OECD Economic Surveys Chile February 2021 OVERVIEW http://www.oecd.org/economy/chile-economic-snapshot/ This Overview is extracted from the 2021 Economic Survey of Chile. The Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries. This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. OECD Economic Surveys: Chile© OECD 2021 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgement of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected] of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. | 1 Executive summary OECD ECONOMIC SURVEYS: CHILE 2021 © OECD 2021 2 | its pre-pandemic levels in late 2022. Private The social protests and the COVID-19 consumption will be a main driver of the outbreak put the economy to a halt recovery, temporarly sustained by extraordinary withdrawals from pension funds, public support Chile has experienced tremendous economic to households, and a gradual improvement of the progress and sustained poverty reduction labour market sustained by hiring subsidies. over the past decades (Figure 1). During 2020, Investment will regain momentum at a slow Chile faced an unprecedented recession after pace, conditional on the evolution of the two large shocks, the social protests at the end pandemic and the effectiveness of the of 2019 and the COVID-19 outbreak. A strong vaccination process in an uncertain institutional and macroeconomic framework is environment, and will be driven by public allowing Chile to navigate well the crisis. infrastructure plans, supportive financing conditions and tax incentives. In the short term, the policy priority should continue to be preventing contagion, Table 1. Chile is set for a gradual recovery continuing the vaccination programme and 2019 2020 2021 2022 avoid future waves, supporting the health Gross domestic product 1.0 -6.0 4.2 3.0 system, the most vulnerable families, Private consumption 1.1 -7.7 7.5 3.4 Government consumption 0.0 -2.1 5.5 1.5 workers and firms. In the medium term and with Gross fixed capital formation 4.2 -13.9 1.8 4.1 the recovery underway, Chile should continue an Exports -2.2 -0.7 7.2 4.1 ambitious structural reform agenda to foster Imports -2.3 -13.4 8.4 5.6 inclusive growth and reduce a persistently high Consumer price index 2.6 2.9 2.6 3.0 level of inequality. As the economy recovers, a Central government -2.8 -8.7 -4.7 -3.8 window of opportunity may be open to create financial balance (% of GDP) consensus among citizens around major pending Current account balance -3.9 0.3 -0.2 -0.7 reforms and continue to reduce inequality. (% of GDP) Figure 1. Progress in poverty reduction has Source: OECD, Economic Outlook 108 database. been impressive but inequality remains high The policy reactions to the pandemic have Inequality and poverty overtime Gini index % of population been swift and bold. Chile entered the crisis 70 42 Gini Poverty rate (RHS) with the most fiscal space in the region, solid 60 36 fundamentals and credible institutions. Containment measures were taken early, and the 50 30 coordination between fiscal authorities, the Central Bank and the financial market regulator 40 24 has been smooth and swift. The authorities have 30 18 introduced unprecedented fiscal and monetary stimulus packages, among the largest in Latin 20 12 America, to mitigate the impact of COVID-19 and preserve jobs and liquidity needs. An agreement 10 6 between political parties led to a temporary 0 0 emergency plan in mid-2020 for the next two 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 years to support support a swift and inclusive Source: World Bank, World Development Indicators database. recovery and a commitment to fiscal StatLink 2 https://doi.org/10.1787/888934193117 consolidation thereafter. Monetary policy has also significantly eased and should continue to COVID-19 could continue to strike in future support the recovery. waves, delaying the recovery and leaving The outlook is bleak and subject to sizeable deeper scars. Chile is set for a gradual recovery risks in a higher than usual uncertain over the next two years, with activity returning to environment. Limits to international travel, bans OECD ECONOMIC SURVEYS: CHILE 2021 © OECD 2021 | 3 on large public events, and some restrictions on one of the lowest in the OECD. While the effects bars and restaurants could persist. The of these policies will be felt only in the long run, economic impact of the pandemic could be long- education constitutes a pivotal lever to fight now lasting, driven by an increase in economically the consequences that COVID-19 could imprint vulnerable households and more indedbted on inclusiveness. Spending on education should firms. The evolution of the pandemic and its be stepped-up and prioritised on high-quality effects on households and firms, the ongoing early childhood, primary and secondary constitutional review and a series of elections education, as a prerequisite for raising skill levels during 2021 could further increase uncertainty and expanding tertiary education. Access to and dampen investment. The resurgence or the affordable childcare would also encourage deepening of social conflicts could also delay the greater female labour force participation. economic recovery. Exports and job creation Figure 2. The outbreak may reinforce the would benefit from a potentially stronger global already high share of vulnerable households recovery than anticipated. The recovery could be Share of economically vulnerable households stronger if herd immunity through vaccination is % 2017 or latest year available % reached faster. 60 60 The economic recovery should be 50 50 accompanied by action to limit the threats 40 40 from climate change. Chile has a solid track record in this area, but the recovery will give a 30 30 chance to integrate environmental improvements further in the economic landscape. The 20 20 unintended negative environmental impacts of 10 10 new short-term fiscal and tax provisions should be evaluated. The use of financial support 0 0 OECD CHL measures could be directed towards supporting stronger environmental commitments. Source: OECD, Wealth Distribution database. StatLink 2 https://doi.org/10.1787/888934193136 Avoiding hysteresis effects on inequality after the outbreak The tax and transfer system could become a key means to reducing economic More than half of Chileans are economically vulnerability. Taxes and transfers do not vulnerable (Figure 2). They are not counted as provide enough protection against adverse poor but remain at risk of poverty. They have low economic shocks (Figure 3). The base of the productivity, many work in informal jobs personal income tax is narrow and broadening it associated with little protection and unstable once the recovery is well on its way would raise incomes. The outbreak is likely to reinforce these needed revenue. In return, the extra resources vulnerabilities. Many households will have to deal can be devoted to the creation of a negative with plunging incomes, with few financial buffers income tax, which would assure each household to cushion themselves and a substantial risk of and individual a basic benefit. falling into poverty. Therefore, continuing targeted, temporary income support is crucial in In response to the outbreak, the government the near term, as done recently with the took rapid actions to ensure access to health Emergency Family Income. services for all. There is substantial space to improve the efficiency, quality and equity of the Improving educational outcomes would be health system. The reform proposal announced the most powerful tool to achieve lasting at the beginning of 2020 to cover at least 80% of improvements in inequality over time. Access health care costs and the reduction in the price to quality education remains strongly linked to the of medications by more than half is a welcome socio-economic status of the family. Public step. spending on primary and secondary education is OECD ECONOMIC SURVEYS: CHILE 2021 © OECD 2021 4 | Figure 3. The tax and transfer system could The deployment of fixed and mobile do more to reduce inequality broadband infrastructure is essential to fully reap the benefits of the digital era. Replacing Differences in Gini coefficients before and after tax and transfers, in percentage points, 2017 or latest year available the existing burdensome regulation on 0 0 concessions will be key to fostering deployment of communication infrastructure. -2 -2 Figure 4. Competitive pressures remain low -4 -4 Extent of market dominance, 2019 7=best 7=best 7 7 Dominated by a few Spread among -6 -6 business groups many firms 6 6 -8 -8 5 5 -10 -10 4 4 -12 -12 3 3 OECD CHL Source: OECD, Income Distribution and Poverty database.