Chile became a new member of the OECD in May 2010, just in time to celebrate our historic 50th anniversary. Chile is a very important, dynamic, young, new member, and the first South American country in the OECD family.

On 7 May 2010, Chile became a member of the OECD, a testimony to its progress and accomplishments. The accession process took place in the difficult context of the 2008–09 recession and the devastating earthquake in February 2010. Nonetheless, the economy has rebounded quickly, showing a welcome resilience to external shocks. To help Chile build on this momentum and achieve increasingly higher living standards as fast and sustainably as possible, President Piñera’s administration and the OECD agreed to prepare an economic assessment with policy options. This report highlights the opportunities and challenges ahead. Its goal is to inform policy makers of options for the future of Chile.

Thanks to its sound macroeconomic policy framework and strong institutions, Chile was well prepared to respond to the global economic recession of 2008-09 and to the natural disasters of February 2010. Consequently, economic growth rebounded quickly and indications are for continued strong growth in 2011 and 2012. The short-term focus is to rebalance fiscal and monetary policy, while the longer term challenge is to accelerate the catch-up toward higher living standards. • Economic activity after the global economic crisis and the natural disasters of February 2010 has been strong. If it remains so, the central bank should continue to raise the policy interest rate to keep inflation expectations well anchored. Similarly, under the same conditions, fiscal policy could make early progress towards the objective of reducing the structural budget deficit. • Chile was well prepared to face the global recession and the February natural disasters, thanks to the large financial buffers accumulated during the copper price boom. The stock of government financial assets is now reduced, and it should gradually be rebuilt to prepare for possible future contingencies. An additional fiscal rule (a floor on net government financial assets) could help to reach this goal. • Convergence toward OECD living standards has slowed over the past decade. Reforms to prepare workers for the skilled jobs of the future as well as further steps to foster business activity, especially innovative start-ups, would contribute to resuming a faster pace of long-term economic growth.

Chile’s productivity has virtually stagnated over the past decade, thus impairing the convergence towards higher living standards. Key policy measures to boost productivity growth include: enhancing competition through legal and regulatory action; removing regulatory barriers to entrepreneurship; and strengthening innovation in firms. Specifically: • Ensure the National Economic Prosecutor receives sufficient resources. Deter cartel participation by linking the maximum fine to revenues on the market involved in the conspiracy. Make price fixing a criminal offence. • Revise the text of the Competition Act to clarify the Competition Tribunal’s jurisdiction to review mergers, the stages of merger analysis and the substantive standards applied. • Reduce entry barriers in retail and business services to discipline incumbent firms. • Continue reducing “red tape” for start-ups to strengthen competition and encourage entrepreneurial ideas. • Reform the bankruptcy law to encourage entrepreneurial risk taking in non-traditional sectors. • Maintain strong commitment to support technological and other forms of innovation and continue efforts to strengthen links between universities and firms. • Complement supply-side measures to foster broadband Internet access by demand-side measures. • Pursue the cluster initiative as a market-friendly, bottom-up approach to give innovation policy the necessary degree of selectivity, but strengthen the evaluation of relevant measures and establish sunset clauses for public support. • Establish by law the institutional structure for innovation policy to ensure continuity of the long-term innovation strategy.

Main recommendations • Ensure that all teacher education programmes meet well-defined minimum standards. • Upgrade the subject content knowledge of teachers, especially in the upper grades of primary schools, through richer curricula in initial teacher education programmes at universities and at post-graduate programmes for practicing teachers. • Develop an induction programme for novice teachers. • Introduce external exit exams for initial teacher education. • Ensure that student selection is prohibited by schools; consider extending the prohibition to secondary schools and strengthening it by requiring lotteries at oversubscribed schools. • Provide teachers, school managers and parents with sufficient information to read results of the national student achievement test (SIMCE), and complement the test with richer quality indicators, including qualitative information and possibly value-added indicators. • Implement the newly designed quality assurance system, while making sure that the new agencies interact efficiently. • Consider introducing higher subsidies at decreasing rates for several income brackets, and limit top-up payments dependent on parents’ income. Over time, consider moving away from shared financing and increase voucher subsidies sufficiently to make up for this. • After significantly expanding access, systematically evaluate quality at preschools and make sure that initial education prepares preschool teachers and aides to enhance children’s abilities and learning skills.

