POLICIES TOWARDS THE TRADABLE SECTOR IN CHILE: RECENT HISTORY AND CURRENT DEBATES

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POLICIES TOWARDS THE TRADABLE SECTOR IN CHILE
RECENT HISTORY AND CURRENT DEBATES

• RAUL E. SAEZ
• International Affairs Coordinator
• Ministry of Finance, Chile

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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THE IMPORTANCE OF THE TRADABLE SECTOR IN THE
CHILEAN ECONOMY AND IN POLICY-MAKING

• Share of traditional tradable sectors reached
  31 in 2002.
• Exports of services play an increasingly
  important role
• - 1999 US 96 million
• - 2003 US 198 million
• - Jan-Oct. 2004 US 169 million
• Share of exports in GDP in 2003 was 36 and in
  the first semester of 2004, 39.

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THE IMPORTANCE OF THE TRADABLE SECTOR IN THE
CHILEAN ECONOMY AND IN POLICY-MAKING

• Import-competing sectors face strong competition.
  Policy approach is neutrality.
• Policy is flat MFN tariff with wheat, wheat
  flour and sugar as only exceptions.
• Ratio of imports to GDP in 2003 was 33.

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THE IMPORTANCE OF THE TRADABLE SECTOR IN THE
CHILEAN ECONOMY AND IN POLICY-MAKING

• All economic-policy decisions are taken in the
  context and considering that
• 1) the tradable sector, and especially exports,
  plays a crucial role in economic growth
• 2) Chiles economy is a small and very open
  economy
• 3) competitiveness and higher productivity are
  the keys for sustaining growth.
• Goal is systemic competitiveness of the economy.

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THE IMPORTANCE OF THE TRADABLE SECTOR IN THE
CHILEAN ECONOMY AND IN POLICY-MAKING

• Close cooperation between the public and private
  sectors to improve the economic environment.
• One important example is the Pro-growth Agenda
  agreed between the Government and the
  Manufacturers Association in January 2002, which
  includes, among other issues

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THE IMPORTANCE OF THE TRADABLE SECTOR IN THE
CHILEAN ECONOMY AND IN POLICY-MAKING

• 1) Measures to improve competitiveness such as
• - Reform of competition policy bodies
• - Reform of bankrupcy law
• - Modernization of regulation of the
  telecommunications, fishing and electricity
  sectors.
• 2) Measures related to technology policy.
• 3) Tax measures so as to facilitate the location
  in Chile of foreign investors headquarters for
  their Latin American operations.

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THE IMPORTANCE OF THE TRADABLE SECTOR IN THE
CHILEAN ECONOMY AND IN POLICY-MAKING

• 4) Reform of the capital market to promote the
  creation of a risk-capital industry, improve
  information disclosure and allow for more
  self-regulation of financial institutions.
• 5) Measures to improve the efficiency of
  government spending.
• 6) Elimination of red-tape.
• 7) Export-promotion actions. Originally limited
  to reform of drawback and other instruments but
  has evolved into own private-public working group
  which covers trade facilitation (both in goods
  and services), general incentives, access to
  foreign markets and export promotion.

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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MACROECONOMIC ENVIRONMENT

• Macroeconomic policy framework geared towards
  insuring stability.
• Rules-based policies
• - Fiscal policy guided by structural-rule
  surplus of 1 of GDP
• - Monetary policy with target range for
  inflation 2-4
• Has allowed reduction of interest rates to
  stimulate the economy the average real interest
  rate for loans over three years was 5.17 in
  2003.
• Low country-risk 75 basis points (Global JP
  Morgan).
• Low cost of credit contributes to competitiveness.

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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REAL EXCHANGE RATE INDEX
REI
REI-5

• REI is real exchange rate index with all trade
  partners REI-5 is real exchange rate index with
  the U.S., Japan, the UK, Canada and the six
  largest partners in the Euro-zone.
• Source Central Bank of Chile

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EXCHANGE RATE

• Pesos per US dollar.
• Source Central Bank of Chile.

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EXCHANGE-RATE POLICY

• Fully-flexible exchange rate policy since
  September 1999.
• This has resulted in a real depreciation
  (measured as the relationship between an index of
  external prices and the consumer price index) and
  greater volatility of the nominal exchange rate.
• Exchange-rate policy is not used to promote the
  tradable sector. Depreciation is the result of
  the fiscal/monetary policy mix.
• To face short-term volatility, exporters are
  encouraged to use market-provided hedging
  instruments.

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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TRADE POLICYUNILATERAL LIBERALIZATION AND FTAs

• Since 1974, the promotion of the exportable
  sector in Chile has been based on the reduction
  of tariffs and elimination of other restrictions
  on imports.
• The MFN tariff has been set at a flat rate since
  1979. It reached 6 in 2003, but the average
  applied tariff was less than 2 at the beginning
  of 2004 as a result of trade agreements.
• The effect of unilateral trade liberalization was
  what theory would predict development of
  activities in which Chile has a comparative
  advantage, and shrinking of those activities in
  which there is no comparative advantage.

