IMF Says Chile Reforms Offer Long-Term Gain, Short-Term Pain

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The International Monetary Fund said that the raft of reforms being pushed through by Chile’s government has the potential to boost long-term growth, while warning the short-term impact may be the opposite.

Growth will accelerate to 2.5 percent this year and 3.1 percent in 2016, after easing to 1.9 percent last year, the IMF forecast in its annual Chile report Thursday. Risks are on the downside though because of “continued uncertainty over the structural reform agenda.”

President Michelle Bachelet has already pushed through tax and education reforms, and plans further changes to labor regulations, the constitution, the health-care system and pension funds. Industry leaders have said the proposals are undermining confidence and investment and that the government needs to backtrack on some of its plans, or at least slow down.

“The reforms have the potential to boost productivity and long-term growth, but the high cost of capital and the complexity of the new tax regime are likely to have a negative effect on economic activity in the short-term,” the fund said in the report.

Finance Minister Rodrigo Valdes said the government planned to simplify the tax increases passed by Congress last year in a response Thursday to the IMF report.

He also said that economic efficiency was not the only yardstick the government used to measure the benefit of policy changes. Equality was also an important issue, he said.

“We agree on one thing, that every reform needs to look at efficiency,” Valdes said. But “with the labor reform, efficiency isn’t the only thing that matters.”

Fiscal Policy

Valdes said he agreed with the IMF over fiscal policy after the fund said Chile needed to tighten fiscal policy as growth remains sluggish, in order to boost business confidence. The budget shortfall will double to 3.2 percent of gross domestic product this year, the IMF estimated.

Moreover, Chile will become a net debtor again this year after more than five years in the black. Net debt will reach 2.6 percent of GDP, compared with net savings of 1.3 percent of GDP last year.

Education changes pushed through last year eliminated fees at many schools, while another bill under debate in Congress will raise pay for teachers and tighten regulations over standards.

Not Impressive

Better schooling was the key to Chile boosting productivity and making the jump to developed nation status, Bachelet has said. It was also essential to narrowing the biggest inequality gap in the 34-nation Organization for Economic Cooperation and Development.

“Chile’s productivity performance has not been convincing,” Roberto Cardarelli, the IMF’s mission chief for Chile, said on a conference call. The country suffers from the “low quality of human capital.”

The education reform goes in the right direction, though it will take some time to see the benefits, he said.

In the meantime, Chile needs to “nurture business confidence” and “minimize the potential of the reforms to negatively effect growth.”

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