The following main recommendations in the labour market and training policy areas draw from the assessments that were made in the accession review process. They also take into account the policy reforms undertaken since then. • Reduce severance payments to strengthen incentives for employers to formalise employment relationships. • Promote collective bargaining and consider developing consultation and dialogue with unions and employers to improve trust. • Promote ongoing reforms to strengthen the Labour Inspectorate and labour courts, along with further efforts to eliminate the remaining pockets of informal employment and non-coverage of social insurance. • Increase the age for receiving the full minimum wage from 18 to 25, and prescribe lower rates (increasing with age) for younger workers. • Enhance the public employment service as a complement to higher spending on unemployment benefits. Consider merging it with the national employment and training agency. Consider sub-contracting employment services to the private sector. • Give high priority to policies that develop education and training systems for lifelong learning. Ensure high-quality enterprise training and provide training to workers in the smallest firms. • Establish systematic consultation between the vocational education and training (VET) system and the industrial sector, allowing for discussion at sectoral and regional levels. • Encourage workplace training in all parts of the VET system, building partnerships between training institutions and employers.

Social mobility in Chile is low. In order to promote equality of opportunity, there are a number of steps Chile should consider taking. The most important is the reduction of different forms of inequality, including current income inequality and inequality in access to quality education. The evidence from OECD countries also suggests that interventions targeted at improving childhood outcomes are desirable. • There is ample scope for mobilising labour supply among groups of workers currently under-represented in the labour market. The training and job-search requirements the government is planning to introduce as conditions of the new Ethic Family Income programme will promote the mobilisation of extra labour supply, provided that adequate assistance can be given to disadvantaged workers. The existing service infrastructure has been inadequate to help many of them get into paid employment, which is a condition for any sharp reduction of poverty. Chile needs to continue its investment in the infrastructure of service provision (e.g. training of social workers and employment service staff). • Government plans to adapt the Social Protection Record to accurately measure current income changes and to design supplementary tools to measure shortterm income changes will enable better targeting and improve incentives to work. Efforts in this direction should be reinforced. • Achieving whole-of-government policy outcomes for social policy programmes will require effective collaboration and co-ordination on policy development, implementation and evaluation between stakeholder ministries and ministers and with the proposed Ministry of Social Development. This will require strong leadership from the President’s Office, the Budget Office and effective leadership within the new ministry.

Chile has the governance institutions in place to maximise the potential of its public administration and to deploy resources in pursuit of its economic and socio-economic aims. As it moves to modernise the state Chile should pay attention not only to structures and processes but also to planning horizons and co-ordination of actors to achieve effective and efficient policy design and implementation. To this end, it should: • Complement its short- to medium-term strategic planning mechanisms with longerterm planning, which can further increase preparedness for “discontinuous” events. • Reinforce inter-ministerial co-ordination and incentives for programme- or planningbased policy approaches to increase synergy in the use of financial and human resources, and to optimise policy outcomes. • Further enhance resource flexibility in budgeting, and consider a medium-term budget or expenditure framework to identify funding sources to implement or further build public policy programmes. • Link staffing levels not only to budget availability but also to future needs to improve flexibility and competences in human resource management. • Take a comprehensive approach to administrative simplification to facilitate growth of multiple sectors and minimise ad hoc ministerial initiatives. • Ensure adequate time, resources and mechanisms to make proper use of information arising from citizen engagement, as a demand or “citizen” driven use of funds can improve policy outcomes. • Be sensitive to the different roles of government and adapt reform approaches accordingly to improve sustainability. (For example, the government’s role in product market or pro-growth tax reform is likely to differ from its role in education or healthcare or administrative reform.)

Ensure greater independence and transparency of the Superintendence of Banks and Financial Institutions, Superintendence of Securities and Insurance Supervisor, and Superintendence of Pensions. • Take legislative action to establish group-wide supervision in the financial sector and expand oversight for significant non-bank credit providers. • Make further progress in risk-management of pension fund administrators, and establish a system of risk-based supervision in the insurance and private pension sectors. • Establish guidelines requiring insurers to assess the adequacy of reinsurers. • Assess the impact of recent reforms on pension benefits and evaluate the need for further policy initiatives to raise pension savings and promote later retirement. • Strengthen financial awareness and education in the area of credit, insurance and private pensions to enable individuals to make better decisions.

