Chile should use upturn to address low productivity and high inequality

A favourable growth outlook offers Chile an opportunity to address its low productivity levels compared to other advanced economies, improve access to quality jobs and take steps to reduce its persistently high inequality, according to a new OECD report.

The latest OECD Economic Survey of Chile says that sound macroeconomic management has placed Chile on a solid economic footing, and measures implemented by the outgoing administration to make growth more inclusive go in the right direction. It says the incoming administration needs to build on these efforts with further reforms to boost productivity growth, diversify the economy, improve adult skills and get more people into formal long-term jobs that add real value. Chile would also benefit from raising public support for research and development and stepping up infrastructure investment, which would spur innovation and competitiveness.

“Chile is in fine economic health, but the triple challenge of how to raise productivity, improve global competitiveness and reduce inequality remains,” said OECD Secretary-General Angel Gurría, presenting the Survey in Santiago. “The current global economic upswing provides a key opportunity to deepen structural reforms so that Chile can achieve its full economic potential, make the most of globalisation and share the fruits more fairly.”

The OECD projects GDP growth in Chile rising to 2.9% in 2018 and 2019 amid robust global economic conditions and firmer copper prices. Yet low productivity remains a drag on living standards.

While high relative to other Latin American countries, output per worker in Chile is stuck at half the OECD average, with too many workers employed in activities that generate little added value per work hour.

Chile’s income inequality gap is also more than 65% wider than the OECD average, with one of the highest ratios between the average income of the wealthiest 10% of its population and that of the poorest 10%. Almost a third of Chilean workers are in informal or non-permanent jobs, and an OECD survey of adult skills shows that one in two Chileans has low literacy skills. The pressure this places on the pension system and living standards will increase with Chile’s rapidly ageing population.

The Survey recommends further measures to lower entry barriers and regulatory complexity to help young firms to innovate, grow and compete. That would also help open up an export market dominated by a handful of conglomerates. Only 2% of Chilean small and medium-sized enterprises currently participate in international trade.

Recent education reforms to improve teaching and skills can be built on to improve and expand vocational training and apprenticeships, including better targeted training programmes to those most in need. Chile should address the still high share of jobs that are informal or on short-term contracts and expand access to unemployment insurance.

Continuing the pursuit of an ambitious social agenda is also critical. More can be done to use taxes and transfers for addressing inequality. Raising property and environmental taxes, or lowering personal income tax bands, could help finance higher social spending, formal employment subsidies and health insurance support. Increasing pension contributions and extending the retirement age, especially for women, could boost GDP per capita over the medium term and help raise the currently low pension replacement rates.