Chile has been one of Latin America’s fastest-growing economies in recent decades, enabling the country to significantly reduce poverty. Between 2000 and 2015, for example, the population living in poverty (on US$ 4 per day) decreased from 26 percent to 7.9 percent.
Nevertheless, GDP growth fell from a high of 6.1 percent in 2011 to 1.6 percent in 2016 because of declining copper prices, which negatively affected private investment and exports. In this context, the unemployment rate has remained relatively stable, largely due to rising self-employment in response to the stagnation of wage employment.
As expected, fiscal policy has been counter-cyclical: The central government’s fiscal balance shifted from a surplus of 0.6 percent of GDP in 2012 to a deficit of 2.8 percent in 2016. Sluggish economic growth and lower copper prices had a negative impact on fiscal income, partially offsetting the effects of the tax reform at the same time the government increased spending for the education reform and counter-cyclical fiscal policy. On the external front, despite lower copper prices, the current account deficit declined from a high of 4.2 percent of GDP in 2013 to 1.4 percent in 2016 due to reduced private investment and lower returns on foreign investments.
Growth is expected to recover gradually as private-sector prospects improve and copper prices rise. The fiscal deficit will likely decrease gradually in response to a fiscal policy firmly rooted in the structural balance rule. Additionally, fiscal income is expected to benefit from the economy recovery and higher copper prices. The current account deficit will also gradually fall given that higher international copper prices will drive increases in exports, compensating for the possible increase in imports that will potentially generate a recovery of private investment.
Responsible macroeconomic and fiscal management provides a solid base for more inclusive growth. To achieve this potential, however, Chile needs to build consensus to respond to the expectations of a growing middle class at the same time it increases economic growth potential. In the short term, it is crucial to recover the trust of the private sector to stimulate investment in sectors in addition to mining. In the longer term, the country must address structural challenges to promote productivity, improve energy provision, reduce dependence on mining and increase the access to and quality of social services.
Last Updated: Apr 12, 2017