Second-Generation Reforms enter consolidation phase
As part of our weekly monitoring of Country Risk Chile’s Top 5 Political Risks 2016, the following analysis focuses on “social change” and second-generation reforms at the end of a 25-year political cycle in Chile and the beginning of democratic consolidation efforts. The announcement made at ICARE's 2016 meeting by center-left Nueva Mayoría coalition’s Nicolas Eyzaguirre to the entrepreneurial elite presents itself as a major political milestone regarding moderation on reforms. Presidential Secretary Eyzaguirre announced that the bulk of reforms contained in Bachelet’s Agenda were in the finalization stage, and any suggestion for additional reforms would have to be ruled out. Eyzaguirre stated it was time to send a message of certainty, consolidate reform legislation, gain voters’ support, and reach the next presidential elections in good standing. With this announcement, Chile's political correlation of forces at the end of a 2-year rule under Bachelet’s second government is moving to the political center of the NM coalition, thus giving out signs of moderation concerning efforts on structural reforms to tackle disparities and inequalities produced in the wake of 25 years of sustainable growth and record high copper prices. Such moderation is in response to external forces affecting the economy worldwide. It echoes pragmatism against the backdrop of record-low copper prices, an appreciated dollar, and record-low investment levels in Chile.
At ICARE’s 2016 meeting, Eyzaguirre presented the local entrepreneurs with the government’s assessment of second-generation reforms. According to Eyzaguirre, half of the initially proposed reforms contained in the Government’s Agenda had already been dispatched to Congress in the first half of the NM Government, where they had become the subject of intense legislative scrutiny. Eyzaguirre called the legislative effort an accomplishment of the NM's emblematic banners, such as the elimination of the binomial law (which artificially reduced political forces to a bipartisan system and enabled minority MP's to keep their seats in Congress), a new tax reform, the AUC (or "civil union association" for same-sex couples) and the creation of the Human Rights Undersecretariat.
Eyzaguirre told ICARE’s entrepreneurs that consolidating on reforms and emphasis on economic growth would be given top priority for the next 2 years before Bachelet's government reaches its fourth and final year. The tone of the announcement signals the shift from reforms-focus to growth-focus and, therefore, the accommodation of political forces to the center of the Nueva Mayoria coalition ahead of the presidential elections in 2018.
Eyzaguirre emphasized that during the first half of NM's rule, 88 bills had entered the Chamber as part of their electoral promises to deal with disparities and inequalities in the country. NM's Bachelet had promised to tackle the gaps through structural reforms and to pull more resources; a tax reform was devised, negotiated, and amended during 2 years to finance, among other things, free access to university students coming to the lowest quintiles of society, raise salaries for teachers in the public system and improve facilities in establishments.
Eyzaguirre reviewed the legislative work during these 2 years of the NM government as part of their pledged program and political campaign that led President Bachelet to reach the presidential seat again. The announcement coincides with Bachelet’s private meeting in Washington last week with major investors to reassure them of the usual business climate they had enjoyed in the last 25 years in Chile. Companies such as Oracle, Goldman Sachs, Equifax, AES Corporation, Principal Financial Group, Metlife, Rio Tinto, First Solar, and Intel run important business operations in Chile. At the meeting, members of the Chilean-American Chamber of Commerce, Council of the Americas, and these major investors met with Bachelet last week, and signs of confidence and reassurance were given.
Eyzaguirre questioned -however - that second-generation reforms were the reason for the economic slowdown in Chile but acknowledged that investors’ confidence had been eroded during these 2 years of negotiations to carry out reforms intended to comply with electoral promises. Eyzaguirre re-iterated the times were calling to consolidate on what had been achieved, send out signs of certainty, and invigorate local growth, amidst the current climate of political and entrepreneurial class attrition, with the latest cases of corruption and political involvement in irregular campaign financing, which - according to the presidential secretary - were bound to have some impact on the economy. On that aspect, Eyzaguirre was clear: unity and certainty were important targets to hit now. Eyzaguirre insisted Bachelet’s second half needed to focus on certainty, enhanced productivity, and improved investor’s confidence. In other words, the rhetoric on reforms had to give way to serious talk on growth.
In that line, Finance Minister Rodrigo Valdés also announced last week that 22 measures are to be implemented to reactivate productivity, mainly expand financing to small and medium companies, promote the export of services, and simplify red tape. Valdes hinted at innovations in the job market, energy sector, and concession bids.
Indeed, 2016 has been named "the year of productivity" by Michelle Bachelet and a Pro-Growth, Pro-Investment and Productivity Agenda is underway.
These 3 announcements (Icare's, Valdes’s 22 measures, and Washington’s meeting) come ahead of the Annual Address to the Nation on May 21st, where Bachelet is expected to highlight NM’s structural reforms as accomplished, give out a sign of confidence to global investors, consolidate on the bulk of structural reforms and shift focus on the presidential elections in 2018.
ICARE’s experts agree on reasons for the economic slowdown, partly due to external factors and attrition in the political and economic elite – mainly recent cases of tax fraud, duopoly, and the cozy relationship between money and politics (via irregular campaign financing). They agree that a new era of reactivation based on productivity is imperative, and signs of certainty, as announced by Eyzaguirre, go in that direction.
For more information, see Icare's meeting, Valdes's 22 measures, Washington's meeting.
April 1st, 2016, Soledad Soza
