Download policies towards the tradable sector in chile

POLICIES TOWARDS THE TRADABLE
SECTOR IN CHILE: RECENT HISTORY
AND CURRENT DEBATES
RAUL E. SAEZ
International Affairs Coordinator
Ministry of Finance, Chile
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
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%.
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%.
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) Chile’s 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.
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:
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.
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 riskcapital 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.
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
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.
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
REAL EXCHANGE RATE INDEX
120
110
100
REI
90
80
70
REI-5
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
60
•
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
Pesos per US dollar.
Source: Central Bank of Chile.
Ene-04
Ene-03
Ene-02
Ene-01
Ene-00
Ene-99
300
Ene-98
Ene-97
Ene-96
Ene-95
Ene-94
Ene-93
Ene-92
Ene-91
Ene-90
Ene-89
Ene-88
Ene-87
Ene-86
EXCHANGE RATE
800
700
600
500
400
ER
200
100
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.
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
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.
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.
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 Chile’s exports are
covered by a bilateral trade agreement.
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.
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
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.
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.
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
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.
AGENDA
1.
2.
3.
4.
5.
6.
7.
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
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?
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.
COMPOSITION OF EXPORTS IN 2002
0%
10%
20%
Primary products
Manufactures based on natural resources
Manufactures with LOW levels of technology
Manufactures with MEDIUM levels of technology
Manufactures with HIGH levels of technology
Other
Chile
Australia, Canada, Finland, Iceland, Norway, New Zealand and Sweden
Source: Estado de la Hacienda Pública 2004, Ministerio de Hacienda de Chile.
30%
40%
50%
60%
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:
- R&D/GDP
Finland
3,4%
Sweden
4,3%
Chile
0,6%
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.
THE CURRENT DEBATE IN CHILE
• Incentives for Direct Foreign Investment
• Education
• Science, research and development
Funding through royalty on mining
POLICIES TOWARDS THE TRADABLE
SECTOR IN CHILE: RECENT HISTORY
AND CURRENT DEBATES
RAUL E. SAEZ
International Affairs Coordinator
Ministry of Finance, Chile