Place-based policies should be promoted: the potential for regional growth will depend largely on how public policies adapt to the specific and varied characteristics and opportunities of the different Chilean regions. • Improving access to infrastructure, basic services and telecommunications in rural areas and peripheral regions represents a potential source of growth that would increase the country’s overall growth performance. • To improve the prospects of rural areas, there is a need to shift from sectoral agricultural policies towards comprehensive rural development programmes. • Chilean regions would benefit particularly from policies aimed at boosting productivity, such as those targeted at innovation and entrepreneurship, and at improving education and training. • The technological upgrading of traditional industries for innovation-led growth can be a spur for regions like Valparaiso or Bio-Bio, and for the northern regions in which manufacturing is underdeveloped. • Bottom-up diagnoses of regional productive advantages can help to find untapped regional resources for diversifying the economy. This would also make it possible to take account of territorial spillovers among sectors and regional dynamics. • It will be important to give extended competences to regional governments to allow them to be active in the discussion, planning and co-ordination of regional development policies. • The potential of the Programming Agreements (taking advantage of the recently approved Constitutional Reform on Regional Government and Administration) could be further developed. This multi-level contractual arrangement could help in the co-ordination of regional and sectoral priorities. • Other mechanisms, such as capacity building, performance management systems and strengthened participation schemes, should be promoted in order to strengthen regional and local capacities and performance. Finally, there is a need to strengthen the governance structure of metropolitan areas to improve the delivery of key public services and promote an integrated urban system.

Further integrate environmental objectives in sectoral policies (mining, forestry, tourism, energy, agriculture, aquaculture and transport) in order to achieve green growth. • Formulate a national greenhouse gas (GHG) mitigation strategy with emission reduction targets and action plans for key sectors; phase out fuel subsidies (including tax credits and exemptions) and introduce carbon pricing as the most cost-effective way to deal with GHG emissions from power production, transport and industry. • Implement fully the National Strategy for Integrated River Basin Management to improve public sector co-ordination in water management. Re-assess river flow standards to ensure that they are adequate and complied with. • Complete implementation of National Biodiversity Strategy and Action Plans, devote adequate resources to meet the target of protecting 10% of all significant ecosystems in Chile and devise mechanisms for providing payments for ecosystem services. • Further reduce the environmental impact of the mining sector (e.g. air pollution by SO2 and arsenic, water pollution, abandoned sites and tailing dams); use economic and other instruments to address pollution concerns, pursuant to the polluter pays principle; and give special attention to small and medium-size mining enterprises through technological, financial and consultancy assistance. • Increase the financial contribution of the mining sector, among other things to support longterm investment in human, environmental and social capital; consider a mechanism for more effective capture of resource rents associated with mineral exploitation. • Use economic instruments more widely to complement the command and control measures the country uses in its environmental policies, including by reviewing the tax system and ensuring that it better reflects the true cost of environmental externalities. • Ensure that the new institutional framework facilitates effective implementation of OECD legal instruments related to environment, in particular those related to waste and chemicals; complete the implementation of the National Policy on Chemicals Safety and the Integrated Solid Waste Management Policy; and ensure enactment and enforcement of a new Law on Waste.

In order for incomes in Chile to catch up with the OECD average, there is a need for rapid export growth, which will in turn require progressive improvements in competitiveness and a diversification of the country’s export base. There are continued opportunities for leveraging Chile’s natural resource endowments, most notably through the increased provision of associated services, such as engineering and business services. These services could also form the basis for new, unanticipated sources of opportunity. Numerous regulatory barriers continue to inhibit trade in services. Participation by Chile in an OECD project to record such regulatory barriers and measure the restrictiveness of trade in services would be valuable in indicating reform priorities. Chile also needs to overcome a range of supply side constraints, where it does not achieve OECD best practice. Important areas include education and human capital, innovation, internal competition and labour market regulation. Existing policy recommendations in these areas could in future be tailored to the needs of specific export clusters.

The objectives of investment policy and investment facilitation efforts should be to: • Preserve a favourable investment regime by introducing periodic regulatory assessments to ensure that regulations continue to meet their intended purposes. • Improve foreign direct investment (FDI) statistics and ensure that information is available to support policy formulation and appraisal. • Review existing investment incentives in the light of current policy priorities and the potential for introducing new instruments to promote greater linkages of FDI with the broader economy. • Streamline and clarify the roles, structure and interrelations among the various agencies involved in investment promotion and facilitation to establish their responsibilities in carrying out the functions of image building, investment targeting, linkage promotion and policy advocacy.

It is recommended that the government of Chile: • Contribute to expand the scope of the “measuring progress” agenda to the needs of emerging countries, by participating in OECD fora and helping to identify issues deemed to be of special salience for these countries, and measurement approaches appropriate for their needs. • Consider the establishment of a national roundtable on measuring progress – involving academic circles, civil societies and regional organisations – to identify the most pressing issues faced by the country, assess the adequacy of available measures and develop a policy-oriented program on measuring progress that could be included in the work plans of the National Statistical Institute and relevant government bodies.