In a turbulent region, Chile has emerged as a particularly resilient economy. The Chilean policy framework is characterised by responsible fiscal and monetary policies, a relatively well-developed financial system and modern institutions. Together with a liberal environment for the private sector, this framework has held up well in the face of several strong external shocks over recent years. As a result, Chile has achieved the highest per capita growth in Latin America since the mid-1980s. Confidence of international financial markets in Chile is reflected by the lowest spreads in the region...

Over the last two decades, Chile has developed into a stable emerging economy within a turbulent region. Following the banking and debt crises in the early 1980s, the country experienced sustained high growth from 1984 to 1997. Subsequently the economy slowed down, though registering negative growth only in 1999. Chile has had the highest per capita income growth in Latin America and a sustained catch-up relative to the OECD average since the mid-1980s (Figure 1). Other signs of its resilience include the steady fall in inflation from 30 per cent at the beginning of the 1990s to 3 per cent annually over the period 1999 to 2002. On the fiscal side, the Chilean government is strongly committed to a structural fiscal surplus of 1 per cent of GDP and has one of the lowest public debt to GDP ratio, together with favourable interest rates and maturities for public debt. Chile has gained praise in international financial markets, as reflected by the lowest spreads in Latin America. Two other factors have also strongly contributed to Chile’s resilience: a continued commitment to market-oriented policies and sound institutions...

Chile has put into place a successful combination of consistent fiscal discipline and monetary credibility. This framework has been reinforced by good co-ordination between macroeconomic policies and structural reforms that enabled a better control of public expenditure, while providing the foundations for a more competitive economy and greater social equity. Important buildingblocks in the linkages between macro and structural policies, as well as between financial and real markets, have been the reform of the pension system, the recent creation of an explicit structural surplus rule and a sustained disinflation process. The latter is presently supported by a credible inflation targeting regime together with a floating exchange rate. It should be stressed that the need to preserve macroeconomic stability has a large consensus in Chile...

Well regulated and dynamic financial markets are a necessary component of a long term strategy for growth. Chile’s progress in this area is remarkable, but further policy actions are required to deepen capital markets and attract new forms of foreign investments. After a sharp increase during the 1980s, national savings have remained stable at around 20 per cent of GDP (Figure 17). This implies that a significant part of new investment has to be financed through foreign savings...

A return to higher economic growth in Chile is likely to be constrained by the segmented labour market. The functioning of the formal market is hindered by the limit of one year for fixed-term contracts, the high severance payments for employers, and strict and cumbersome rules for dismissal for those with indefinite contracts. Enterprises have reacted to these rigidities by widespread and increasing recourse to outsourcing and informality. These non-standard jobs are insecure and provide little incentive for employers and employees to invest in skill improvement. Other characteristics of the Chilean labour market are the low participation rate of the young and women, which is partly related to a shortage of part-time jobs, and the lack of centralised tripartite negotiations and dialogue, as well as decentralised bargaining between employers and employees...

The improvement in access and efficiency of education and health care has been one of the government’s main priorities since 1990. Through these policies, the current administration aims at reducing poverty and income inequality, but also seeks to improve human capital and as such increase welfare that should provide broader foundations for growth. To improve schooling, the government started to introduce full-day public education since 1997 (to be completed by 2006). In health care, a new universal health insurance should become operational in 2004...

Improving the business environment is a key aspect of the policy agenda for growth. Chile pioneered liberalisation policies in the 1970s and 1980s, but some reforms were designed with a perhaps excessive faith in the functioning of markets. Advances in microeconomic theory and accumulated experience in Chile and OECD have led to a better understanding of the role of economic regulation. Along these lines, the government plans to strengthen its regulatory framework and to improve competition law enforcement by creating a new, independent Antitrust Tribunal with more resources and greater independence from the government...

The Chilean economy is highly dependent on international demand. Exports of goods and non-factor services, accounting for roughly 30 per cent of GDP, are a major source of growth. But small emerging economies like Chile face tough international competition. A much debated question in this context has been whether the persistent Chilean specialisation in primary commodities is a handicap for sustained growth. Dependence on a narrow range of commodities has exposed the Chilean economy to large fluctuations in the terms of trade and international demand. These have not been easy to accommodate...