More supportive macroeconomic policies needed, says OECD
Chile’s strong recovery lost some momentum as the world economy slowed, weakening copper prices and consumer confidence in Chile, according to a new report from the OECD.
Given considerable uncertainties regarding the health of the world economy, more supportive macroeconomic policies may be needed in the short run, it says.
The report suggests that an overall of the tax system is needed, including reform of property taxes and the introduction of environmental taxes to create more revenue for spending on education and alleviating inequality and poverty.
In the longer run, reducing poverty and inequality is a key challenge. Both remain high by OECD standards, but better education and job opportunities for the poor would enable more Chileans to contribute to a more dynamic and productive economy and thus to higher welfare, it adds.
GDP is expected to have grown by 6.5% in 2011 but slow to 4% in 2012. The report adds that provided confidence improves and the global economy picks up again it could increase to 5% in 2013.
‘However, a small, very open economy with a large share of copper in total exports, Chile would be vulnerable to a sharper than expected global downturn,’ it says.
It also points out that Chile’s income gap with other OECD countries is large and poverty and inequality are high, mainly because the tax system does little to redistribute wealth.
‘Despite strong economic growth inequality has been highly persistent over the past 20 years. Social mobility is low. Chile’s main challenge is to sustain high growth while distributing the gains more evenly across society,’ says the report.
‘Better education and stronger product market competition will be needed to foster productivity and reduce inequality. Efforts to enhance growth should be combined with measures to increase the employment of the poor and to improve living standards,’ it explains.
Another hurdle is that imports have grown fast but mining and industrial exports volumes have grown weakly.
The government has increased spending on education and social policies over recent years and these are long term spending needs that will need additional revenue sources, it says.
‘This should be achieved through efficiency measures such as fighting tax evasion, closing loopholes, reforming property taxation and introducing environmental taxes. Such measures would correct distortions and aspects of the tax system that make it less progressive while helping to collect more revenue,’ it concludes.
