Chief Economist, BICE Inversiones, Chile
Opportunities for the Chilean Growth
After the pandemic, and the stimuli that were implemented, global inflation rose to highs that we had not seen in decades, a phenomenon from which Chile was not exempt. However, with the normalization of the global supply of goods and the necessary monetary policy measures, we as a country have already managed to control this phenomenon, since inflation is one step away from reaching its goal of 3.0%1. Given the above, our concern should now be to stimulate growth. In this sense, having a lower central bank interest rate is of great help, but its main characteristic is to smooth economic cycles rather than promote greater growth in the long term.
As a country we went from growing on average close to 4.8% in the period between 1990 and 20192, while now the potential growth provided by experts is close to 2.0%3. Growing 2% on average for 10 years implies that in that period the GDP would increase by 22%, while if it were 4.8% this increase would be 60%. Assuming the same growth for GDP per capita, that would leave us with income of USD 39,600, just USD 500 short of Japan's income in 2020 4.
To recover these levels of growth, we could wait for a positive external shock which we cannot influence, such as an increase in demand for copper and lithium in the midst of the energy transition, or we could be more proactive and implement the necessary structural reforms to reactivate investment and growth.
Investors prefer to have legal certainty, therefore they would always choose to face known conditions in the long term. In this sense, it would be worse for an investor to confront the uncertainty of possible higher costs than to bear higher costs themselves. In this respect, important reforms, such as tax and pension reforms, are currently being discussed in the country. Although this causes uncertainty and in the short term may imply higher costs, on the other hand, proper design of these reforms could allow us to recover growth in the long term.
In the case of tax reform, a key point is to define how these additional resources would be used. Although higher taxation could produce negative effects for investment in the short term, on the other hand, if these funds were used to promote an increase in the country's productivity, for example, through greater investment in education or research and development, its long-term impact could be positive5.
Meanwhile, in the case of the pension reform, it is key that its design allows the country's savings to increase so that in the long term its impact may be positive. A higher level of savings, on the other hand, also allows for greater access to resources for investors. This becomes even more relevant after the withdrawals of pension funds, since the capital market was reduced significantly, with USD 50 billion leaving the system. For this reason, an individual capitalization system or inter- or intragenerational savings could be effects to achieve this objective6.
Although economic income is not the only important variable to measure the quality of life of a country, it is one of the most relevant. Once one’s most basic needs are covered, which can be achieved by having a higher income, people can carry out other activities that would allow them to improve their quality of life.
Footnotes:
“Boletín Índice de Precios al Consumidor Enero 2024”, Instituto Nacional de Estadísticas.
Base de datos estadísticos, Banco Central de Chile.
Acta Comité Consultivo del PIB No Minero Tendencial.
Purchasing power parity; 2017 international dollar. World Economic Outlook, FMI.
“Impacto en el nivel de PIB per cápita de largo plazo de la Reforma Tributaria”, Ministerio de Hacienda de Chile.
“Evaluación de impactos macroeconómicos de largo plazo de modificaciones al sistema de pensiones”, Banco Central de Chile.
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