Basic statistics of Chile (2010 unless noted)
Chile’s strong recovery lost some momentum as the world economy slowed, weakening copper prices and consumer confidence in Chile. Given considerable uncertainties regarding the health of the world economy, more supportive macroeconomic policies may be needed in the short run. In the longer run, reducing poverty and inequality is a key challenge. Both remain high by OECD standards, notwithstanding impressive progress. Redistributive transfers and progressive taxes are very limited. Better education and job opportunities for the poor would enable more Chileans to contribute to a more dynamic and productive economy and thus to higher welfare.
Assessment and recommendations
Chile’s vigorous recovery after the global recession of 2008-09 and the devastating earthquakes and tsunamis of early 2010 has lost some momentum, as the world economy has turned down. GDP is projected to grow by 6½ per cent in 2011, but to ease to 4% in 2012. Provided that confidence improves and the global economy picks up again later in 2012, growth in Chile should rise to around 5% in 2013. However, as a small, very open economy with a large share of copper in total exports (close to 60% in 2010) Chile would be vulnerable to a sharper than expected global downturn, notwithstanding the fact that it recovered fast after the global crisis of 2008/2009 and proved resilient to the earthquakes and tsunamis in 2010.
Reducing poverty in Chile
Notwithstanding impressive progress, poverty and inequality remain high in Chile in OECD comparison, and the tax-benefit system does little to improve on this. The government plans to introduce a new cash transfer for the poor, the Ingreso Ético Familiar. This is a welcome initiative. However, the transfer will be modest by OECD standards, at least initially, and it will be quite narrowly targeted at families living in extreme poverty. Over time, the government should consider increasing the size of this transfer and opening it to a wider range of beneficiaries through gradual benefit withdrawal. Strong support for the poor to find jobs of decent quality will be key to help them overcome poverty in a sustainable way. Ingreso Ético Familiar will come with an employment programme for beneficiaries. This should build on the existing infrastructure of active labour market policies, which will need to improve at the same time. The government should strengthen the capacity of local labour offices and use the current evaluation of training programmes to retain only those of proven effectiveness, while focusing them more on low-skilled workers and the unemployed. Strengthening unemployment benefits, while limiting severance pay, would make employment protection more effective and do more to avoid labour market duality.
Building blocks for a better functioning housing market in Chile
Chile has made good progress in improving housing conditions, but still around 10% of the population lives in either overcrowded houses, or of inadequate quality and/ or with poor access to basic services. Improving further housing conditions of the poor is important for curbing poverty and reducing inequality. First, better targeting of housing subsidies will be essential to free resources for those truly in need. The government should also rethink subsidies, which are currently directed exclusively at ownership. Means-tested rental cash allowances coupled with more balanced tenant-landlord regulations would strengthen the rental market, thus enhancing residential mobility and potentially reducing segregation. Second, better enforcement of social housing quotas for new building projects coupled with investments in urban renewal and social services in poorer neighbourhoods and developing unused land in urban areas could also help to reduce inequalities. Third, effective thermal and energy standards for buildings would improve the quality of the housing stock, protect public health and reduce air pollution. Limiting construction in fault lines and risky coastal areas could also increase Chile’s resilience to natural disasters. Fourth, taxing housing so owing is not favoured over renting would reduce distortions and make the tax system less regressive. Finally, enhancing the responsiveness of housing supply to demand would ensure there is a good match between housing construction and demand, and avoid that public support gets capitalised into housing prices.
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