2014 Santiago Blog: Amid Dampening Growth, Chile's Government Seeks Reforms

Michelle Bachelet entered her second turn as Chile's president on a ticket of reform. And this she's done, pushing through almost all the 56 reforms she promised in her first 100 days in office. These include an important far-reaching tax reform. Bachelet's government hopes to use the new revenue the tax changes will bring to pay for big shifts in Chile's education system. The government argues broader and more accessible education will spur growth and development through increased human capital. Nonetheless, some believe now is not the right time to tamper with Chile's successful economic formulas given a recent economic slowdown. So what is happening with the economy?

Chile's economy experienced a slowdown over the past year or so, which the Central Bank says was caused by a fall in the price of copper, the country's main export, as well as dampened internal demand. This was coupled with the weak global economy, affecting other exports. Chile grew 5.4 percent in 2012 and 4.1 percent the following year, but growth over the fourth quarter of 2013 and first quarter of 2014 stood at 2.7 percent and 2.6 percent, respectively, according to Central Bank figures. 

The Central Bank doesn't think this trend will reverse in the short term, and changed its outlook for 2014 by half a point to a range of 2.5 to 3.5 percent. This is the second readjustment this year. In March, the Bank cut its forecast by a quarter point down to between 3 and 4 percent. But this doesn't bode well for a government attempting to restructure revenue sources.

The private sector is less optimistic. BCI, a local finance firm, just cut its forecast for 2014 to between 2.4 and 2.8 percent growth. In a note to clients, BCI wrote that “recent labor and retail sales indicators have continued to deteriorate, which anticipates low growth in consumption over the next few months.” BCI analysts also see internal demand as at least part of the cause of the economy's woes.

Foreign investment hasn't done so well, either. The UN Conference on Trade and Development said foreign direct investment to Chile fell 29 percent from 2012 to 2013. This dropped the country's ranking on the most attractive destination list from 10 to 17.

Still, there's hope. The Inter-American Development Bank (IDB) believes Chile will regain its growth momentum. IDB Chief Economist Juan José Ruíz said that Chile is an open and resilient economy able to withstand shocks, and Chile will regain 4.5 percent and 5 percent growth in the medium term. 

Chile's Economy Minister Luis Céspedes also believes the country's sound economic and fiscal standing will help it bounce back. He says the end of a long-term commodities boom impacted Chile's mining sector. Now, he says, “it is important to ask what are [Chile's] sources of future growth, so as not to be subject to the vagaries of external factors. For this reason you have to generate more human capital and education to generate an economy based on knowledge.”