Chile's Competitiveness Plan Aims to Boost Infrastructure Development, Economy, and Trade

(Sources: Bloomberg.com, Business News Americas, Business Chile, The Economist)

As the government prepares its 2007 budget this month, Chile’s Competitiveness Plan is defining how the country will use its economic surplus. Finance Minister Andres Velasco foresees a 6 percent growth for Chile’s economy in 2006. Velasco, formerly a professor of international finance and development at Harvard University’s Kennedy School of Government, has emphasized that the government will be socially responsible in ensuring that the recent economic windfall from copper will reach the nation’s rural communities, the elderly, and the poor. President Michelle Bachelet recently earmarked US$ 330 million for education spending in 2007. In a statement this week on the government’s Web site, Bachelet explained that this money will be used to increase access to and quality of education, as well as to improve government oversight of schools. In May and June of this year, students protested nation-wide, demanding more funding for schools, teacher salaries and books.

Chile also plans to use the economic surplus to boost the nation’s infrastructure. On September 1, the government passed a bill giving tax breaks to private investors of public roadways, as well as to private companies participating in their construction. This measure, intended to strengthen private-public collaboration, has caught the attention of mining and forestry companies which have already submitted a number of proposals to the Public Works Ministry. One such project is the construction of the Arauco-Lebu road, which will help bring lumber to the coast for export. In addition to serving the mining and lumber industries, the development of better public roads will improve mobility and communication in rural areas, benefit local merchants selling their products, promote tourism, and improve traffic flow as well as travel time. Another measure intended to spur economic growth is the FOGAPE – the Guarantee Fund for Small Entrepreneurs – which provides loans to small entrepreneurs lacking sufficient collateral. Public and private financial institutions participate in this fund managed by Banco Estado.

President Bachelet’s reform priorities also include pension reform and jobs for young people. Recent studies have suggested that the private pension system has failed to provide a sustainable income for retired workers who may have experienced brief periods of unemployment, informal employment, or self employment. A commission will be appointed to study how to revamp the system while remaining faithful to the principle of individual savings accounts. In addressing the 20% unemployment rate among the young, the government hopes to persuade companies to hire hourly workers and to subsidize firms that hire apprentices.

The price of copper, Chile’s main export, has quadrupled in the last three years. As of June 30, the Chilean government held US$6.98 billion of copper revenue. The government forecasts between a US$ 17.4 billion and a US$ 19 billion trade surplus for 2006. The government has followed strict fiscal rules in order to save much of the surplus for leaner times and to give relief to its currency, the peso. For instance, some of the surplus is kept offshore in foreign currency. An additional offshore kitty holds 0.5% GDP per year for future pension obligations. Furthermore, the government places any surplus beyond 1% of its GDP in an economic and social stabilization fund, also held abroad.

To read an English translation of the “Chile Competes” Plan, visit Chile’s Ministry of Finance website at www.hacienda.cl.