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TRADE POLICYUNILATERAL LIBERALIZATION AND FTAs

• The basket of exports has become more diversified
  and the number of countries of destination has
  increased. Chile has no dominant or natural
  export market.
• The vulnerability to shocks in the price of
  copper has been reduced as well as to the
  economic cycle of specific regions of the world.

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TRADE POLICYUNILATERAL LIBERALIZATION AND FTAs

• Until 1990, trade policy was based only on
  unilateral elimination of trade barriers.
• Starting in 1990, an active policy of negotiating
  FTAs was implemented as a complement to
  unilateral liberalization.
• As a result, about two thirds of Chiles exports
  are covered by a bilateral trade agreement.

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TRADE POLICYUNILATERAL LIBERALIZATION AND FTAs

• The main objectives of negotiating FTAs has been
  to improve market access, both in terms of facing
  lower or no barriers and reducing uncertainty
  regarding the conditions of such access.
• This has been through the elimination of tariffs
  which, as a collateral result, should eliminate
  tariff escalation, and the scrapping and/or
  regulation of non-tariff restrictions.

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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FOREIGN DIRECT INVESTMENT POLICY

• The basic premise has been neutral policies
  towards direct foreign investment.
• Only benefit is a guarantee of tax invariability
  for those investors that use DL 600.
• Debate over whether incentives should be used to
  attract investment in high technology industries.
• Recently grants for the co-financing of
  activities related to investment activities in
  high technology sectors have been introduced.
• Chile does not use performance requirements.
  Furthermore, now the FTA with the U.S. limits
  their use.

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FOREIGN DIRECT INVESTMENT POLICY

• Active search for establishment of regional call
  centers and shared-services centers.
• Attractiveness based on low cost of
  telecommunications, high levels of connectivity
  and quality of life.
• Limitation Human capital availability.

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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COMPETITIVENESS AND PRIVATE PROVISION OF
INFRASTRUCTURE AND CERTAIN GOVERNMENT SERVICES

• Competitiveness and the development of the
  tradable sector requires appropriate
  infrastructure so that exports can reach ports of
  exit at the lowest cost possible.
• In the second half of the 1990s, Chile began a
  massive process of transferring roads to private
  operators through BOT contracts.
• The government has also been transferring the
  operation of docks at major ports to private
  enterprises, maintaining the overall management
  of the ports.
• More recently, other services, such as the
  building and operation of prisons, is being
  transferred to the private sector.

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AGENDA

• The importance of the tradable sector in the
  Chilean economy and in policy-making
• Macroeconomic environment
• Exchange-rate policy
• Trade policy unilateral liberalization and FTAs
• Foreign Direct Investment policy
• Competitiveness and private provision of
  infrastructure and certain government services
• The current debate
• - The natural resource curse
• - Investment incentives
• - Education
• - Science, research and development

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THE CURRENT DEBATE IN CHILE

• Natural resource curse?
• Concentration in natural resource-based exports
  does not mean that Chile only exports
  commodities. Wine and salmon are two major
  examples.
• Fresh fruit is also another example if one
  includes all the sophisticated services
  associated with exporting it.
• Even in the case of copper, and mining in
  general, an industry of providers, some of them
  with innovative products, has developed.
• But, is it enough to sustain growth?

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THE CURRENT DEBATE IN CHILE

• Some research indicates that natural-resource
  abundance reduces growth
• - Rent-seeking activities
• - Dutch disease
• - Little or no linkages to domestic economy
• But, there is also research that shows that that
  natural-resource abundance affects negatively
  growth only in countries with low levels of human
  capital.
• The issue that Chile faces can be illustrated
  with the following diagram.

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COMPOSITION OF EXPORTS IN 2002
Source Estado de la Hacienda Pública 2004,
Ministerio de Hacienda de Chile.
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THE CURRENT DEBATE IN CHILE

• Looking at developed countries relatively rich in
  natural resources (Finland, Sweden, Australia and
  New Zealand).
• Three basic issues
• 1) High levels of human capital can interact
  with natural resource endowment and lead to high
  growth
• 2) Capacity to innovate
• - RD/GDP
• Finland 3,4
• Sweden 4,3
• Chile 0,6

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THE CURRENT DEBATE IN CHILE

• - Number of patents per year per 1 million
  persons
• Finland 180
• Sweden 195
• Chile 1
• - Innovation around natural resources
• 3) Appropriate institutions, respect of
  contracts and property rights, rule of law,
  development of capital market, in particular seed
  capital, coherent economic incentives.

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THE CURRENT DEBATE IN CHILE

• Incentives for Direct Foreign Investment
• Education
• Science, research and development
• Funding through royalty on mining

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POLICIES TOWARDS THE TRADABLE SECTOR IN CHILE
RECENT HISTORY AND CURRENT DEBATES

• RAUL E. SAEZ
• International Affairs Coordinator
• Ministry of Finance, Chile