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LatAm in Focus: Economic Realities Facing Chile's Next President

Gigante de Cobre, copper statue in Chile

Chile is the world's largest copper producer. (Image: Flickr user Prensa AIA)

September 27, 2017

“Anybody who comes to power in Chile, it doesn’t matter who, will have to reform the [tax] reform.” —@felipelarrain
23% of Chileans think the economy is improving. Ex-Finance Min @felipelarrain shares a plan for how to change that.

Chile’s economy is slowing down, and the governing party may pay the price when the November 19 presidential election comes around. The Chilean economy is expected to grow just 1.3 percent this year, and only 23 percent of Chileans think the economy is improving.

Former Finance Minister Felipe Larraín blames poor policy in a podcast interview with AS/COA Online’s Elizabeth Gonzalez. The Chilean economist is now serving as an economic advisor for Sebastián Piñera, the leading candidate in the presidential race and former president from 2010 to 2014. The first priority, says Larraín, is fixing the last tax reform passed by current President Michelle Bachelet in 2014: “Anybody who comes to power in Chile, it doesn’t matter who is the president, will have to reform the reform.” Larraín argues the rise in corporate taxes has reduced the country’s potential GDP by one whole percentage point, discouraging investment, lowering productivity in the mining sector, and complicating the tax code for small entrepreneurs. His plan of action under a Piñera government would recommend returning to a system that grants 100 percent in tax credits to corporations, and ending discrimination between local and foreign investors, the latter of which gets a better tax rate.

This is not a smooth slowdown. This is a really hard landing what has happened in the Chilean economy.

Another big agenda item: pension reform. Even though Bachelet aims to reform the system before she leaves office in March 2018, a 68 percent disapproval rating of the current bill and the short time left to approve it, makes it a likely task for the next administration. Larraín believes the current legislation’s requirement that companies contribute 5 percent of individuals’ salaries to a pension fund will be a damaging tax on labor. “There is a clear demand for pension reform,” says Larraín, but “it’s not a good idea to have the Chilean middle class finance the improvement of pensions of those at the very bottom.”