OECD Observer: How has the recent earthquake affected Chile’s economic prospects in an already difficult global situation?
Felipe Larraín: The macroeconomic situation prior to 27 February was characterised by increasing economic activity and a higher-than-expected expansion in Chilean demand. In fact, the post-crisis economic recovery by the end of 2009 was faster than expected. The recovery was bound to continue over 2010. The country’s productive stock of capital suffered greatly as a direct result of the disaster, which affected the proper functioning of the entire economy. We estimate national infrastructure damages at $21 billion, of which some $10.6 billion to public infrastructure.
In the short term, a lower level of economic activity is expected, particularly in the manufacturing industry that was exposed to the area of the disaster. We also forecast a temporary scenario of higher inflation resulting from problems in the production and distribution of goods.
How has the disaster influenced policy?
The government is considering a reconstruction plan with an estimated cost of $8.4 billion that should come into effect in the next four years. This will be financed by sources such as budget reallocations, transitory and permanent tax modifications, the sale of dispensable assets, external and internal debt, and using the Economic and Social Stabilisation Fund.
Despite these unforeseen policy changes, we remain confident in our ability to accomplish the government programme, which requires an additional $9.3 billion. These resources will basically go towards:
i. Achieving an average growth rate of 6% for 2010-2014
ii. Creating one million new jobs during the same period
iii. Beginning to win the battle against crime and drug trafficking
iv. Defeating extreme poverty by 2014 and eradicating poverty by 2018
v. Improving education and job training
vi. Improving the quality of healthcare
vii. Establishing a powerful public policy for small and medium enterprises, enabling them to grow, develop and access new markets.
What would you say to reassure investors?
First, we reiterate our commitment to raise the annual rates of growth to an average of 6% over the coming four-year period.
Second, that the lower level of economic activity we have perceived as a result of the earthquake is normal and transitory. Investment projects will soon start to materialise, and the reconstruction efforts should help domestic demand to recover. Moreover, we can expect higher productivity due to the replacement of lost capital.
Third, our fiscal policy will continue to preserve macroeconomic stability. Chile's public sector is a net creditor abroad, in excess of 10% of GDP, and the deficit will be below 2% of GDP this year, despite the earthquake.
We also expect inflation to converge to 3% by the end of this year. The exchange rate should also remain stable given that the reconstruction plan considers several financing flows, which inhibits significant effects over this variable.
In sum, the fulfilment of the reconstruction plan and of the government programme is expected to achieve structural fiscal balance by the end of the current administration, and the reconstruction efforts should boost the economy’s return to a vigorous growth path during the second semester of 2010.
What difference do you think OECD membership will make to Chile’s economy?
Sitting at the same table as countries that have implemented successful policies will allow us to learn. For instance, some OECD members are leaders in technology-intensive industries, and their experience will help us improve our competitiveness and productivity; others are experts in managing natural disasters.
As an OECD member, Chile will be subject to peer reviews that will help us assess our policies in areas such as education, innovation, economic and territorial development, and public governance.
We see the OECD as a club of “good practices”, and to those practices we expect to converge.
What contribution do you believe Chile can bring to the organisation?
We can bring the fresh perspective of a middle income country on global problems. We will share our successful experience on pension reform, trade liberalisation, public finance management and bank regulations.
We hope to learn from others and to contribute to the group as a whole. Chile will work along with OECD members in finding solutions to key social, economic and environmental challenges.
This interview, conducted in May 2010, will introduce a special focus on the Chilean economy to be published in the July edition of the OECD Observer. For information, contact email@example.com
©OECD Observer No 279 May 2010