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Chile, before its great opportunity

A man cycling through Santiago de Chile two days before the referendum on October 25.PEDRO UGARTE / AFP / GETTY IMAGES

Chile has faced two heavy blows in the last 12 months. A year ago, in October 2019, a social and political crisis exploded in protest. The country came from a growth of 4%, but the economy collapsed in the fourth quarter with the riots and the result was only a 1.1% annual expansion. Although it recovered soon, the covid-19 pandemic emerged in March, which has already caused 14,118 deaths. GDP plummeted 14% in the second quarter of 2020 – there hasn’t been a hit of this size since 1982 – and two million people lost their jobs. Although activity in Chile has begun a slow recovery, this year the economic decline will be 5.5%, according to the Ministry of Finance. Last Sunday’s plebiscite, where the option to replace the current Constitution, drawn up in 1980 during the dictatorship of Augusto Pinochet, was emphatically won, set the Chilean economy at a turning point. It can be the definitive step to development or a fall into stagnation.

“The situation is uncertain. The country may derail and enter a trajectory of low growth, populism, fiscal weakness and back to the mediocrity of Latin America. It is an option that we cannot rule out if a constituent process is carried out that makes promises that are not kept “, says José de Gregorio, dean of the Faculty of Economics and Business at the University of Chile and former president of the Central Bank (2007-2011 ). “But there is also a possibility that we will build a constitutional framework that unites us and allows us to deepen democracy and advance in directions that either we were not advancing or we were going very slowly. Within a context of a growing economy that has incentives and spaces for economic growth ”, he adds. For De Gregorio, the chances of one or the other option are “50% and 50”. “I want there to be a good future, but I cannot assure it, because we do not know what the development of politics will be like.”

On April 11, the 155 members of the Constitutional Convention will be elected, who, for nine months – extendable until one year – will draft the Magna Carta. It will take two thirds to approve the text, so big agreements will have to be reached. Substantive issues will be addressed, such as the government system and social rights. At the latest, in June 2022 the work should be completed and, then, a new plebiscite would be held to ratify the new Constitution. Chile will spend two years in a constituent process that will be held in parallel to municipal, governor, parliamentary and presidential elections.

“There is a tough road ahead, with tensions, but I think there are opportunities,” says De Gregorio. “Chile needs to change towards a system with greater social security and if we call that an end to Chicago’s neoliberalism, yes. That changed. We need a more integrated country in terms of health, education and pensions, although this does not mean that we are going to abandon the capitalist system, nor that we should give up fiscal responsibility or macroeconomic responsibility and our openness and insertion to the rest of the world ”, he clarifies.

There are at least three milestones that mark the macroeconomy and that will probably influence the medium term, according to Alejandro Fernández, an economist and partner at the Gemines consulting firm. The first is the significant decrease in economic growth from 2014, during the second government of Michelle Bachelet. “This period is characterized by extremely low growth, less than 2%, which was unprecedented in many years in Chile.” This expert recalls the tax reform promoted by that Administration as one of the many causes of stagnation, and points out that low growth contributed to the social outbreak of last year in Chile. “Chile is not the same as before October 2019.”

Fernández lists the pandemic as the second key factor and, third, the constitutional change. “Legal reform brings its own share of uncertainty to everything to come, at least until mid-2022,” says the economist. “It is difficult to think that someone in their right mind will invest a lot until the medium and long-term outlook becomes clear,” he adds. “Even if it is assumed that the new Constitution will be fantastic – that it does not change the good that the current one has and improves its weaknesses – and that the whole country validates it, Chile’s great challenge from 2022 onwards is to regain growth.” It is a matter repeated over and over by different experts. “If this country does not grow again at around 4% a year average —or at least 3% or 3.5% – you may have the most perfect Constitution in the world, but you will not have with which to satisfy the demands that increased with the crisis of October 2019 and that will probably arise from the new institutional design ”, analyzes Fernández.

To get back on the path of growth, according to De Gregorio, integration is key. “Perhaps one of the problems that has limited our growth phase is the levels of social disintegration. How many children who are born and have a mediocre quality education miss the opportunity to be professionals or technicians and to participate in the process of progress? ”He asks.

Rodrigo Vergara, former president of the Central Bank (2011-2016), says that so many years of low growth is a problem and a challenge: “It is essential to increase productivity to grow in the long term.” The academic, however, considers himself “optimistic” with the constituent process that has started in Chile: “Today we have a Constitution that divides us. But an opportunity opens up to achieve a fundamental letter that has an acceptance and everyone feels a participant. I don’t have to think that we’re going to do it wrong. Chileans are moderate, beyond the polarization of the political world ”. Vergara, however, also recognizes risks: “We are going to be the next two years discussing constitutional issues and I would not be surprised if unreasonable ideas appear that generate uncertainty and affect the economy and investment.”

According to the academic from the Catholic University, Chile managed to face the two great blows of the last year – the social crisis and the pandemic – “thanks to the fact that it had a very solid fiscal position. “They were years of prudence and austerity. Therefore, there is room to spend and borrow. The fiscal deficit this year is estimated to reach 8% or 9% of GDP and the State has open markets and can finance itself at the lowest rates in Latin America ”. Vergara recalls that the fiscal coffers “are not eternal and have their limits” and calculates that the public debt will rise and that in 2023 it could reach 45% of GDP. “It is an important increase, but still moderate,” says this expert who highlights that, together with the fiscal packages for 12,000 million dollars injected in the pandemic, interest rates, close to 0%, also provide support.