This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Chile were reviewed by the Committee on 25 September 2013. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 4 October 2013.The Secretariat’s draft report was prepared for the Committee by Sean Dougherty, Aida Caldera Sánchez, Carla Valdivia de Richter and Nicola Brandt, with statistical assistance from Roselyne Jamin and Valery Dugain, under the supervision of Patrick Lenain.The previous Survey of Chile was issued in January 2012.

Sound macroeconomic policies and a commodity price boom have yielded an enviably long phase of economic growth and job creation. The banking system is healthy, and the strong government financial position has been rewarded by low sovereign spreads and credit rating upgrades. The economy is projected to continue growing at a healthy pace. Historically-low unemployment has resulted in some labour-market tightness, but inflation remains contained. Strong domestic demand and weakening foreign markets have pushed the current account balance into deficit, which has been financed mostly through FDI, thus limiting the risk of capital flow reversals. Downside risks to growth could emerge mainly from a sharper fall in the copper price. Inflationary pressures could also be reignited by the tight labour market. Monetary and fiscal policies are well positioned to address these short-term risks, with the help of the floating exchange rate.

Chile has made tremendous progress towards greater economic prosperity and lower poverty. Per capita income more than doubled over 20 years to be the highest in Latin America. Chile enjoys a prudent fiscal policy and strong inflation-targeting framework, features that have been well-recognised by sovereign rating agencies. The financial sector is healthy, and the government has sought to broaden the productive base of the economy and to boost entrepreneurship and innovation through investments in education and the reduction of product-market entry barriers. Despite these achievements, key challenges contained in this report should continue to be addressed by the new government taking office in March 2014 following the 2013 presidential elections.

Economic growth and recent policy reforms have increased employment and reduced overall poverty. Women and young people have entered the labour force in greater numbers, but their participation rates remain low compared to most OECD and Latin American countries. Attitudes towards women’s work and childcare commitments as well as regulations regarding childcare provision pose a barrier to female employment. Overall education quality and access to higher education have improved, but early stages of compulsory schooling remain the priority and poor linkages between education and job related skills often limit employment prospects. Among low-skilled workers, a high minimum wage and strict employment protection pose a barrier to employment, and the public employment services and training systems are still underdeveloped. Expanding childcare, promoting a more flexible labour market and strengthening education and skills policies, among others, would make the labour market more inclusive.

Catching up toward higher living standards will depend crucially on the Chilean economy becoming more innovative and productive. However, business R&D intensity has been low in the past and innovation has suffered from a variety of bottlenecks, including a shortage of qualified STEM graduates. Policy settings have become more supportive of innovation recently, with reforms encouraging firms to invest in R&D assets and to access financing. Chilean firms have become more innovative, including in traditional sectors centred on comparative advantages and natural resources. Start-up Chile has attracted international attention as a way to foster entrepreneurship, and entry barriers to open a business have been reduced. The underused R&D tax credit has been made easier to claim, with its take-up now increasing. Still, there is scope to further develop the innovation system, improve existing programmes and strengthen institutional coherence.