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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 – PowerPoint PPT presentation

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


1
POLICIES TOWARDS THE TRADABLE SECTOR IN CHILE
RECENT HISTORY AND CURRENT DEBATES
  • RAUL E. SAEZ
  • International Affairs Coordinator
  • Ministry of Finance, Chile

2
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

3
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

4
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.

5
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.

6
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.

7
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

8
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.

9
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.

10
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

11
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.

12
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

13
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

14
EXCHANGE RATE
  • Pesos per US dollar.
  • Source Central Bank of Chile.

15
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.

16
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

17
TRADE POLICY UNILATERAL 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.

18
TRADE POLICY UNILATERAL 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.

19
TRADE POLICY UNILATERAL 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.

20
TRADE POLICY UNILATERAL 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.

21
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

22
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.

23
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.

24
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

25
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.

26
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

27
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?

28
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.

29
COMPOSITION OF EXPORTS IN 2002
Source Estado de la Hacienda Pública 2004,
Ministerio de Hacienda de Chile.
30
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

31
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.

32
THE CURRENT DEBATE IN CHILE
  • Incentives for Direct Foreign Investment
  • Education
  • Science, research and development
  • Funding through royalty on mining

33
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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