Chile: Improve productivity, social protection and boost revenues for sustainable recovery, says OECD

23/05/2022 – Chile has achieved an impressive recovery from the COVID-19 crisis, but the pandemic has hampered past progress in reducing poverty and social disparities.

Chile needs structural reforms to boost productivity, social protection and tax revenues, while tackling short-term challenges such as high inflation, according to a new OECD report.

The latest OECD Economic Survey of Chile welcomes progress on significant reforms including a universal basic pension and plans for a fairer tax system which can generate higher revenues. Measures to drive higher productivity, improve competitiveness, get more Chileans into quality jobs and to improve social protection coverage should also be a priority, the Survey says.

“Chile is taking important steps towards strengthening its tax base and is closing gaps in social protection,” OECD Secretary-General Mathias Cormann said, presenting the Survey in Santiago alongside Minister of Finance Mario Marcel. “Complementary reforms to raise productivity and investment would help to generate stronger growth, more jobs and deliver additional income to enable Chile to invest further in economic and social progress.”

Chile’s solid institutions and prudent management of public finances enabled a strong fiscal response to the pandemic and a vigorous recovery. The Chilean economy grew by 11.9% in 2021, far outpacing OECD and regional peers. The Survey projects growth slowing to 1.9% in 2022 as global growth slows and inflation, now at a 30-year high, curtails purchasing power. Thanks to a swift monetary policy response, inflation should return to target in early 2024.

Chile’s tax revenues at just 21% of GDP are very low by international standards, with close to a third of the workforce in informal jobs with only a fifth of Chileans paying personal income tax. The Survey welcomes a planned reform which would bring the tax intake closer to the Latin American and OECD averages of 28% and 34% respectively. Greater tax revenues would help strengthen the resilience of public finances and importantly help finance rising social needs.

Chile’s longer-term growth outlook will depend on its ability to address structural growth bottlenecks including weak competition and low investment in research and development to promote innovation.

After many years of convergence, Chile’s income and productivity gap to advanced economies is again widening. The Survey recommends simplifying cumbersome regulations and licensing procedures which hold back new firm entry and investment, increasing investment in new technologies and expanding access to high-quality education.

There is also scope to diversify Chile’s exports, still dominated by the mining industry, and to improve trade facilitation and the efficiency of border procedures.

Chile has one of Latin America’s most comprehensive social protection systems, but the pandemic highlighted gaps in coverage, particularly for informal workers. Enhancing social protection coverage for all, including via pensions, access to health services and basic income support, can help to reduce these gaps. The Survey recommends raising pension levels while applying progressive contribution rates and unifying social assistance programmes to achieve a wider coverage. Future social benefit reforms should also pay particular attention to how they affect the incentives for creating formal jobs.

Chile is making significant progress on sustainable energy, with renewable sources now accounting for 47% of electricity generation as solar and wind energy have gained importance. Looking ahead, Chile has a much higher potential in renewable energy generation, far exceeding domestic needs.

See an overview of the Survey with key findings, charts and summaries in English and Spanish (this link can be included in media articles)

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