile
As part of our weekly monitoring on Country Risk Chile’s top 5 political risks 2016, we bring a fresh analysis on risk Nr 5, Productivity. This week, we analyze the public and private initiatives to foster growth and productivity against the negative external scenario of low record copper prices, China's economic slowdown, an appreciated dollar and the impact of second-generations reforms - led by the center-left Nueva Mayoría coalition- on investors' confidence.
On March 31st, Chilean Finance Minister, Rodrigo Valdés, announced the implementation of 22 measures as part of the 2016 Chilean Agenda for Growth and Productivity declared by President Michelle Bachelet. Alongside these 22 measures, the Chilean CPC (Confederation of Productivity and Commerce, comprising the local entrepreneurs) came up with 109 additional measures to boost growth. There is a widespread concern as well as an agreement that the country needs to re-direct efforts on growth and minimize the impact of second-generation reforms on investors' confidence. Both government authorities and local entrepreneurs agree on the urgent need to find new strategies to deal with external factors such as the end of the commodities boom, the appreciated dollar and low record copper price, especially when the Chinese are shifting their economy - from being a giant consumer of raw materials to playing a major role in the service market. Macroeconomic factors and the uncertainty triggered by internal reforms are compelling authorities and local entrepreneurs to analyze strategies to recover the path of sustainable growth that Chile has enjoyed in this 25-year political cycle and ensure its usual resilience at a time of volatility. What is new in this regard is the inclusion of advanced human capital in the Agenda and general recognition about improving educational variables for the first time amongst local capital stakeholders.
Events leading to urgent measures on productivity
The warning came from Rodrigo Valdes and the Central Bank at the beginning of March 2016, with the announcement that reforms under way would have to be carefully financed and planned in consideration to the projected budget 2016/2017. The announcement meant the projected figures would have to be reduced due to external variables such as low record copper price worldwide - a major factor to guard against irresponsible social expenditure. Such move is indicative of fiscal austerity on rainy days.
Valdés called for austerity times, in that sense, measures in the public sphere would necessarily mean that civil servants' salaries would have to be frozen. Then, Nicolas Eyzaguirre, the Government Secretary, announced to entrepreneurs that the bulk of reforms had reached its final stage and the focus was being shifted to growth. Then came the expectations raised by key actors waiting to hear on figures for a restricted budget. Like the economies of Peru, Colombia, and Mexico, the Chilean budget was also reduced, though it was the smallest reduction in Latin America, a cut of USD 450 million. The projected GDP was estimated to grow at 2% but the local financial market set it at 1.8% for this year.
In mid-April, the IMF came up with a much lower projection of 1.5% GDP for 2016. Finance Minister, Rodrigo Valdes - however - suggested the IMF projection had not considered an improvement in the external conditions, but he understood IMF was trying to reach for the most pessimistic figure in order to be able to explain a positive trend in the next quarter.
As part of our weekly monitoring on Country Risk Chile’s top 5 political risks, this week we analyze the macro and micro conditions as variables causing reduced rates of FDI and lower investor's confidence over second-generation reforms in Chile. These reforms have culminated in new legislation to date: indeed, the first two years of Bachelet's Nueva Mayoria center-left coalition (2014-2015) has seen a much controversial tax reform, a much debated educational reform (triggered by students' marches in 2011 onwards) and currently a process of reconsidering a new Constitution for Chile which is causing the usual controversy in the media, political parties and the civil society. The 1980 Constitution is highly contested in a new political era, there is a view in the public sphere that the Constitution lacks legitimacy since it was drafted and passed under Pinochet's rule despite its many changes and reforms made during 25 years of transition to democracy.
It is worth mentioning that second generation reforms have been deemed necessary by IMF and OECD to jump into inclusive growth but they have been fiercely and ideologically negotiated against the backdrop of low copper prices, and an appreciated dollar, and no less importantly, in a climate of elite attrition with cases of political campaigns irregularly financed by private companies and the subsequent tax fraud cases surfacing the media, causing national uproar and eroding confidence in political parties, political actors and the role of politics. As monitored by Country Risk Chile in an earlier analysis, the cases of corruption have been reaching the courts with the media playing a key role in denouncing and bringing these cases under the spotlight, the judiciary has played its role with independence, proving institutions are working for the public good. Some cases of poor regulation such as duopolies, cartels, and fraud have put the local entrepreneurial elite under severe scrutiny. In that regard, the move to pass legislation to secure transparency and impose severe jail sentences for those breaking the law has been hailed in April this year as a major milestone.
In a recent meeting at ICARE on April 20th, key stakeholders such as CPC, President Bachelet, Finance Minister Valdes, the workers' union CUT (Central Unitaria de Trabajadores) and small and medium companies Pymes, met to discuss productivity; the CPC representatives stated the urgent need for strategic initiatives to boost productivity Michelle Bachelet reassured representatives measures have been given green light to be implemented as legislation. We observe that the politics of consensus which has led to agreements between private actors and the state is producing a new generation of ideas to tackle red tape to facilitate trade and prompting the usual defensive-offensive strategy to capture and attract capital investment.
What is extraordinary in this regard is the fact that CPC discussed at length the role of advanced human capital and the necessity to foster Ph.D.'s and postdoctoral studies in Chile as well as maintain a database with experts and professional advice. For the first time, advanced human capital and the variables of education are being introduced in the Agenda of Productivity in line with OECD guidelines and WEF reports which have warned in previous years about the negative impact that a poorly- educated labor force and professionals have in the economy. Country Risk Chile estimates efforts on inclusive growth on education access should go along with quality-driven measures such as making sure private universities contribute to I&D as well as the state, and capital owners go in the line of philanthropy, and public-private synergies emerge with strong impetus.
Country Risk Chile estimates the usual austerity, pragmatism, and politics of consensus continues to be a major political and institutional capital gained in the 25-year political cycle leading to second generation reforms. We place our analysis on the opportunity side, the moves to legislate on cartels, duopolies, irregular political campaigns, education access and quality are in that line; also of great significance to boost productivity is the implementation of strategic initiatives to deal with external factor, but also by the way of new legislation which serves as strong deterrent against duopoly and fraud. Therefore, the recent announcement by Government's Eyzaguirre that the bulk of reforms is now complete and that the focus of interest is shifting to growth is sending a strong signal to investors worldwide that pragmatism is prevailing over ideology as a trend in the XXI century Chile.
Regarding the Constitution, Bachelet and the Nueva Mayoría government stated their adherence to the rules of the game this year. Bachelet travelled to Washington at the end of March to meet with major investors in Chile, to explain reforms were necessary to advance in inclusiveness but also to reassure them that the usual climate of freedom to do business is to remain intact as it has been in 25 years of transition to democracy, a period over which Chile reduced poverty rates dramatically and jumped into a phase of transition to full development (WEF 2015).
The recent controversy over a new labor reform - currently muddling through the various institutions - and the antagonistic views from entrepreneurs for greater power to unions will find the same path of moderation once the political debate and the institutional bodies are exhausted.
May 3rd, 2016. Soledad Soza
