Chile has been one of Latin America’s fastest-growing economies in recent decades thanks to a solid macroeconomic framework, which enabled the country to cushion the effects of a volatile international context and reduce the population living in poverty (on US$ 5.5 per day) from 30 percent in 2000 to 3.7 percent in 2017. However, more than 30% of the population is economically vulnerable and income inequality remains high.
In the context of social unrest, GDP growth decreased from 3.9 percent in 2018 to 1.1 percent in 2019. The disruptions in economic activity resulted in an uptick of unemployment, from 7.1 in December 2018 to 7.4 percent in December 2019. Social unrest caused a change in the composition of public spending away from an investment promotion agenda and towards higher social expenditures. It also induced the government to call for a constitutional referendum currently scheduled for October 25, 2020.
The current account deficit increased from 3.6 percent of GDP in 2018 to 3.9 percent in 2019 as lower exports more than offset a decline in imports caused by slowing domestic demand. As foreign investment dropped, the external deficit was financed by private and public external debt, which increased from 62 percent of GDP in 2018 to 70 percent in 2019. Over this period, international reserves increased slightly from US$39.8 to US$40.7 billion despite Central Bank interventions to prevent a higher nominal depreciation.
The fiscal deficit increased from 1.5 percent of GDP in 2018 to 2.7 percent in 2019 due to additional spending in response to the civil unrest and the economic slowdown, dampened tax revenues and lower copper exports on revenues. The deficit was partially financed with fiscal buffers, but public debt increased from 26 to 28 percent, mainly domestic debt.
The social unrest reflected widely spread frustration with high and persistent inequality of opportunities that prevailed despite significant improvements in social outcomes. Between 2006 and 2017, Chile had reduced poverty (measured as income below US$5.5 2011 international dollars per day) from 19.6 to 3.7 percent, and the vulnerable population (income between US$5.5 and US$13 per day) decreased from 43.9 to 30.1 percent. However, inequality of incomes, as measured by the Gini coefficient, remained around 0.44 in 2017, among the highest in the region. The growing middle class perceives high inequality of opportunities due to segmented service provision in education and health care and segregated labor markets. Jobs and higher wage premiums have largely gone to skilled workers, while workers with fixed-term contracts support a greater workload, have less job security, and have not been traditionally entitled to severance pay or unemployment insurance, though some of this has been addressed in economic measure to mitigate the impacts of COVID-19 on vulnerable populations.
The balance of risks is tilted to the downside due to uncertainty about the impact of COVID-19 and the fluid domestic political context. Chile is exposed to lower than expected copper prices and longer subdued export demand resulting from the pandemic. Additionally, prolonged containment measures will likely impact on economic activity despite fiscal and monetary stimulus. Similarly, political uncertainty around the constitutional reform could weaken private sector confidence, dampening the recovery.
In the medium term, Chile needs to reach political consensus on a policy response to social demands, while not eroding Chile’s traditionally sound macroeconomic management. Chile also should promote productivity gains at the bottom of the income distribution, including by fostering innovation, enhancing
the link between education and the labor market, and promoting female labor participation. Reducing inequality of opportunity will be crucial to eliminate the persistent pockets of poverty and ensure social stability.
Last Updated: Apr 16, 2020