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Equality the key to economic dynamism in Chile

Article - December 18, 2014

“President Bachelet understood that Chile could not wait any longer and she took on the challenge and decided to stop sweeping our inequalities under the carpet,” says Ximena Rincón, Minister Secretary General to the Presidency

In as little as 30 years, Chile has been transformed—from one of the Latin America’s poorest countries into one of its most stable and prosperous, with GDP growth averaging a robust 5% between 2003 and 2012. The country’s economic transformation has been dubbed the “Latin American miracle”, while Forbes has hailed Chile as the region’s “economic sweetheart”. A testament to Chile’s progress came in 2010 when it joined the Organization for Economic Co-operation and Development (OECD)—the first South American nation to do so.

Economic development in Chile has depended heavily on mining, and in particular copper. It is the world’s number one copper producer and exporter—possessing 28% of world’s copper reserves and responsible for almost a third total global production. The mineral accounts for around 60% of exports and 13% of GDP.  “Chile has generated $100 billion in taxes from the exploitation of its resources,” says engineer, former minister and current Director of the School of Engineering in Mines and Natural Resources at the Central University of Chile. “These resources have been used to improve the economic indicators of the country. In 1990 per-capita income was $3,000. Today it’s $20,000. The poverty rate was 33% in 1990, while today it’s less than 13%.”

Chile’s mining sector will continue to be instrumental for economic growth; investments in mineral exploitation totaling more than $100 billion are expected to be made in the next ten years as demand for its resources from China and other rapidly developing countries in Asia continues to grow.

However the new coalition government led by Michelle Bachelet, who was elected in March with 60% of the vote, is determined to lower the country’s dependence on its finite mineral resources. Central to Ms. Bachelet’s plan is eliminating equality, which she believes is necessary for inclusive and sustainable growth. “It is the most intelligent and reliable way to bank on our future economic dynamism, political stability, and social cohesion,” she declared in her address at the Brookings Institution in Washington D.C. in July.

Ms. Bachelet’s plan to eliminate inequality and spur economic diversification focuses on investment and reform in education. She believes disparity of opportunity is most apparent in Chile’s educational system and eradicating it is the first major step towards tackling inequality. Furthermore it is expected that investment in a quality education system will be the basis behind the creation of a knowledge, innovation and production-based economy.

 “We don’t have a quality and fair education system. The children of the rich go to good-quality private schools and leave with an initial advantage. Those who cannot afford to send their children to private schools will send them to subsidized schools. The most vulnerable are going to municipal public schools. So education is segregated, and to change that we must make efforts to benefit the most vulnerable” says the President of the Senate, Isabel Allende Bussi (whose father, the much-revered Salvador Guillermo Allende, was president from 1970 until his death in 1973 during the Chilean coup led by Augusto Pinochet).

The coalition government’s education reform bill aims to eradicate profit-making and discrimination from the education sector and to create fair, equal and affordable access to first-class state universities for all Chileans. Ms. Bachelet has also vowed to raise the number of toddlers attending nurseries to 30%, up from the current 17%.

While the president’s education reform is no doubt commendable, what has been contentious is her decision to impose tax hikes in order to pay for it. The government’s new tax bill, which was passed by Chile’s congress in September, will generate an additional $8.2 billion for government coffers by increasing the corporate tax rate from 20 to 25%, closing some tax exemptions for businesses that reinvest profits, and raiding VAT on tobacco products, alcoholic drinks, sugary drinks and diesel fuel. To offset the impact of these tax hikes, the top rate of personal income tax will be lowered from 40% to 35%.

Those opposed to the tax reform bill say the corporate tax hikes will harm the economy by impacting Chile’s ability to attract investment, but the government has played down those concerns, while also assuring investors that it is committed to public-private partnerships, the free market and open to foreign investment and free-trade agreements.

There is no doubt that corporate tax hikes and the closure of tax loophole may concern foreign investors. Nevertheless Chile will remain one of the most attractive investment destinations for investment in Latin America. It has been in the top 10 of the Heritage Foundation’s Index of Economic Freedom for the past three years; in the latest 2014 index, it ranked 7th—the highest ranking for a Latin American country and even higher than the likes of the U.S., Sweden, Denmark, Germany and the U.K. Chile also leads Latin America in Forbes’ list of the Best Countries to do Business (positioned 22nd) and in Transparency International’s 2014 Corruptions Perceptions Index, in which it shared 21st place with Uruguay.